When You Should Convert Contractors to Full-Time Employees

Working with contractors has many perks. For one, you don’t have to pay tax and statutory benefits as an employer, and it can be an efficient way to approach project-based work, or quickly get access to in-depth expertise.

But if you find yourself using a contractor’s services long-term, converting them to a full-time employee could be the right move to ensure compliance and avoid risks like contractor misclassification. An Employer of Record like Playroll can help you simplify this process, and make sure all your workers are correctly classified and working compliantly.

Here’s your guide on why and how to convert contractors to full-time employees, the easy way.

The Legal Differences Between Contractors And Full-Time Employees

When deciding whether you need a contractor or a full-time employee for your business, you first need to understand how the law distinguishes between the two types of workers. This is especially important to avoid the legal and financial repercussions of contractor misclassification.

There are many key legal differences and business requirements at stake. These tend to be practiced around the world, but each country may have its own particularities.

We’ll use the U.S. as an example when it comes to country-specific details here:

Taxation

For employees:

• Employers have to contribute to Social Security and Medicare taxes. They also must pay unemployment taxes.
• Employees get a W-2 form at the end of the year detailing their earnings and taxes withheld.

For contractors:

• Independent contractors and freelancers are responsible for their own taxes, including income tax and self-employment tax (which covers Medicare and Social Security).
• Contractors usually receive a 1099-NEC form when they earn a certain amount of money from a client in a year. In the U.S., the form is issued once the worker earns $600 or more.

Benefits

For employees:

• Employers must provide mandatory benefits to their employees. This means paying worker’s compensation, health insurance, and unemployment insurance.
• Most companies also offer benefits like paid time off and retirement plans, among others.

For contractors:

• Independent contractors and freelancers don’t have any mandatory benefits.

Control

For employees:

• It’s up to the employer to dictate what kind of work is done and how it’s done. This goes for directing work methods, setting work hours, providing tools, and more.
• Employers also have more insight into employees’ behavior and better control of the company’s intellectual properties.

For contractors:

• Independent contractors have more autonomy in performing their work. They can set their own hours, tools, schedule, etc., and they can also work for as many clients as they want.
• Clients must oversee contractors to guarantee that they treat their products and IPs as they should.

Labor laws

For employees:

• Employees are protected by many fair employment laws worldwide. These laws tend to govern minimum wage, overtime pay, unemployment insurance, and more.
• Anti-discrimination laws also govern areas such as ethnicity, age, religion, and disabilities. These ensure that every worker is treated equally regardless of their circumstances or background.

For contractors:

• Most employment laws, like minimum wage and overtime pay, don’t apply to contractors.
• They are bound by contracts that dictate their rights and obligations, as well as compensation.

Liabilities

For employees:

• In most countries, employers are liable for their employees’ actions on the company’s premises or during work hours.
• Employers must pay workers’ compensation insurance in case of illnesses or injuries occurred on the job.

For contractors:

• If the contracts don’t state otherwise, contractors are responsible for their own actions and liabilities.
• They are not covered by workers’ compensation insurance.

When To Hire Contractors For Your Business

Independent contractors can help your business flourish without changing your whole operation. It makes sense to hire contractors if you need to urgently complete short-term projects, or if you require expert input or skills that will be difficult to source. 

Here are some of the best ways to hire contractors for your business:

• ‍Marketplaces: There are many online platforms that connect you with many talented freelancers. Popular examples of marketplaces are Fiverr, Upwork, and Toptal.
• ‍Agencies: Specialty agencies that can assign teams of contractors for project-based work or to provide temporary cover, for example when employees are on lengthy maternity or injury leave.
• ‍Contractor Management services: Use Global HR Solutions like Playroll, that cut down HR challenges and streamline contractor management to ensure compliance and efficiency. Playroll offers a Contractor Management solution that allows you to compliantly hire contractors in 180+ countries, set-up custom contractor agreements and make timely payments, all in one platform.

When You Should Consider Converting Contractors To Full-Time Employees

Transitioning from relying on freelancers to employing full-time staff is a significant shift in business strategy. If you find yourself ticking many of the boxes below, it might be time to consider converting a contractor to a full-time employee.

• Enhanced Control and Commitment: You want tighter oversight over a contractor's day-to-day work and a full-time commitment to your business goals, instead of having them work for multiple clients.
• Legal Compliance: You’re starting to use a contractor’s services for longer-term projects, and need to comply with local employment laws to avoid the risks of contractor misclassification. In this case, converting contractors is a necessity to avoid hefty fines and legal repercussions.
• Retention of Talent: You want to retain top talent and increase their job satisfaction by offering competitive benefits.
• Intellectual Property Protection: The contractor’s work starts to involve sensitive information that requires safeguarding through clearer contractual terms.
• Team Cohesion: You want to foster a strong, collaborative team dynamic that requires more full-time engagement between your team members.
• Career Development: You want to provide the contractor with more professional growth opportunities within a stable environment.

How To Convert A Contractor To A Full-Time Employee With Playroll

You can convert a contractor to an employee in two ways. If the worker is local, your HR team and the contractor will have to complete the necessary admin that’s relevant for that country. For example, in the U.S. this involves filling out form W-4, which determines the amount of federal income tax to withhold from an employee's paycheck. Additionally, your new employee will complete form I-9 that acts as verification that they can work in the United States.

But if you’re dealing with global workers, it gets complicated and expensive if you don’t have a legal entity in the country.

It doesn't have to be a cumbersome process, though. One of the best alternatives is to use an Employer of Record (EOR). These services handle global compliance, payroll and all the HR admin on behalf of an organization. They allow companies to hire employees in new markets without having to establish an entity, by leveraging the EOR provider’s networks instead.

With a good EOR provider, like Playroll, the process of converting a contractor to an employee is straightforward. We will simplify the transition process, handling the administration on your behalf, and ensure full legal compliance when you’re adding your new team member to the platform.

‍Contact our team to learn how we can simplify contractor conversions to streamline your HR efforts and keep you focused on your business.

FAQs

What’s the difference between a contractor and an employee?

Contractors are not bound to any specific company, so they can work on their own terms and for as many clients as they want. But that means they are not protected by labor laws and don’t have the full benefits that employees have.

What is a 1099 Employee?

A 1099 employee is another term for an independent contractor or freelancer in the U.S. They receive income in the form of a 1099-MISC or 1099-NEC tax form, rather than a W-2 form which is used for full-time employees.

What is a W-4 Tax Form? 

The W-4 tax form, officially known as the Employee's Withholding Certificate, is a crucial document used in the United States by employers to determine the correct amount of federal income tax to withhold from an employee's paycheck.

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