Converting Contractors to Full-Time Employees

To tap into the fullest of human potential and build top global teams, companies often rely on both full-time employees and global contractors. Each type of working relationship has its advantages and disadvantages. In some cases, companies may benefit from converting independent contractors to permanent employees.

A best-in-class Employer of Record (EOR) like G-P can simplify hiring global contractors and international employees, as well as transitioning between these roles. An EOR allows companies to efficiently and compliantly hire, onboard, and manage teams across the world, without a local entity in-country.

What is the difference between a contractor and a full-time employee?

A global contractor is a self-employed professional who provides services to one or more companies internationally, working independently based on an agreed rate for specific services or projects. Independent contractors determine when, where, and how they will perform the services without control or oversight by the company.

In contrast, employees are hired under an employment contract with set hours and receive a salary along with legal benefits, such as health insurance and paid vacation time. Employees are under the direction and control of their employer and receive supervision and direction from a supervisor or manager.

Global contractors are typically hired for short-term projects, while employees are permanent members of the company. Additionally, independent contractors manage their own tax payments and filings, while the company is responsible for withholding taxes and ensuring regulatory compliance for employees.

Can a company change a contractor to an employee?

Yes, converting a contractor to an employee is possible and can benefit both parties when done compliantly. However, the process can be complex, especially for contractors living abroad. Companies that want to convert an independent contractor to an employee, but don’t have a legal entity in the country where the contractor is located, often partner with a top-tier Employer of Record like G-P to simplify the transition, enabling seamless, compliant hiring and onboarding.

What are the benefits of converting a contractor to an employee?

Converting an independent contractor to a full-time employee could be beneficial for both the worker and the company. If your company is debating whether to make this switch, keep the following in mind. By converting a contractor to an employee, you can:

1. Integrate the worker more fully into the company. Independent contractors are not fully integrated into the company and generally do not contribute to the overall business strategy or may not have a long-term investment in your company’s success. An employee can be fully integrated into the company and its culture and will know the business in depth.
2. Create a competitive advantage. In a competitive job market, companies can benefit from building strong working relationships with contractors who offer specialized skills. Offering these individuals an employment position allows a company to create a long-term solution of leveraging valuable expertise.
3. Reduce risk of compliance violations. Companies should correctly classify workers by converting them to full-time employees when their involvement and relationship with the company begins to qualify as an employer-employee relationship. This avoids the risk of misclassification and potential labor and tax violations.
4. Support individual career goals. Many independent contractors may prefer an employment relationship for greater involvement in the company, job security, and access to benefits, vacation pay, bonuses, and other benefits not available to the self-employed. Companies also often invest in employees’ skills development, creating more opportunities for career growth.

Companies should take a case-by-case approach to understand whether a contractor should transition to an employee.

Key considerations before converting contractors to employees

When considering converting a contractor to full-time employment, both the company and individual need to assess many factors to ensure it’s the right choice, including:

1. Integration into the company. When a company wants to more fully integrate the worker into the team or have the contractor performing work that is core to the company’s business, then converting the contractor to an employee is a good option.
2. Amount of work. When the contractor’s paid time amounts to a full-time position, or the company wants the contractor to perform ongoing work, then transitioning to employment may be the sensible move to streamline workflow.
3. Compensation. Contractors do not have taxes withheld by the company for the services they perform, and they may expect to take home the same amount of compensation, so be prepared for increased costs to the company.
4. Benefits and vacation. Contractors aren’t eligible for vacation, health insurance, retirement plans, or in-kind benefits. Offering a broader remuneration package can help in the negotiation process.
5. Training and supervision. Companies have limited ability to provide training and supervision to independent contractors. Transitioning to employment may be critical to ensuring a successful long-term relationship between the company and the worker and if the company would like more control over how the work is performed.
6. Tax status. While independent contractors are responsible for remitting their own taxes, employers in most countries are responsible for deducting and remitting income taxes for their employees.
7. Local employment laws. Both the company and the contractor should be aware of local employment regulations which don’t apply to a contractor relationship. If the relationship operates like an employment relationship, converting the independent contractor to an employee protects the company against misclassification claims and ensures compliance.
   

   To ensure compliance, the company should either establish a local legal entity or partner with an Employer of Record for expert, in-country guidance on the local laws and how to implement practices that ensure adherence.

Workers and companies should carefully consider and discuss the above factors that differentiate the contractor vs. employee status so that both parties can make informed decisions.

How to convert contractors to employees

Converting a contractor to an employee involves steps beyond the normal hiring process. The company must first assess the contractor’s professional status, negotiate terms, develop an employment agreement, and onboard the new employee. Here’s an overview of the process when converting a contractor to a full-time employee.

Steps to Convert a Global Contractor to a Full-Time Employee
1 Determine the worker’s status.
2 Establish a legal entity or partner with an EOR.
3 Inform the contractor and negotiate.
4 Develop an employment contract.
5 Onboard the employee.

1. Determine the worker status.

Start by determining whether the contractor can and should become an employee. Local tax agencies and departments of labor often have guidelines to help assess whether the role and relationship qualifies as employment. In the U.S., for example, the IRS provides guidelines for distinguishing between contractors and employees.

2. Establish a legal entity or partner with an EOR.

If the individual will be the first employee at your company, you’ll need an entity in that country to employ them. A simpler, cost-effective option to setting up and operating an entity in another country is to partner with an Employer of Record (EOR). An EOR is the legal employer and handles the legal requirements relating to employment. This helps ensure your company is compliant with local laws and regulations related to payroll, benefits administration, and HR tasks, allowing you to hire and manage global employees with confidence.

3. Inform the contractor about the conversion and negotiate terms.

After confirming that you would like to engage the worker as an employee, or that the status of the worker should legally be an employee, inform the contractor of your company’s intent to hire them as a permanent employee. This step includes negotiating salary, setting work hours and location, and defining job duties and responsibilities.

4. Develop an employment contract.

Once the worker has agreed to transition to the role of an employee with the company, the next step is to create a locally compliant employment contract. Each country has its own regulations around employment contracts and what is required to be included within an employment contract. Generally, an employment contract should include the required job duties and responsibilities involved in the role, working hours, working location, whether the employment is subject to a probationary period, annual leave and other benefit entitlements, and termination terms.

Be sure to seek legal counsel when developing an employment contract to ensure it meets local labor laws. However, if you are using an EOR to employ the worker, the EOR will provide a locally compliant employment contract and guidance on local requirements and market norms.

5. Onboard the new employee.

Once both parties have signed the employment contract, the company can add the new employee to its payroll and onboard them. The onboarding process may differ to a traditional hire, as the contractor likely already knows the company, its products, and its systems. However, you will want to make sure the employee is aware of company policies and procedures and expectations around performance and conduct.

Unlock the possibilities of global hiring with G-P today.

Whether you’re hiring employees or contractors, an Employer of Record (EOR) like G-P simplifies the process of building and managing your workforce. G-P acts as a trusted guide to global employment, supporting every step of your growth journey.

G-P’s AI-enabled global employment products and EOR solutions help you hire, onboard, and manage the global teams you need to succeed. Powered by our proprietary knowledge base and data systems, our technology ensures you have the instant answers and expert insights to make informed decisions and expand compliantly in 180+ countries.

For companies needing contractor expertise, G-P Contractor enables you to hire and pay anyone, anywhere in your choice of currency with self-service workflows and real-time tracking – for greater confidence and flexibility. If you choose to convert contractors to full-time employees, G-P Suite is backed by the largest team of legal and HR experts, providing the essential HR technology and guidance required to compliantly hire and manage teams today.