A hiring manager researching on her laptop the process of converting a contractor to an employee

How to Convert a Contractor to an Employee: A Guide for Global Businesses

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Hiring contractors is an essential part of growing your business internationally. Engaging skilled contractors helps you quickly scale your workforce, target talent for specialized projects, and test new markets.

However, when considering your long-term business goals, it may make more sense to convert your contractors into full-time employees down the line. Converting contractors to employees offers several benefits to your business, including reducing risk.

Below, learn how to convert contractors to employees and its benefits to your organization.

What is the difference between a contractor and an employee?

Domestic and global contractors are self-employed individuals who provide work services for an agreed-upon rate on an independent schedule. Employees work for a company permanently, on a set schedule, and receive compensation through salary and benefits.

Contractors are not subject to the same company rules and regulations compared to employees. While no set rules determine whether a worker is a contractor or employee, a worker's legal employment status typically depends on a range of factors related to the financial and behavioral relationships between the employer and the worker.

For example, a contractor often works for multiple clients, chooses their own work environment and schedule, does not receive company benefits, and pays and files their own taxes. 

Tax authorities classify workers differently from country to country. In the United States, the Internal Revenue Service (IRS) dictates that an organization cannot control when, where, and how a contractor chooses to work.

Can you change a contractor 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 you change how you pay, tax, and assign work tasks to them, but you must also establish a legal presence and maintain compliance with the labor laws and regulations of the country where they live and work. 

Many companies partner with a third-party expert like an employer of record (EOR) to assist with compliant contractor conversion for overseas talent. We discuss this option in more detail later on in this guide. 

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, you can quickly hire experts in new global markets and acquire short-term support for your business needs.

Still, there are several considerations that may lead a business to convert its contractors to full-time employees down the line. Below we look at notable reasons why a company may consider contractor conversion:

Stay compliant with classification laws

Hiring contractors can lead to severe misclassification risks. Tax law states that if a business does not declare the exact nature of a contract agreement, or attempts to control a contractor's time and work methods, it can 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 you misclassify your talent, you 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 ever-evolving and differ from country to country, so you must follow the rules of the country where the work is performed. Many 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 their employees create. 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 have intimate knowledge about a company, making them valuable to competitors.

By turning contractors into employees, your company has a better chance of increasing security and protecting your intellectual property, ensuring sensitive information stays safe and doesn’t get into competitors’ hands.

Ensure long-term business goals

While working with contractors help businesses achieve short-term goals, converting contractors to full-time employees ensures your company’s future success by improving your employer brand.

Investing in a long-term employment strategy strengthens DEI efforts and allows you to build and invest in a high-quality distributed workforce that will help your business 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 your contingent workforce more incentive to convert into full-time employees for your company.

Providing competitive employee benefits not only helps you attract skilled employees but also helps your workforce feel supported. Benefits ensure your team’s motivation, production, and overall health and wellness. 

Retain top talent

Another critical reason companies convert contractors into employees is to retain their top talent. Contractors often already have the skill sets and experience you need and can be valuable assets to help you achieve your business goals. By turning these contractors into employees, you 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.

Five ways to convert contractors with an EOR partner - Read the blog here

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.

 


Steps for how to convert a contractor to an employee

1. Verify contractor or employee classification

The first step in contractor conversion is to determine whether or not a contractor can become an employee based on the nature of their role.

For example, in the U.S., converting a contractor to a common-law employee includes switching from Form 1099-NEC to Form W-2 to report, withhold, and contribute taxes on their wages. The IRS determines the designation of a worker based on the following categories:

  • Behavioral control. The business directs and controls the work performed by the worker. 
  • Financial control. The business directs or controls the financial and business aspects of the worker's job. 
  • Relationship. The company provides benefits, the relationship will continue indefinitely, and the services performed by the worker are a key aspect of the regular business of the company.

2. Research the foreign country’s employment laws

If a contractor becomes an employee for a company in a different country, they are still protected by their home country’s employment laws. To ensure compliance, you must conduct research and offer benefits following local regulations.

For example, statutory employee benefits in Germany include 20 paid days off per employee per year based on a five-day workweek and additional time off for national public holidays. Also, employees who give birth receive six weeks of paid leave before their due date and another eight weeks after delivery.

3. Set up a foreign entity or partner with an EOR

If a contractor lives and works in another country, you must establish a legal entity in that country before you can convert them to employees. However, foreign entity establishment is often a lengthy and costly process and doesn’t always align with a business’s long-term goals.

A more flexible alternative is to partner with an EOR. An EOR not only compliantly reclassifies your talent, but it allows your talent to seamlessly relocate to virtually any location at any time—without the need for you to establish a legal presence in that location.

An EOR also handles onboarding, payroll, benefits administration, and HR support for your distributed workforce on your behalf—so you can avoid entity establishment and noncompliance risks while maintaining full day-to-day control of your employees.

Read more: What Is an Employer of Record (EOR)?

4. Make an offer with salary and benefits

Once you determine a contractor can become an employee, you must make an offer of employment, which includes salary and statutory benefits like health insurance, pension, and worker’s compensation—although statutory requirements vary based on the employment laws of your talent’s jurisdiction.

To incentivize your contingent workforce to join your team as full-time talent, consider offering competitive supplemental benefits in addition to competitive salaries. These perks include paid bonuses, additional retirement contributions, and additional paid leave.

5. Hire the employee and add them to payroll

After a contractor accepts your full-time employment offer, you must also add them to your company payroll and set up proper withholdings and contributions in accordance to the payroll, tax, and employment laws of your talent’s jurisdiction.

6. Remain compliant with local regulations

To properly maintain employees domestically and abroad, you must keep up with and adhere to the local laws that govern worker classification and employment in the city, state, or country where your employees live and work.

Maintaining compliance includes—but is not limited to—using proper tax forms, calculating correct payroll contributions, providing market-specific statutory benefits, and meeting fair labor standards of each country you have employees.

Easily 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. Turning useful contractors into valuable full-time employees ensures your long-term business strategy and is easy when you partner with Velocity Global.

Our Employer of Record (EOR) solution helps you streamline compliant onboarding in more than 185 countries without devoting extra time or resources. Whether you want to avoid entity establishment, take the guesswork out of classifying talent, or improve your employer brand, Velocity Global can help.

Converting contractors to employees is simple with Velocity Global’s built-in oversight of local labor laws. Our established in-country experts reclassify your talent as full-time employees—then handle payroll, benefits administration, ongoing HR support, and more on your behalf.

Our Contractor Conversion solution also allows you to maintain the flexibility you need in your workforce while ensuring classification compliance by easily converting your contractors to employees on fixed-term contracts.

Read this contractor conversion customer story to learn how we helped a company go from misclassified to compliant by quickly converting their contractors to employees.

Or contact Velocity Global to learn how we simplify contractor conversion to support your global business goals without interruption.
 

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