When should you convert a contractor to an employee?
by Preston on 2020-10-16
International employment can be tricky. Many companies take the easy option and pay their foreign workers as contractors. Unfortunately, the easy option isn’t always the right option — or the safest.
While contractor designations may be appropriate for some business relationships, companies cannot simply pay people as contractors because it’s easier. Contractors and employees fulfill different roles and have distinct legal definitions. Converting a contractor to an employee can protect the employer from penalties, provide a better experience for the employee, and make it simpler for both parties to collaborate.
Remote helps companies convert contractors to employees all over the world. If you want to convert a contractor or want to know more about the benefits and drawbacks of conversion, this guide can help you get started.
What are the advantages for the employer?
Employers bear a greater burden of responsibility in contractor relationships. If the contractor is incorrectly classified, the employer ends up with the penalties and fines.
Misclassification isn’t the only problem, though. Contractors are their own legal entities in most countries, which entitles them to certain rights regarding the work they perform. In some cases, an employer who commissions work from a contractor could discover that the contractor owns all or a portion of the work’s intellectual property rights. This is worrisome enough for one project, but in long-term contractor relationships, IP rights can become matters of extreme concern for unprepared businesses.
Full employees also cost less than contractors in many scenarios. Although companies don’t owe benefits to contractors, businesses still save money in the long run by securing a valued worker with experience working for the company. Tracking these savings may not be straightforward, but the gains in productivity and stability are real.
Employers who take care of their employees by providing benefits also reap the rewards of high morale and a strong company culture. Contractors are mercenaries by trade, jumping from one project to the next, while employees who are fairly compensated for their time can commit all their energies to a single mission.
What are the advantages for the worker?
Some workers prefer to work as contractors, but for most, the benefits of full employment far outweigh the downsides.
Full employees are entitled to a host of benefits that contractors don’t receive. In most countries, employees get paid time off, unemployment protections, access to better healthcare options, tax-advantaged retirement savings opportunities, and other perks.
Contractors who convert to employees also get the chance to develop their skills as part of a supportive team. Businesses with international workforces must be proactive to ensure employees living far from headquarters don’t feel like second-class citizens. By making workers full employees instead of contractors, businesses can show their team members that they value them as full contributors toward the company’s future.
Signs you should convert a contractor to an employee
Every situation is different. Some long-term contractor agreements make sense, while others are drawn-out legal battles waiting to happen. Consider your relationships with your contractors and watch for these common signs that it may be time to convert the contract to an employee.
1. You are out of compliance in the contractor’s country.
Do you know the laws regarding contract labor in the country where the contractor lives? Are you sure? Laws vary widely from one country and region to another. What qualifies as a contractor in the US may not qualify in the UK. Many countries have enacted new laws regarding contractors in response to the growth of “gig economy” companies. If you discover you are out of compliance, move quickly to convert and avoid hefty penalties.
2. You want your contractor to play a greater role in your company.
Contractors work on projects, but they don’t often play an active role in building the future of a company. Even a contractor on retainer is only tied to the company for a fixed amount of time or budget. Once you find an impressive contractor who could help you build your business, why leave that relationship to chance? Convert the contractor to an employee and bring some top talent into your organization with minimal onboarding.
3. You want to offer benefits to your contractor.
Because contractors are not usually entitled to benefits, their compensation is limited to cash. To provide a contractor with perks like health insurance, retirement savings options, and paid time off, you must first turn that contractor into an employee. Nothing helps companies retain top talent like a great benefits package.
4. You want to provide a better employee experience.
When contractors work with teams of full-time employees, they feel like the odd ones out. Employees share company culture in a way that contractors can’t quite enjoy. By converting contractors to employees, you invite them into the fold, creating a first-class experience for your team members all over the world.
5. You want more protections for your company’s intellectual property.
As mentioned earlier in this guide, contractors are their own entities and are entitled to certain rights regarding the work they produce. You can protect your IP with a well-written contract, but your rights are stronger when the person doing the work is your employee and not an outside contractor. Certain countries default IP rights to independent creators over companies, so if you have international contractors, make sure your contracts are ironclad on IP.
6. You want to save money in the long run.
Contractors demand higher wages than employees. The longer you keep working with them, the more money you spend that you could have spent on internal talent. Employees require benefits and other obligations, but once you convert a contractor, that person immediately becomes a more productive long-term asset for your team.
7. Your contract with the worker is outdated.
How long ago did you sign the agreement to work with your contractor? Many full-time freelancers work for the same company for months or years without receiving new contracts. These contracts may not hold up to changes in employment law, especially as laws evolve to prevent abuse in gig work. Onboarding the contractor as an employee eliminates this problem, provided the contractor is willing to make the switch.
8. You don’t want your competition to hire the contractor first.
Your favorite contractor may sign an NDA, but most countries won’t let you prevent a contractor from going to work for a competitor. What happens if someone who helps keep your business running suddenly starts using those skills for someone else? If you have a great contractor who would be an excellent asset for your competition, make an offer of employment before someone else does.
9. Your contractor wants to become an employee.
The simplest reason to convert a contractor to an employee is also one of the best. What does the contractor want? Some people prefer to live the freelance life, even when offered a great position with great pay. Others would like to leave the uncertainty of contract work in favor of the security and protections that come with full employment. Ask your best contractors if they would like to work for you as full-time employees, and if they say yes, make it happen.
How Remote helps convert contractors to employees
Making the transition from contractor to employee benefits both sides, but this move also carries its share of challenges. Paying an international contractor is easier than onboarding an international employee, especially for companies with limited experience.
Fortunately, Remote makes it easy to convert contractors to employees in countries all over the world. Our global employment and global contractor solutions let you decide what’s best for your business. We can help you pay and manage contractors in minutes, and if you decide to convert them to employees later, Remote can help you make the switch easily and quickly. For payroll, benefits, taxes, and international compliance, Remote makes it simple.