When to Transition From Contractors to Full-Time Employees

Building a successful business is all about balance. Especially when it comes to your workforce. In the early days, hiring contractors makes perfect sense. You get the flexibility to scale quickly and have excellent access to specialized talent. Plus, overhead costs are kept low by only taking on the staff you need when you need them.

But as your company grows, so do the complexities of managing a contractor-heavy workforce. At some point, the question arises: When is the right time to transition from contractors to full-time employees?

The answer isn’t always straightforward, but in this guide, we’ll break down some key indicators that signal it’s the right time to transition. We’ll also discuss the key benefits of hiring employees and how global companies can manage the transition and onboarding.

Let’s dive in.

What is the difference between an employee and an independent contractor?

There are several key differences between an employee and an independent contractor. Understanding these differences is essential for compliance. If you get it wrong, you could face worker misclassification penalties.

Employment relationship

• Employee: Works under direct management of the company, following set work schedules and policies

• Contractor: Operates independently, usually setting their own hours and working on a project basis

Tax and compliance obligations

• Employee: Employer handles taxes, social security payments, and other benefits

• Contractor: Responsible for paying own taxes and other payments, often invoicing the company for services provided

Job security and benefits

• Employee: Receives benefits such as paid time off, retirement plans, and health insurance (benefits vary between countries)

• Contractor: No guaranteed benefits however, they are often paid a higher rate to offset the lack of benefits

Client exclusivity

• Employee: Usually dedicated to one company long-term

• Contractor: Often works with multiple clients on short-term projects

Read more: Contractor vs. Employee: Key Differences in the United States

Why companies often start with contractors

According to research, 40% of the global workforce are now contractors. Instead of committing to full-time employees right away, many companies choose to start with contractors. This enables them to bring in specialized talent when needed without any long-term obligations. Often, using contractors is the fastest and most flexible way to grow the business.

Startups and growing companies often hire contractors to complete short-term projects or gain access to industry experts without the overhead and commitment of having full-time employees. Plus, for global companies, working with contractors can be easier as it avoids the complexities of setting up legal entities in multiple countries.

But while working with contractors has its perks, relying on them long-term comes with its own risks and challenges.

The challenges of relying on contractors long-term

Understanding some of the issues around relying on contractors long-term can help you determine the right time to transition to full-time employees. Some common challenges include:

Cost-effectiveness

At first glance, hiring contractors seems like the cost-effective route to take. And in many cases, it is. No benefits, no payroll taxes, and no long-term commitments. But rehiring contractors time and time again may mean you end up spending more on compensation than you would if you hired full-time employees instead.

Contractors typically charge higher hourly or project-based rates to offset their lack of benefits and job security. When you factor in the potential compliance risks, turnover, and the cost of rehiring and retraining, the long-term cost of working with contractors can exceed that of full-time employees.

Compliance and legal risks

If not managed correctly, working with contractors can come with compliance and legal risks. Employee misclassification occurs when employees—whether intentionally or unintentionally—are labeled as independent contractors. This is either done on purpose to avoid taxes and legal protections or mistakenly as a result of complex global employment laws. In the US, for example, 30% of employers have misclassified at least one worker, which highlights how easy it is to slip up.

Misclassification is serious and can result in significant consequences, including back payment of wages, taxes, and benefits like health insurance, retirement, overtime, and unemployment insurance.

However, the distinction between employees and independent contractors isn’t always clear-cut, and different countries have different rules and requirements regarding employee classification. Navigating these complex considerations can be challenging for businesses, particularly those operating globally.

Not sure if your contractors are classified correctly? Use our misclassification tool to help you assess.

Lack of commitment and engagement

Contractors often juggle multiple clients, which means their focus isn’t solely on your company. Without a long-term stake in your business, they may not be fully invested in your goals and company culture. This can result in inconsistent work quality and lower engagement compared to full-time employees.

Since contractors aren’t bound by the same commitment as employees, they may also leave at any time for a better opportunity.

Investor and stakeholder concerns

If your workforce relies heavily on contractors, investors and stakeholders may see this as a red flag. A business built on short-term, flexible labor can raise concerns about long-term sustainability, largely due to workforce retention and compliance risks.

Transitioning important roles to full-time employment indicates stability, which can boost investors’ confidence and help attract long-term funding.

When is the right time to transition from contractors to full-time employees?

So, how will you know when it’s time to transition from contractors to full-time employees? Here are some key indicators that the time has come.

1. When your business needs more stability

As businesses grow, they often need more consistency. Contractors, while flexible, often come and go, which causes instability around operations, staffing, and even company culture.

On the other hand, full-time employees offer a sense of permanence and commitment. They’re more likely to be dedicated to the company, which can be invaluable in helping develop a strong company culture.

Example: Your business is scaling, and the contractors you rely on are coming and going. Hiring full-time employees ensures the stability and continuity your business needs to keep things running smoothly.

2. When you are out of compliance in the contractor’s country

If you’re hiring contractors in different countries, it’s easy to fall out of compliance with local labor laws accidentally. Each country has different rules about what qualifies as a contractor versus an employee, and misclassifying a worker can result in hefty fines.

Example: You’ve hired a contractor in Germany who works on a regular, ongoing basis, but after reviewing the local laws, you realize this arrangement is a violation of Germany’s labor regulations. By transitioning this contractor into a full-time employee, you’re now compliant and can avoid potential penalties.

3. When you want to retain top talent

Contractors often bring unique skills to the table, but they don’t always have the same commitment to your company as full-time employees. If you have a contractor who consistently delivers exceptional results, it might be time to offer them a full-time position so you don’t risk losing them.

