How to Convert a Contractor to an Employee Fast and Seamlessly

When figuring out how to convert a contractor to an employee, several concerns arise: Is the process too costly to justify? Will the contractor lose productivity without the “freedom” of independence? Can we convert a contractor who has other clients?

These are valid concerns. Transitioning a contractor to full-time employee status is a complex, resource-intensive process.

It involves revising payroll, benefits, equity, performance management, and other HR processes. The employment offer must also be more attractive than the contractor arrangement while ensuring compliance with local labor laws.

Fortunately, Deel EOR simplifies this process. Deel turns it into a strategic move that converts contractors into engaged, productive employees committed to the company’s success.

We’ll explore how Deel assists in selecting the right contractors for conversion while ensuring a compliant and streamlined process.

What’s the difference between a contractor and an employee

A contractor is a self-employed individual who provides services at an agreed-upon rate, operating independently. They maintain control over how and when they complete their work as long as they meet set deadlines.

An employee is a permanent worker who operates under the company’s direct supervision and has set work hours. The employer controls the employee's schedule, tools, and methods of work.

This is the key difference between an independent contractor and an employee. Additional legal, financial, and behavioral factors further distinguish a contractor from an employee, including:

1. Payments

Employees receive compensation through regular or hourly wages. They receive mandatory benefits as well, according to local labor regulations, such as health insurance, retirement plans, and paid leave.

Contractors receive payments based on the invoices they submit for the services provided. This can be on an agreed-upon hourly or project-based rate. Contractors are not obligated to receive company benefits.

2. Taxes

For employees, the company is responsible for withholding taxes, such as income tax. Contractors manage their own taxes, including income and self-employment tax, without deductions made by the company.

3. Commitment

Contractors can work with multiple clients simultaneously and are not bound by exclusive contracts unless specified. Employees, however, are part of the company’s internal team. They work under an exclusive contract, dedicating their time and services to one company.

4. Intellectual property ownership

Contractors retain ownership of the work they produce unless the contract specifies otherwise. Employees generally assign their intellectual property rights to the company as part of their employment agreement.

5. Labor laws

Labor laws protect employees by regulating minimum wage, overtime pay, anti-discrimination, and other workplace protections. In contrast, contractors have no entitlement to these benefits or safeguards.

Worker classification laws vary by country and continue to evolve. In the US, for instance, the Department of Labor has recently updated its criteria for classifying workers as either employees or independent contractors. This revised approach considers multiple factors to assess whether a worker is economically dependent on an employer or operates independently.

Keeping up with these changes can be challenging. However, misclassifying contractors and employees can have financial and legal consequences.

Deel’s Compliance Hub updates you on local regulatory changes and keeps your workers properly classified. It actively monitors and flags global regulatory updates, providing timely alerts and insights into compliance and misclassification risks.

See also: Mastering Global Employment Status: A Guide to Worker Classification

When should you convert a contractor to an employee

While preventing misclassification is a key reason to convert an independent contractor to an employee, other factors may also demand a transition:

• Consistent need for their services: If the contractor is performing an ongoing, essential role for your business, converting them to an employee ensures stability and consistency
• A desire for more control over their work schedule: When you need to control how, when, and where work occurs, it may indicate that the role requires an employee
• Full-time commitment: If the contractor is working full-time or close to full-time hours for you, they may essentially be an employee. At this point, converting them helps prevent misclassification
• Retain top talent: For contractors who add significant value, offering employee status with benefits and job security can ensure their loyalty and prevent poaching by competitors
• Stronger protection of the company’s intellectual property: While contractors can sign intellectual property agreements, converting them to employees provides stronger protection. Employees typically have stricter confidentiality and legal obligations
• The contractor expresses a desire for employee status: If a contractor indicates a willingness to transition to employee status, granting their request enhances their investment in the company

See also: When Should You Move from Contractors to Full-Time Employees

What are the benefits of converting a contractor to an employee

Converting contractors to employees can enhance organizational effectiveness and strengthen team dynamics. Here are some key advantages:

1. Improved team cohesion

This transition ensures that all workers adhere to the company’s policies and processes, creating consistency in task completion. It promotes a more collaborative approach to work and fosters a stronger team dynamic.

2. Reduces legal risks

A clear employer-employee relationship makes it easier to align with labor laws and clarify employee rights and benefits. This clarity minimizes the risk of legal penalties and audits related to misclassification and non-compliance.

3. Improves employee experience

Giving the workers access to the same benefits and rights as their colleagues helps them engage fully in the company culture. As a result, they feel more valued and invested in the organization, improving retention rates.

4. Simplifies training and development

Transitioning contractors to employees ensures their exclusive commitment to your organization and a deeper alignment with its goals. You can invest in their skill enhancement and career growth without the limitations of a temporary arrangement.

