Employment Contract

When hiring Indian talent directly from a foreign entity, you’ll typically engage them as independent contractors rather than traditional employees. This guide explains how this works, what Indian regulations you need to be aware of, and how to structure compliant contractor agreements.

Understanding the Contractor Model

Why Contractors, Not Employees?

For international companies without a legal entity in India, hiring talent as independent contractors is the standard approach. Here’s why:

Without an Indian Entity:

  • You cannot legally employ someone on your foreign company payroll in India
  • You cannot deduct Indian taxes (TDS) or make statutory contributions (PF/ESI)
  • You cannot provide employment benefits required under Indian labor laws
  • Setting up an entity is expensive ($500K-$2M+ for a GCC) and complex

With Contractor Arrangements:

  • You engage talent through a service contract (B2B relationship)
  • Contractor is self-employed and handles their own taxes
  • No need for local entity, payroll infrastructure, or compliance burden
  • Simpler, faster, and cost-effective for initial engagements

Think of it as: You’re buying services from a freelance professional, not employing them.

While contractors are not “employees” under Indian law, you should understand the basic legal landscape.

India’s labor laws distinguish between employees and independent contractors:

Independent Contractor:

  • Provides services under a contract for services
  • Controls how and when work is done (within agreed parameters)
  • Can work for multiple clients
  • Not entitled to employment benefits (leave, PF, ESI, gratuity)
  • Not covered by most labor laws (Shops and Establishments Act, etc.)
  • Responsible for their own taxes

Employee:

  • Works under a contract of service (employment contract)
  • Subject to employer’s control and direction
  • Typically exclusive to one employer
  • Entitled to statutory benefits and protections
  • Covered by Indian labor laws
  • Employer deducts taxes and makes contributions

Key Point: Your relationship with Indian talent should clearly be that of a contractor, not an employee, to avoid legal complications.

What Makes Someone a Contractor (Not an Employee)?

Indian courts and regulators look at several factors to determine the nature of the relationship:

Indicators of a Contractor Relationship:

  • Control: Contractor controls how work is done; you control the output
  • Independence: Contractor can work for others; not exclusive to you
  • Own resources: Contractor uses their own equipment, workspace, tools
  • Payment structure: Paid per project, invoice, or fixed fee (not salary)
  • Benefits: No employment benefits, leave, insurance, etc.
  • Business relationship: Contractor invoices you; treats income as business income
  • Duration: Project-based or fixed-term contracts (not indefinite employment)

Indicators That Could Suggest Employment:

  • You control their working hours rigidly (like an employee schedule)
  • Exclusive full-time arrangement with no freedom to work elsewhere
  • You provide equipment, workspace, and resources
  • Monthly “salary” with traditional employment benefits
  • Indefinite relationship with no clear end date
  • Performance management like an employee

Best Practice: Structure your engagement to clearly reflect a contractor relationship. This protects both parties and ensures compliance.

Structuring a Compliant Contractor Agreement

Your contractor agreement is the foundation of the relationship. It should be clear, comprehensive, and structured to reflect a genuine service contract.

Essential Elements of a Contractor Agreement

A proper contractor agreement should include:

1. Parties to the Agreement

  • Your company details (legal entity name, address, registration)
  • Contractor’s details (name, address, PAN number)
  • Clear statement that this is a “Contract for Services” or “Independent Contractor Agreement”

2. Scope of Services

  • Detailed description of services to be provided
  • Deliverables and expected outcomes
  • Performance standards or quality expectations
  • Make it output-focused, not activity-focused

3. Term and Duration

  • Start date
  • End date or project completion milestone
  • Renewal terms - if applicable, how/when renewal happens
  • Consider fixed terms (6 months, 1 year) rather than indefinite

4. Compensation and Payment Terms

  • Fee structure - monthly retainer, hourly rate, or project-based
  • Currency - typically USD, EUR, GBP, etc.
  • Payment schedule - monthly, bi-weekly, upon milestones
  • Payment method - wire transfer, Wise, PayPal, etc.
  • Invoice requirements - contractor must invoice you for payment

