Why is contracting so popular among developers in Eastern Europe, and how can global companies compliantly capitalise on this trend?

Central & Eastern Europe is home to over 800,000 professional software engineers. The region’s STEM-focused educational history and high level of English proficiency, has secured its reputation as one of the world’s largest pools of highly skilled, yet still comparatively affordable technical talent, fuelling innovation for technology businesses globally.

A stat that surprises most Western Technology leaders is that of these 800,000, a large and rapidly growing portion are hired as sole proprietors or contractors. Of those not yet contracting, data clearly points that they have a strong desire to do so. Carbon’s CEE Engineering Poll (2023), found that, astonishingly, 81% of the mid and senior software engineers surveyed in Romania, Poland and Hungary had a preference to be hired as contractors rather than as employees.

Poland, home to 350,000 software engineers, boasts the largest pool of developer contractors in Europe, not just because it’s the region’s largest tech talent market, but because of its segmentation; Poles are most accustomed to contracting and have been for the last decade.

It doesn’t take much browsing on LinkedIn or on Polish job boards, to immediately stumble upon the term ‘B2B’ next to most published engineering roles. The term, quite literally meaning ‘business-to-business’, isn’t describing a business model per se, but is an acronym coined by the local market to describe a hiring engagement type; business-to-contractor or ‘business-to-business’ - as ~50% of developer contractors choose to work under their own 1-person limited liability companies rather than sole proprietorships.

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Explaining a regional nuance and its effect on developer hiring

In Western Europe and the US, when a hiring manager asks a candidate what their salary expectations are, they are provided a desired gross annual wage. Employees in Eastern Europe, however, quote their expected salaries net monthly; ultimately only caring about what they receive in their pocket at the end of the month, once all taxes and social security contributions are deducted. Similarly, a company’s CFO or VP of Engineering preparing annual budgets are more concerned about the gross cost to company for each hire, rather than what that hire earns on a net basis.

So you’re probably wondering - why the high number of developer contractors in Eastern Europe?

The answer, quite simply: tax optimisation. The employment taxes to hire a full-time employee in Eastern Europe, paid by both employer and employee, are substantially higher (sometimes ~50% higher!) than the income taxes and social security contributions paid by equivalent full-time contractors.

Compared to Western Europe, countries in CEE have relatively low - sometimes very low - taxes for the self-employed and for limited liability companies (corporate income + dividend tax). Furthermore, unlike in the West, where people are taxed progressively depending on their income brackets, taxes in most of Eastern Europe are not just low but also flat rate; resulting in higher net earnings for the region’s well-paid software engineers.

As seen in the table above, the potential upside in one’s net earnings by simply switching from being employed to self-employed can be truly substantial. Romania sees the greatest upside, with a 46.5% higher net earnings for individuals contracting through their limited liability companies, followed by Hungary that see 25% higher net wages for contractors than their employed counterparts. As a result of the region’s income tax asymmetries, all employees turned contractors across Eastern European see a material increase in their net pay.

Similarly, companies opting to hire contractors in Eastern Europe can see the added benefit of significantly reducing their gross cost per hire. With ‘B2B’ contracts, and employment and social security taxes passed onto contractors, which are taxed less than if they were employed, companies can see a cost saving per hire of 20% in Poland and 33% in the Czech Republic. Companies may choose to pass some of these considerable payroll cost savings onto their full-time contractors in the form of higher salaries earnings, increasing the company’s attractiveness on the market whilst still benefiting from a degree of cost optimisation.

In a time when engineering leaders need to do more with less, choosing to hire developers in Eastern Europe as contractors - rather than employees - not only makes financial packages substantially more attractive on a net basis, but it also reduces your company’s marginal cost per hire. Given these numerous benefits, one might be wondering - what’s the catch? After all, being reliant on contractors is considered by many to be imprudent - or is it?

Mercenaries vs. Missionaries: No two contractors are created equally

A lot of business leaders are often adamant to hire contractors, either avoiding them completely or only hiring them when they have no other alternative to achieve their product development goals. Some of the concerns for hiring contractors include:

• Contractors are just not as committed as their employed counterparts
• Contractors are just in it for the money, billing by the hour or day
• Contractors aren’t going to be with the company for long, moving from project to project
• That contractors juggle multiple jobs

Whilst some of the above concerns might be valid, such generalisations do not universally apply to every contractor, especially not your typical software developer contractor in Eastern Europe.

Those tech workers in the region who choose to work as full-time contractors are, in reality, more missionary than the mercenary in their attitude. Despite being employees-turned-contractors, the nature of most of their engagements remains, in essence, identical.

