Hiring contractors enables businesses to scale rapidly and access specialized skills across borders. While this approach offers flexibility for short-term projects, converting contractors to full-time employees can become a strategic move for achieving sustainable global growth. This transition reduces compliance risks, strengthens team cohesion, and aligns talent with long-term organizational goals.
Below is a step-by-step guide to compliantly convert contractors to employees, followed by key considerations for global employers.
How to convert a contractor to an employee: 6 key steps
The process of converting a contractor to an employee requires several essential steps, which we outline below.
1. Confirm worker classification
Begin by verifying whether the contractor’s role aligns with local employee classification criteria. The IRS determines the designation of a worker based on the following categories:
- Behavioral control. Employers dictate how, when, and where employees complete tasks, unlike contractors who retain autonomy.
- Financial control. Employees receive fixed salaries and reimbursements, while contractors invoice for services and cover their own expenses.
- Nature of relationship. Employees typically have long-term roles with benefits, whereas contractors work on a project basis.
In the U.S., converting a contractor to a common-law employee requires transitioning from Form 1099-NEC to Form W-2 tax reporting. Globally, classification rules vary. For instance, France evaluates economic dependency, while Australia emphasizes “employee-like” work arrangements.
2. Analyze local employment laws
Each country mandates unique benefits, taxes, and termination rules. For example:
- Employee benefits in Germany provide 20+ paid vacation days (though 81% of employers offer 26–30 days), 14 weeks of maternity leave, and six weeks of paid sick leave.
- Brazil requires a 13th-month pay bonus, and South Africa enforces mandatory pension fund contributions.
Non-compliance risks fines or legal action, such as back taxes for misclassification in the U.S. or severance disputes in Germany.
3. Choose a global hiring strategy
Converting contractors abroad requires either:
- Establishing a local entity. Costly and time-intensive, with ongoing compliance burdens.
- Partnering with an employer of record. An EOR legally employs workers on the company’s behalf, managing payroll, benefits administration, and tax compliance without entity setup.
For example, an EOR ensures adherence to Germany’s stringent labor contracts or Brazil’s profit-sharing laws while providing HR support and scalable workforce solutions.
4. Draft a competitive employment offer
Present a formal offer outlining salary, statutory benefits, and supplementary perks tailored to local norms. Key components include:
- Statutory benefits. Mandatory entitlements like health insurance (Germany), pension contributions (U.K.), or decimo terceiro (13th-month salary in Brazil).
- Supplemental perks. Optional incentives may include performance bonuses, remote work stipends, or extended parental leave beyond the legal minimums.
For example, 80% of professionals prioritize benefits like mental health support and professional development. Offers should align with regional expectations—Sweden’s parental leave often exceeds 60 weeks, while Brazil’s profit-sharing bonuses are standard.
5. Onboard and integrate into payroll
Formalize the transition by enrolling the employee in a localized payroll system. This involves managing tax withholdings and deducting income tax (e.g., PAYE in the U.K.) and social security (e.g., Mexico’s IMSS). It also includes benefits enrollment and registering employees for pensions (Japan’s kosei nenkin) or unemployment insurance (France’s assurance chômage).
Common pitfalls include miscalculating overtime in Spain (125% to 150% of regular pay) or overlooking India’s Provident Fund deadlines. Choosing the right EOR can help automate these processes and improve accuracy across different countries.
6. Remain compliant with local regulations
To properly maintain employees domestically and abroad, organizations must stay up-to-date with and comply with the local laws that govern worker classification and employment in the city, state, or country where employees live and work.
Maintaining global compliance includes—but is not limited to—using proper tax forms, calculating accurate payroll contributions, providing market-specific statutory benefits, and meeting fair labor standards in each country where employees reside.
What is the difference between a contractor and an employee?
Global contractors and employees differ fundamentally in their work relationships, rights, and obligations. These distinctions vary by country but generally include the following:
- Work relationship. Contractors are self-employed professionals or entities that often serve multiple clients. Employees work exclusively for one employer under a formal agreement that includes scheduled hours and ongoing responsibilities.
- Control over work. Employers dictate how, when, and where employees complete tasks. Contractors retain autonomy over their methods and schedules, provided they deliver agreed-upon results.
- Payment structure. Employees receive regular salaries or hourly wages, often with overtime pay. Contractors are typically paid per project or milestone, with no entitlement to overtime or benefits like health insurance.
- Benefits and protections. Employees qualify for statutory benefits (e.g., paid leave, retirement contributions) and labor protections. Contractors manage their own benefits and assume liability for workplace risks.
- Tax obligations. Employers withhold income taxes and social contributions for employees. Contractors are responsible for handling their own tax filings, although some countries require companies to withhold payroll taxes on their behalf.
- Termination terms. Employees often require advance notice or severance pay. Contractors can usually be dismissed immediately unless local laws mandate brief notice periods.
Misclassifying workers carries significant penalties, including fines and back taxes. Regulations differ globally—for example, France mandates employment contracts in French, while Germany enforces strict severance rules. Partnering with an employer of record simplifies compliance by navigating local laws during the conversion process.
