Perhaps you bootstrapped your startup from scratch. Or you may have joined an established company to spearhead its expansion efforts, strategically scaling operations as new demands emerge.
Chances are, you employed (or still employ) independent contractors along the way. And now, you may wonder, is it the right time to convert some of these contractors to full-time roles?
If they play a vital role in your company and you need them to perform ongoing work, that conversion might be beneficial. And, if you want to avoid the risk of misclassification and stay compliant with employment laws, it might be legally necessary.
Key takeaways:
- Converting contractors to full-time employees can benefit the employer and the employee.
- A new contract will need to be drawn up, outlining the worker's new job title and compensation package.
- Switching an international worker’s title from contractor to employee may require establishing a local entity or partnering with an Employer of Record.
When Should You Consider Converting a Contractor?
You View Them as an Integral Member of Your Team
Each independent contractor you hire serves a specific purpose. Say you need a freelancer to write your blog content. Or design your logo. Or manage your company's HR functions in the company's early stages.
As you grow, contractors may become more integrated into your workforce. Writing blogs can lead a writer to expand into crafting UX copy. Your designer may also possess coding skills and pivot to working on your website's front end. Your contract HR worker may have evolved into an indispensable member of the team — and the only one who knows your administrative systems inside and out.
You can think of it this way: do you consistently rely on a contractor's work? If so, it's likely time to have a conversation with the contractor about bringing them on full-time.
You Want Greater Control Over Their Work
There's no two ways about it. One reason they're called freelancers is because they have more freedom over how and when they work. If you want more of a say in when and how contractors perform their work, it may be time to start the process of converting them into employees.
Making the switch will give your company greater control over their work by allowing you to set clear expectations around job responsibilities, working hours, and performance standards.
Unlike contractors, who typically operate independently and manage their own schedules, employees are legally required to follow company policies, report to managers, and prioritize tasks as directed.
There Might Be Misclassification Risks, or Their Legal Status May Have Changed
Do you know the meaning of "Scheinselbstständigkeit"? If you don't, take a moment to give that article a skim if any of your contractors work in Germany. Go ahead. We'll wait.
Are you back? Excellent, as you now know, it means "false self-employment." Essentially, it refers to workers that German law considers to be incorrectly classified as contractors when they're actually employees.
Worker misclassification occurs when a contractor is found to be functioning more like an employee than a freelancer. In that case, you might need to reclassify them. Otherwise, you could be on the hook for stiff penalties.
Laws like Germany's legislation against false self-employment or the U.K.'s IR35 guidance, which includes specific rules for contractors, can be strict on this matter.
There may even be limits on how long a worker can be classified as a contractor before your business is required to begin the conversion process.
They Might be Eligible for Benefits
In some countries, long-term contractors may become legally entitled to benefits after a certain period — or technically already be classified as employees without your (or their) knowledge.
As an old saying goes, "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." Meaning, that if your contractor works for your company full-time and exclusively, works set hours, and/or uses company equipment, they could easily be considered an employee and entitled to benefits in the eyes of the law.
Converting them to full-time employees could be a safer and more straightforward solution and help you avoid potential legal penalties and compliance risks down the road.
You Want Stronger Protection for Your Company's IP
We're not saying you shouldn't trust your contractors, but intellectual property (IP) protections are generally stronger when company work is created by an employee. That's because, in most jurisdictions, the default legal framework grants automatic ownership of employee-created work to the employer.
Often covered under "work made for hire" provisions, any intellectual property created by an employee usually belongs to the company without the need for any additional agreements.
In contrast, contractors typically retain IP rights unless a clear and legally binding agreement transfers ownership to the company.
Many countries have strict regulations about how and when these rights can be reassigned, and failing to establish proper contracts can result in contractors retaining legal control over their creations.
Converting contractors to full-time employees ensures stronger IP protection, providing companies with automatic ownership and greater legal security over any work created.
How to Convert a Contractor to an Employee
Have you decided it's time to convert your contractor to a full-time employee? Have they agreed? Great, it's time to take the following steps.