5. Prevents interruptions

An employee status prevents disruptions from contract renewals or staffing gaps. It creates stability, ensuring that projects continue smoothly without the risk of losing key contributors.

6. Better talent management

An employee arrangement fosters long-term relationships, allowing you to assess their strengths, weaknesses, and growth potential. This supports strategic workforce management, including succession planning and effective talent allocation.

Understanding each employee’s contributions allows you to optimize talent and fill key positions with individuals who drive company growth.

What are the risks of converting a contractor to an employee

Brace yourself for these challenges.

1. Increased HR workload

Converting contractors to employees adds administrative tasks. This includes managing benefits enrollment, ensuring compliance with labor laws, onboarding, and integrating them into training programs.

2. Reduced flexibility in staffing

Contractors provide temporary support. They help in aligning staffing with changing workloads and project needs. Converting them to employees may diminish this agility, as employees typically have more rigid schedules and defined responsibilities.

3. Cultural integration challenges

Integrating new employees into the company culture can be difficult. This is especially true if they have operated as independent contractors for an extended period. They may need time to adjust to team dynamics and organizational expectations.

Key considerations before converting a contractor to an employee

Before beginning the transition process, ensure it is financially sound and compliant with relevant regulations.

1. Determine if the contractor can legally become an employee

Assess the worker’s current classification to ensure it meets the legal definition of an employee under local labor laws.

Utilize Deel’s Misclassification Quiz. This AI-powered tool uses past employment law cases and relevant local laws to classify workers with over 90% accuracy.

2. Consider whether the long-term financial commitment is viable for the company

Evaluate the costs of converting the contractor to employee status, including salary, benefits, taxes, and administrative overhead. Check if this cost aligns with your budget.

Also, analyze these costs against the potential benefits of full employment. Consider factors like increased stability, loyalty, and productivity and their impact on your bottom line. Weigh these benefits against the total cost to determine if the investment is reasonable in the long run.

How to convert a contractor to an employee fast, easily, and compliantly

Once you’re confident that the conversion is financially viable and legally possible, follow these steps.

1. Propose an offer to the employee

The contractor has the choice to transition to a full-time employee or remain in their current status. Your role is to highlight the advantages of becoming an employee while maintaining honesty and transparency.

Explain why you want them as a full-time employee, what the role entails, and how this change will benefit them.

Transitioning to full-time employment may require them to drop other clients, impacting their overall income. To compensate, offer a competitive salary and benefits package. Be flexible on work hours, paid time off, and other perks as well.

How to do it:

Research local industry standards for compensation and benefits to ensure a competitive offer.

Use Deel’s global hiring toolkit. It provides real-time market rates for different roles and locations, as well as insights into statutory, common, and competitive benefits. This helps you tailor your compensation package to meet expectations while staying within budget.

You can also spice up the offer by granting equity through Deel’s equity management feature. Our in-house experts can help you select the best equity plan and handle all tax and regulatory requirements.

See also: How-to-Guide to Compensation Conversations with Employees: Build Trust and Motivation

2. Set up an entity in the employee’s country of residence (or use an EOR)

Once the contractor accepts your offer, establish a local entity in their country of residence. It’s a legal requirement for most countries. Having a local entity facilitates compliance with essential obligations such as tax liabilities, social security contributions, and benefits administration.

Key steps include obtaining permits or licenses, opening local bank accounts, and securing government approvals.

How to do it:

Setting up a local entity involves time-consuming, resource-intensive bureaucratic processes. Moreover, the waiting period for approvals can delay the transition.

A more efficient route is to bypass the burden of establishing a legal entity altogether by using Deel EOR.

Deel assumes the legal responsibility for the employee by acting as their official employer. It handles payroll, tax filings, social security contributions, and compliance with local labor laws on your behalf. Meanwhile, you retain control over the employee’s work assignments and performance.

Discover how Lloyd's List Intelligence built teams in seven countries with Deel. It increased its global presence by 33% while saving time and money.

See also: Cost Comparison: EOR vs. Opening an Entity

3. Create and sign an employment contract

Next, formalize the employment relationship with a clear contract that specifies:

• The employee’s role, responsibilities, and working hours
• Salary, benefits, and overtime policy
• Termination policy and notice period
• Intellectual property rights, confidentiality, and any non-compete clauses

Both parties should fully understand the terms to avoid future disputes.

How to do it:

Ensure the contract complies with the local labor laws of the employee’s country of residence. Deel EOR simplifies this by creating locally compliant contracts for you, along with Data Processing Agreements (DPAs).

You can easily access, edit, and send for signatures via the Deel platform. We regularly update these contracts to reflect the latest changes in local labor laws.

Discover how Magic creates compliant contracts with Deel. It saves the company over 50 hours in admin work monthly and reduces HR workload by 25%.

See also: Stay Compliant with Data Processing Agreements

4. Collect employee information

Although you may have some of the contractor’s information, converting to an employee requires more details to comply with local laws.