Can a contractor be converted to an employee?
Yes, it is possible to convert a contractor to an employee. This change can be beneficial for both the employer and the worker.
However, converting a contractor to an employee can be time-consuming and becomes more complicated when the contractor lives overseas. Not only must employers change how they pay, tax, and assign work tasks, but they must also establish a legal presence and maintain compliance with the labor laws and regulations of the country in which they operate.
Why businesses convert contractors to employees
Hiring teams of remote contractors is a common strategy for businesses seeking to expand into international markets. With contractors, organizations can quickly hire experts in new global markets and acquire short-term support for their business needs.
Still, several considerations may lead a business to staff primarily contractors or full-time employees down the line.
Stay compliant with classification laws
Hiring contractors can lead to severe misclassification risks. Many tax laws stipulate that if a business fails to disclose the precise nature of a contract agreement or attempts to control a contractor’s time and work methods, it may face tax penalties for contractor misclassification.
Common misclassification triggers include:
- Restricting the contractor from working for other clients
- Directly controlling a contractor’s schedule or how they do their job
- Employing the contractor for a continuous period
If an employer misclassifies its talent, it could face risks and financial liabilities, including unpaid taxes, back benefits, legal fines, and reputational damage. Converting contractors to employees helps avoid worker status confusion and misclassification risks.
Contractor classification laws are continually evolving and vary from country to country. That’s why companies seek in-country expertise or partner with an EOR to avoid misclassification risks and ensure compliance with local country regulations.
Read more in our complete guide to employee misclassification.
Protect intellectual property
Employers own the copyright for any intellectual property created by their employees. However, a business’s intellectual property is typically not protected when using contractors to perform work-related tasks.
Because contractors are not company employees, they own the copyright for the intellectual property they create on the job. Contractors also have intimate knowledge about a company, making them valuable to competitors.
By converting contractors into employees, companies have a better chance of enhancing security and protecting their intellectual property—ensuring that sensitive information remains secure and does not fall into competitors’ hands.
Ensure long-term business goals
While working with contractors helps businesses achieve short-term goals, converting contractors to full-time employees ensures the company’s future success by improving its employer brand.
Investing in a long-term employment strategy strengthens diversity and talent acquisition efforts. Offering employment allows organizations to build and invest in a high-quality, distributed workforce, helping them meet the demands of tomorrow—at scale.
Offer competitive benefits
Typically, contractors do not receive benefits from their clients and must organize their own. Offering competitive global employee benefits such as low-cost health insurance, retirement contributions, life insurance protection, and paid vacation days gives a dynamic contingent workforce more incentive to convert into full-time employees.
Providing competitive employee benefits not only helps organizations attract skilled employees but also helps their workforce feel supported and valued. Benefits ensure teams remain motivated, productive, and can balance their overall health and wellness.
Retain top talent
Another critical reason companies convert contractors into employees is to retain their top talent. Contractors often already possess the necessary skill sets and experience, making them valuable assets that can help achieve business goals. By turning these contractors into employees, organizations can gain long-term knowledge, skills, and expertise.
Converting contractors to employees also helps reduce talent turnover and creates a unified company culture, which engages employees, boosts morale, and increases loyalty.
Frequently asked questions
Common questions arise when transitioning contractors to employees, especially across borders. Below are answers to key concerns for global employers.
Does a contractor need to agree to conversion?
Contractors must voluntarily accept a formal employment offer. Employers can encourage acceptance by aligning compensation with local market standards, emphasizing career advancement opportunities, and offering benefits like health coverage and retirement plans.
Can an EOR manage multi-country conversions?
Yes. EORs streamline bulk conversions by ensuring compliance with regional labor laws, drafting localized contracts, and managing payroll and benefits. This approach eliminates entity setup and centralizes HR tasks across jurisdictions.
Is new documentation required for converted employees?
Employers typically need updated employment contracts, tax forms (e.g., Canada’s TD1, Australia’s TFN), and benefits enrollment documents. An EOR automates this process, ensuring adherence to country-specific requirements like Germany’s written contract mandates or India’s Provident Fund registrations.
Seamlessly convert contractors to employees with Velocity Global
While these steps may seem daunting to a busy business, the contractor conversion process doesn’t have to be complicated. Transforming skilled contractors into valuable, full-time employees facilitates a long-term business strategy. Partnering with Velocity Global can make this process seamless.
Our EOR solution helps global teams streamline compliant onboarding in over 185 countries without requiring additional time or resources. Whether to avoid entity establishment or take the guesswork out of classifying talent, Velocity Global can help.
Velocity Global’s local labor law expertise streamlines the conversion of contractors to employees. Our established in-country experts reclassify talent as full-time employees, then handle payroll, benefits administration, and ongoing HR support.
Our Contractor Conversion solution provides flexibility while ensuring classification compliance by easily converting contractors to employees on fixed-term contracts. Read this contractor conversion customer story to learn how we helped a company go from misclassified to fully compliant by quickly converting their contractors to employees. Or contact us to learn how we simplify contractor conversion.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
© 2025 Velocity Global, LLC. All rights reserved.