Review the Existing Contract
Check if your existing contract with the freelancer includes the conditions and process for reclassification to employee status. It may not, and that's OK.
But you'll want to ensure you and your (soon-to-be) new employee are both on the same page regarding how the shift in status will proceed.
Determine if You Need to Hire an EOR or Open an Entity
Does your business officially operate in the country where your contractor works? If not, you'll need to open a legal entity, which can take a lot of time (months or, in some cases, a year or more) and money.
Or, you can hire an Employer of Record (EOR) to employ your contractor as an employee legally.
An EOR acts as the legal employer of international employees and takes care of all the on-the-ground legal and financial matters that can make hiring internationally so complex.
In a nutshell, EORs minimize your risk and stress by assuming legal liability and ensuring compliance.
Negotiate the Transition
Once you and a freelancer agree to convert their role to a full-time employee position it's time to dive into the details, including:
- Negotiating their new compensation package
- Outlining responsibilities, job title, reporting structure, etc.
- Informing them of the benefits they're entitled to as a full-time employee, such as PTO, health insurance, etc.
It's essential, too, to ensure your new employee understands what it means to transition away from the life of a freelancer.
For example, what will their official working hours be if they live in a different time zone from other team members? What's the plan for scheduling synchronous and asynchronous work hours?
As a freelancer, they also may not have had to attend many (or any) meetings. But that's likely to change when joining the team in a full-time role. Ironing out expectations like these ahead of time will make the process smoother for everyone.
Draft a New Employment Contract
A formal employment contract may be required to ensure compliance with local labor laws.
The employment contract should include:
- Job title and responsibilities
- Salary and compensation structure
- Benefits (like healthcare, pensions, PTO, wellness benefits, etc.)
- IP ownership clauses and non-compete agreements
- Employment terms, such as start date and probationary period, and termination clauses (both voluntary and involuntary)
Finally, outlining reporting structures and expectations for performance can help ensure a smooth transition into full-time employment.
Collect Required Documents & Update Payroll and Benefits Systems
When converting a contractor to an employee, it's important to know what paperwork you must obtain to ensure compliance with local labor laws.
In addition to the employment contract, this includes:
- Tax forms: Depending on the country, the employee may need to complete tax registration forms or tax declaration documents.
- Social Security & benefits enrollment forms: This includes registration for any government-mandated benefits like healthcare, pensions, and unemployment insurance.
You'll also need to make updates to your payroll and benefits systems. This includes:
- Payroll Classification: Update their designation from contractor to employee to ensure proper tax withholdings.
- Banking & payroll information: Employees must provide their bank account details to be paid via direct deposit.
- Salary & payment timing: Adjust payment frequency (if necessary) and include benefits, bonuses, and deductions as required.
- Tax & Social Security contributions: Register the employee for payroll tax withholding, employer contributions, and government-mandated benefits.
- Benefits enrollment: Enroll the employee in company-sponsored benefits such as health insurance and retirement plans.
Your HR team should work closely with your new employee to make this experience as smooth as possible and answer any questions they have along the way.
Onboard the Employee
When onboarding a contractor transitioning to full-time employee status, companies should treat the process as they would for any new hire, even if they’ve worked for the company as a contractor for some time.
The onboarding process should include training on company policies and performance expectations. The new employee should also be granted access to internal tools and systems they may not have used as a contractor.
Managers should discuss career growth opportunities, company culture, and any changes in work expectations.
Hire and Convert Contractors with RemoFirst
Whether you're hiring contractors, need to hire employees, or are ready to convert an international contractor to employee status, RemoFirst can help you every step of the way.
We'll handle all the administrative tasks, including:
- Shipping any necessary equipment
- Creating compliant contracts (with IP protection)
- Managing payroll
- Employee benefits administration
We'll also ensure full compliance with all local employment laws.
Schedule a demo today to learn how we can help with your global employment needs in more than 185 countries.