5. Working Arrangements

  • Flexibility - contractor has flexibility in how/when they work
  • Availability expectations - time zone overlap for meetings, core hours
  • Independence - contractor uses own equipment and workspace
  • Remote work - acknowledge this is a remote arrangement

6. Probationary Period (Optional but Recommended)

  • Duration - typically 1-3 months
  • Shorter notice during probation (e.g., 1-2 weeks)
  • Assessment criteria - clear expectations for successful probation
  • Transition - what happens after probation (confirmation or termination)

7. Termination Provisions

  • Notice period - reasonable notice for both parties (typically 30-60 days)
  • Termination for cause - conditions allowing immediate termination
  • Termination without cause - either party can end the contract with notice
  • Transition obligations - knowledge transfer, return of materials

8. Intellectual Property (IP)

  • Work product ownership - typically you own all deliverables
  • Assignment of IP - contractor assigns IP rights to you
  • No use of company IP - after contract ends, contractor cannot use your IP
  • Portfolio use - can contractor showcase work publicly? (define limits)

9. Confidentiality and Non-Disclosure

  • Confidential information - definition and scope
  • Obligations - how contractor must protect your confidential info
  • Duration - confidentiality continues after contract ends
  • Return of information - contractor must return/destroy confidential materials

10. Non-Compete and Non-Solicitation (Use Carefully)

  • Reasonableness - cannot be overly broad or restrictive
  • Duration - typically 6-12 months after contract ends
  • Scope - limited to specific competitors or activities
  • Geographic limitations - if applicable
  • Enforceability - broad non-competes may not be enforceable in India

11. Independent Contractor Status

  • Explicit statement - “Contractor is an independent contractor, not an employee”
  • No benefits - clarify no employment benefits are provided
  • Tax responsibility - contractor responsible for own taxes
  • No agency - contractor does not represent your company

12. Governing Law and Dispute Resolution

  • Governing law - which country’s laws govern the contract (typically yours or India)
  • Jurisdiction - where disputes will be resolved
  • Arbitration - consider arbitration clause for efficiency
  • Good faith resolution - encourage direct communication before legal action

13. General Provisions

  • Entire agreement - this contract supersedes prior agreements
  • Amendments - changes must be in writing and signed
  • Severability - if one clause is invalid, others remain enforceable
  • No waiver - failure to enforce one clause doesn’t waive other rights

Key Considerations for Your Contract

Make it clear this is NOT employment:

  • Use language like “independent contractor,” “service provider,” “consultant”
  • Avoid terms like “employee,” “employment,” “salary,” “benefits”
  • Structure payment as fees/invoices, not salary
  • Don’t offer employment benefits (PF, insurance, leave, etc.)

Balance flexibility with expectations:

  • Contractors should have flexibility in how they work
  • You can set expectations for availability (time zone overlap, meetings)
  • Focus on deliverables and outcomes, not micromanaging activities

Be reasonable with termination terms:

  • Include a probationary period with shorter notice
  • After probation, reasonable notice (30-60 days) protects both parties
  • Allow termination without cause (with notice) for flexibility

Protect your IP clearly:

  • All work product should belong to you
  • Make assignment of IP explicit
  • Include confidentiality obligations

Consider using templates wisely:

  • Many online contractor agreement templates exist
  • Customize for your needs and ensure they reflect India context
  • Consider having legal counsel review for high-value engagements

Tax and Compliance Considerations

Your Tax Obligations (as Foreign Company)

Good news: When engaging Indian contractors from outside India, you typically have minimal direct tax obligations in India.

Why?

  • The contractor is responsible for their own Indian taxes
  • You’re paying for services (B2B), not employing them
  • No requirement to deduct Indian TDS (Tax Deducted at Source)
  • No requirement for PF/ESI contributions (these apply only to employees)

Your role:

  • Pay the contractor according to the agreed terms
  • Make international wire transfers (bank to bank)
  • Keep records of payments for your own accounting

Contractor’s responsibility:

  • They must report income and pay taxes in India
  • They handle their own tax filings and compliance
  • They may register for GST if income exceeds thresholds

Note: If you establish a “permanent establishment” in India (physical office, significant ongoing presence), tax rules change. Consult tax advisors if expanding significantly.