Each country demands different documents and information. In the US, for instance, you need to fill out W-2 forms for employees instead of the 1099 forms used for contractors. A W-4 is also necessary for tax withholding, and an I-9 to confirm work eligibility.

In Canada, you need a completed TD1 form for tax withholding. You also need the employee’s SIN for payroll and registration with CPP and EI programs for mandatory contributions.

Alongside legal requirements, collect the details necessary to offer benefits, such as health insurance preferences.

How to do it:

This is a lot of information to manage, but Deel’s self-serve platform makes it simpler.

Through Deel’s self-serve platform, workers can see the country-specific documents they need to provide. They can upload documents, sign necessary forms directly on the platform, and update their information independently.

Deel also securely stores all documents. This ensures centralized and easy access to your global workforce’s paperwork.

5. Add them to payroll

When you convert a contractor to an employee, they transition from invoicing to joining your payroll. It’s essential to ensure they receive timely payments with the same convenience they enjoyed as contractors.

Transitioning international contractors requires integrating each country’s tax, social security, and benefits regulations into your payroll. You'll also need to manage currency exchange, international banking regulations, and tax treaties to avoid over-taxation.

How to do it:

Use Deel’s Global Payroll service to consolidate and streamline your international payroll operations. We handle compliance, tax deductions, and filings—your only task is to approve payments.

Deel automatically syncs data from your HR and time attendance software, reducing the risk of errors from manual entry. You can effortlessly make off-cycle payments and generate payslips automatically.

Our in-house payroll experts provide guidance on local tax regulations, while Customer Success Managers offer dedicated support.

To enhance the experience for transitioned employees and the entire workforce, Deel offers:

• One dedicated point of contact for each country that employees can reach out to with their queries
• Multiple payment methods, including Deel Card, digital wallets, cryptocurrency, and local bank transfers
• Advance payments through Deel Advance
• Access to funds in their local currency

Discover how Yodo1 automates payroll across 30 countries, saving 100 work hours. It also reduces 40 transactions to just one, all with Deel.

See also: Your Expert Guide to Payroll Management

6. Onboard the employee and provide a positive experience

The next step is to onboard the employee. Welcome and equip them to succeed in their role.

A good onboarding process:

• Introduces the new employee to the company culture, policies, and values
• Provides access to company tools and systems, including adequate training on their use
• Assigns an onboarding buddy to support the new employee
• Creates opportunities for the employee to connect with their managers and teammates
• Provides role-specific training
• Incorporates regular check-ins with the direct manager

Having a well-structured onboarding process sets the stage for long-term engagement and productivity.

How to do it:

Onboard your workers using Deel’s onboarding plugins to simplify the process for both managers and employees.

You can automate workflows that assign onboarding tasks in Slack based on the employee’s department and location, including timely reminders. This keeps them on track and ensures they don't miss important steps in the onboarding process.

Additionally, Deel’s one-on-one plugin lets managers conduct regular check-ins, share feedback, and address employee concerns.

To support your new hires further, use Deel IT to ship essential tools directly to them. Deel handles shipping, reassigns unused items, and manages returns when an employee leaves.

We also keep your equipment inventory updated. You can easily view the status of devices, users, and locations at a glance.

Discover how Outfittery reduces onboarding time by 80% with Deel.

See also: Sample Onboarding Plan for New Employees: Your Ultimate Resource

7. Manage the employee’s performance and development

Once you settle the employee, establish clear performance expectations and provide ongoing support through regular training and feedback. It’s also important to outline a career path that aligns with their personal aspirations.

This approach motivates employees by highlighting their growth potential within the organization. It also nurtures a more capable workforce.

How to do it:

Use Deel Engage. It provides a suite of tools for personalized, comprehensive employee development, including:

• 360° reviews to provide a comprehensive view of performance
• Employee training software to create and assign relevant upskilling and reskilling courses
• Competency-based career progression frameworks to offer a roadmap for growth
• Slack HR plugins like kudos to acknowledge and reward good performance

These tools help employees understand their strengths and areas for improvement. They also cultivate a supportive environment that encourages continuous learning and high performance.

Discover how reev merges four separate HR tools into one with Deel. Deel also streamlines seven processes for a smoother employee lifecycle.

See also: How to Create an Effective Performance Management System in 12 Steps

Leverage Deel to convert contractors to employees seamlessly

Converting select contractors to employees is a strategic move that strengthens your workforce and positions your organization for growth.

However, ensuring a compliant transition that provides a positive experience for your workers is crucial for realizing these benefits. This is where Deel comes in.

Deel supports you at every stage of the contractor-to-employee conversion process. We help determine eligibility, establish conversion structures, and set up employees for high performance.

But Deel goes beyond just conversions. We enhance your entire workforce management approach, ensuring compliance, efficiency, and employee satisfaction.

Curious to see Deel’s features in action? Book a demo.