That is not to say that mercenary-esque contractors do not also exist in Eastern Europe, but they are far less prevalent than the typical contractors found working in London, New York and Berlin. The explanation for this goes back to the primary reason as to why these tech workers chose to contract in the first place: tax optimisation.

From a company culture perspective they behave as if they were full time employees - the only difference being that they invoice monthly under their own entities and legally optimise their tax liabilities. Given these idiosyncratic nuances and tax structures, contracting doesn’t automatically make a developer in Eastern Europe any less of an employee team member, just as a company operating under an offshore holding doesn’t make it any less of a company.

How is hiring full-time contractors in Eastern Europe any different?

Whilst contractors in the West might choose to simultaneously work multiple jobs, the overwhelming majority of developer contractors in Eastern Europe - especially those on fixed monthly rates - work full-time and exclusively for one company. Unlike their employed counterparts who are automatically included in monthly payroll, these developer contractors simply issue invoices on the last day of the month, invoicing the same sum each month (essentially a salary equivalent). This can, if not compliantly monitored, put companies in danger of employee misclassification risk.

So how concerned should we be about employee misclassification risk?

Employee misclassification can occur when companies hire independent contractors but treat them like employees in all but name. Examples of this include: contractors that work on an exclusive basis for one company and who are made to follow strict requirements in how they conduct their service (e.g. onsite vs. remote), whilst also being offered various benefits (private pension + medical insurance) which/that only employees would typically receive. Although the criteria for employee misclassification differs from country to country, in the eyes of most labour authorities around the world, a combination of the above can be seen as the basis for employee misclassification. It can, if discovered and enforced, have serious legal and financial consequences for an employer, including: back taxes and fines, as well as liability for back pay overtime and benefits.

Separating Perceived Risk vs. Actual Risk

Although employee misclassification can carry consequences for employers who breach the legislation, the reality is that repercussions have globally been incredibly rare, and in some parts of the world even unheard of; regardless of what Employer of Record providers might try to argue. However important compliance might be to every maturing organisation, forward-thinking business leaders are presented with an enticing trade off in the context of hiring full-time contractors vs. employee misclassification risk; especially given the asymmetries of the current legislation’s enforcement.

Whilst intra-country employee misclassification cases are substantially more prevalent (think California Supreme Court vs. Uber), when it comes to cross-border hiring of international contractors, the number of such cases essentially eviscerates. It is extremely unlikely that the Hungarian labour authorities would investigate and crack down on a possible misclassification case against a US fintech halfway across the world that maintains a team of full-time developer contractors in Budapest. Despite each country's labour codes clearly specifying the criteria for employee misclassification, the legislation's limited enforceability across the globe has permitted thousands of remote-first companies to freely hire with little care on the matter.

Lack of enforcement aside, a company’s Legal Counsel will no doubt have a comment or two about working in this manner [with full-time contractors]. That said, thousands of forward-thinking companies have found compliant workarounds to essentially mitigate most misclassification risk. From the careful wording of each service contract, to staying up to date with local labour laws and monitoring any local enforcement of similar cases. Utilising a 3rd party nearshore staff augmentation specialist like Carbon can further shield away from such liability. Lastly, mitigating against possible damage, insurance policies against employee misclassification can be taken out for surprisingly low premiums - perhaps given the fractional % probability of a claim.

So why hire full-time contractors in Eastern Europe?

Hiring developer contractors in Eastern Europe enables companies to unlock massive upside with minimal downside; providing a huge tailwind for talent acquisition, business operations and product development. Not only would hiring contractors in CEE widen a company’s potential talent pool, it would also entice the very best local engineering talent with ultra competitive [net] earnings whilst reducing financially-induced attrition. This can naturally propel a company’s competitive advantage, and be especially advantageous for those operating in winner-takes-all markets.

From a financial perspective, choosing to hire contractors in Eastern Europe will also reduce the gross cost to company; substantially so in countries like the Czech Republic and Poland where employers bear the largest brunt of employment and social security taxes in the region.

Lastly, by choosing to follow - and not fight against - the growing trend of hiring contractors over employees in Eastern Europe, companies inadvertently benefit from limiting their liability to protective laws pertaining to typical employment. Choosing to hire contractors over employees makes onboarding and dismissal more elastic, whilst also limiting potentially high severance packages.

Any global company committed to assembling high performance engineering teams - and that wishes to do so competitively - should consider Eastern Europe and capitalise on the trend of strategically hiring from the region’s growing developer contractor base.

Carbon is the go-to staffing specialist for Eastern European and North African technical talent. Trusted by the biggest names in technology and venture capital, Carbon’s hyperlocal expertise makes entering new talent markets for value-seeking global companies possible.

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