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How to Convert Contractor to Employee: A Guide for International Businesses

By April 28, 2022No Comments
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Hiring contractors is an essential part of growing your business internationally. However, during your expansion, it may become more economically viable and less risky to convert your contractors into employees. Use this guide to learn how the conversion process works and how it can benefit your organization.

What Is the Difference Between a Contractor and Employee?

Contractors are self-employed individuals that provide work services for an hourly rate on an independent schedule. An employee works for a company on a permanent basis, on a set schedule, and receives compensation through salary and benefits.

Compared to employees, contractors are not subject to the same company rules and regulations. For example, in the United States, the Internal Revenue Service tax law dictates that an organization can not control when, where, and how a contractor chooses to work.

Why International Businesses Convert Contractors to Employees

For businesses that are trying to expand into international markets, being able to hire teams of remote contractors is essential. With contractors, companies can quickly hire experts in new international markets and acquire short-term or longer-term support.

Of course, there are risks and costs that come with using contractors instead of employees. To avoid extra risk and costs, companies will convert contractors to employees to:

  • Stay compliant with classification laws. Tax law states that if a business does not declare the exact nature of a contract agreement, or attempts to control the time and work methods of a contractor, it can face tax penalties for misclassification.
  • Protect intellectual property. Contractors have intimate knowledge about a company, making them valuable to competitors. By turning contractors into employees, a company will have a better chance of increasing security and protecting its intellectual property.
  • Control work schedules. Under tax law, contractors can work when they want and do not have to adhere to a standard “9 to 5” schedule. Changing contractors to employees allows companies to maintain more control over their team’s schedule.
  • Offer competitive benefits. Typically, contractors do not have any benefits and must organize their own. Offering competitive benefits such as low-cost health insurance, retirement contributions, life insurance protection, and paid vacation days ensures your team is healthy, well-rested, and able to work.
  • Retain top talent. Another important reason companies convert contractors into employees is to retain top talent. By turning experienced contractors into employees, companies gain long-term knowledge, skills, and expertise.

How to Convert an International Contractor to an Employee

The process of converting a contractor into an employee requires essential steps. This infographic outlines the conversion process from start to finish.

How to convert contractor to employee graphic image1. Verify Contractor or Employee Classification

The first step in conversion is to determine whether or not an international contractor can become an employee based on the nature of their role. Some tax laws may not allow individuals to convert their status. For instance, in the U.S., a contractor can not be under the behavioral or financial control of a company and may not receive benefits.

2. Make an Offer With Salary and Benefits

Once it’s determined that an international contractor can become an employee, companies must make an offer of employment, which includes salary and benefits. To help convert contractors, companies should offer competitive salaries and benefits packages, with perks like paid bonuses and generous paid time off.

3. Research the Foreign Country’s Employment Laws

If an international contractor becomes an employee for a company located in a different country, they will still be protected by their home country’s employment laws. To ensure compliance, a company must conduct research and offer benefits in accordance with local laws. For example, in Germany, individuals get no less than 24 days off per year.

4. Set Up a Foreign Subsidiary or Partner With a Global Employer of Record

To navigate foreign employment and tax laws, companies can either invest in setting up a foreign subsidiary or partner with a global Employer of Record that can convert and manage overseas employees. Partnering with a global EoR allows companies to compliantly hire, onboard, and pay newly converted employees in multiple countries.

5. Hire the Employee and Add Them to Payroll

When an international contractor is properly converted to an employee, they must be added to the company payroll and paid a full-time salary, plus benefits. Without the proper documentation and payroll tracking, an employee may receive incorrect payments or be misclassified.

6. Remain Compliant With Local Regulations

To properly maintain employees abroad, a company must continually keep up with the correct classification of employees, payroll tracking, and strict adherence to local employment and tax laws. This includes providing the proper tax forms, paying payroll taxes, and meeting fair labor standards.

Easily Convert Contractors to Employees With Velocity Global

While these steps may seem daunting to a busy enterprise, the conversion process doesn’t have to be complicated. Turning useful contractors into valuable full-time employees is easy with the help of Velocity Global.

By using Velocity Global’s Entity Setup & Support and global Employer of Record solutions, you can seamlessly establish a foreign entity or streamline compliant onboarding in more than 185 countries and 50 United States, without devoting extra time or resources.

Converting contractors into employees is simple with Velocity Global’s built-in oversight of local labor laws, payroll, taxes, benefits, and more. If you have questions about converting contractors, reach out today.