Indian GST Considerations

GST (Goods and Services Tax) is India’s value-added tax system.

For services exported to foreign companies:

  • Services provided by Indian contractors to foreign companies are typically zero-rated exports
  • Contractors may not charge you GST
  • Contractors must still file GST returns if registered

What this means for you:

  • You likely won’t pay GST on contractor fees
  • The contractor handles GST compliance on their end
  • Your invoice from the contractor should clearly state “Export of Services - Zero Rated”

This is typically the contractor’s responsibility to manage, not yours.

Foreign Exchange and Payments

When paying Indian contractors:

Payment Methods:

  • Wire transfer - Standard bank-to-bank transfer (most common)
  • Wise (TransferWise) - Lower fees, faster, popular for international payments
  • PayPal - Convenient but higher fees and conversion costs

Currency:

  • Typically pay in USD, EUR, or GBP
  • Contractor receives payment in foreign currency, converts to INR in their bank
  • Exchange rates are handled by banks/payment platforms

FEMA Compliance:

  • Contractors receiving foreign remittances must comply with India’s FEMA (Foreign Exchange Management Act)
  • This is the contractor’s responsibility
  • Banks handle most compliance automatically when receiving foreign transfers
  • Contractors may need to provide documentation to their bank (contract, invoice, etc.)

Your responsibility: Pay on time according to contract terms. The contractor handles receiving and compliance on their end.

Best Practices for Working with Indian Contractors

  • 📄 Have a written contract - Always formalize the relationship in writing
  • 🔍 Clearly define the scope - Be specific about deliverables and expectations
  • 💰 Pay on time - Honor your payment commitments promptly
  • 🗣️ Communicate clearly - Regular check-ins, clear feedback, transparent communication
  • ⚖️ Respect the contractor relationship - Don't treat them like employees with rigid controls
  • 📊 Focus on outcomes - Measure results, not activity or hours worked
  • 🤝 Build trust - Long-term relationships benefit both parties
  • 🔒 Protect your IP - Ensure contracts cover intellectual property clearly
  • 📋 Keep good records - Maintain contracts, invoices, payment records
  • ⏰ Be mindful of time zones - Respect overlap hours and asynchronous communication

When Contractor Arrangements Are Not Enough

The contractor model works well for:

  • Initial engagements and pilots
  • Project-based work
  • Small teams (1-5 people)
  • Flexible, short-to-medium term needs

However, as your relationship with Indian talent matures, you may want to consider:

Transitioning to Permanent Employment:

  • Offering job security and traditional benefits
  • Retaining high-quality talent long-term
  • Building a stable, committed team in India

This is where Employer of Record (EOR) services come in. (See next document)

Setting Up a Legal Entity:

  • For larger teams (10+ people)
  • Long-term commitment to India presence
  • Full control over operations and benefits

Key Takeaways

  • 🎯 Contractor model is standard - For foreign companies without Indian entities, engaging talent as contractors is the norm
  • 📋 Clear contracts are essential - Well-structured contractor agreements protect both parties and ensure compliance
  • ⚖️ Maintain contractor distinction - Structure the relationship to clearly reflect independence, not employment
  • 💸 Minimal direct tax obligations - Contractors handle their own taxes; you just pay for services
  • 🌍 Cross-border payments are straightforward - Wire transfers, Wise, and other platforms make payments easy
  • 🤝 Focus on partnership - Treat contractors professionally, pay on time, and build trust
  • 📈 Know when to evolve - Contractor arrangements are great for starting, but consider EOR for long-term relationships

Engaging Indian talent as contractors is a proven, compliant, and effective way for international companies to access world-class tech talent. With a proper contract, clear communication, and fair treatment, these relationships can be highly successful for both parties.

Next: Learn how Employer of Record (EOR) services can help you transition contractors to permanent employees when the relationship matures.