Example: You’ve been working with a contractor for months who has proven to be an irreplaceable part of your team. Offering them a full-time role will not only help secure their services but also give them the benefits and career growth they need to stay with your company long-term.

4. When you’re at risk of worker misclassification

If your contractors are working similar hours and schedules to your full-time employees, there’s a chance you could be at risk of worker misclassification.

Worker misclassification can incur penalties and even lawsuits, so if your contractors’ roles are similar to those in full-time employment (like regular work hours or sole commitment to your business), it’s a good idea to transition them to employees. This will ensure compliance and reduce any legal risks.

Example: A contractor working full-time hours, following your company’s internal schedule, and reporting directly to a manager may be legally considered an employee, not a contractor. Moving them to a full-time role removes any ambiguity and protects you from potential penalties.

5. When you keep rehiring the same contractors

If you find yourself repeatedly hiring the same contractors for ongoing work, it might be time to offer them a permanent position. This reduces your administrative work and ensures you have the right people for the job.

Example: You’ve been working with the same contractor(s) for several years on recurring projects. Rather than repeatedly signing short-term, high-cost contracts, consider offering them a permanent position. The result could be less administrative work and more security on both sides.

6. When it could save you money

Keep a note of how much you are spending on each contractor per month or year. You may be surprised to find that the cost adds up to more than it would if you hired a full-time, permanent employee.

Not only could hiring full-time employees save you money on compensation, but you’ll also reduce the costs associated with finding and hiring new contractors.

Example: After several months of working with contractors, you start to notice that the cost of hiring and paying them is stacking up. You’ve also realized that the work they are doing isn’t a short-term project, it’s due to go on for some time. This indicates that it is time to enlist permanent employees.

7. When you want more control over work and schedules

While the flexibility that contractors offer is great, there may come a time when your business may need more stability. If you want to have more control over how and when your staff work, full-time employees could be the solution.

Example: As your company takes on larger projects, you need to ensure that certain tasks are done on a set schedule and that project deadlines are met without issue. Having employees who work regular hours can give you better control over deliverables.

8. When a contractor wants to become an employee

Contractors often lack the benefits and stability of employment. They typically don’t have access to benefits such as healthcare and retirement plans, and job security isn’t guaranteed.

If a contractor has expressed an interest in joining your team full-time, it’s a clear sign that they value your company. This is a great opportunity for you to offer them a permanent position.

Example: A contractor you’ve been working with has told you that they would like to join the company as a full-time employee. It’s a win-win. They gain the benefits and stability they’re looking for, and you secure their expertise and loyalty, and there may even be some cost savings. The risk if you don’t employ them? They make seek better opportunities elsewhere.

The benefits of transitioning from independent contractors to full-time employees

Changing from independent contractors to full-time employees comes with benefits for both the employer and the employee.

Key benefits for employers

• Increased stability and commitment: Employees are more likely to stay long-term, reducing turnover costs

• Better control: Employers have greater oversight of work schedules

• Stronger company culture: Permanent employees mean better bonds and stronger company culture

• Intellectual property protection: Work produced by employees is owned by the company, protecting proprietary information

• Improved investor confidence: A stable workforce increases credibility with investors and stakeholders

Key benefits for employees

• Job security: Full-time employees benefit from financial stability and long-term career growth

• Company benefits: Employees have access to health insurance, retirement plans, paid leave, and other perks

• Career development opportunities: Employees can access training and have the opportunity for promotions and pay rises

• Better relationships with other team members: Employees see the same people each day and are likely to form better relationships

• Legal protection and rights: Employees benefit from labor law protections, including wrongful termination safeguards

How to transition from independent contractors to full-time employees

Transitioning from independent contractors to full-time employees requires careful planning and execution to manage both employee satisfaction and legal complexities. Here’s a step-by-step breakdown.

1. Review your existing contractor workforce

Firstly, you need to decide who (if anyone) is a suitable candidate for full-time employment. Look at different roles, what they do, how much they’re costing, and their workload both now and in the future. It’s up to you to decide if their work should be permanent or if it’s something that can remain flexible.

You’ll also need to consider legal requirements in their country of residence to ensure that you are, or will be, compliant.

2. Manage legal and compliance requirements

Once you’ve decided who to employ, you must ensure that you can meet the specific criteria for employment in their country of residence. This includes wages, working hours, and other benefits.

To help manage this part of the process, partnering with an Employer or Record (EOR) can massively simplify the legal complexities. This is particularly helpful if you’re employing internationally.

For example, Deel EOR helps businesses hire and manage employees globally without setting up entities in each country. It handles payroll, tax, compliance, and legal requirements, ensuring you stay compliant with local employment laws.

3. Communicate with contractors

Open communication is essential. Be clear about your intentions to convert contractors into full-time employees and provide them with all the information they need about the change.

You should explain the benefits and stability of being a full-time employee versus a contractor and discuss any changes that may happen during the transition. Inform your contractors early and allow them to ask questions to make an informed decision about their future with your company.

4. Discuss salaries and benefits

Before the transition can be agreed upon, it’s time to talk about salaries and benefits. Full-time employees typically receive different compensation than contractors, with benefits like paid time off, health insurance, and retirement plans.

Make sure that the salaries you offer are competitive and reflect the employee’s new role and responsibilities. Research local laws to ensure the benefits offered are compliant with the regulations in your employee’s country. You’ll need to consider things like paid time off, health insurance, and maternity or paternity leave.

5. Onboarding

Unlike contractors, full-time employees will need formal onboarding processes, including training, setting up benefits, and providing access to the tools and resources they need. The onboarding process sets the tone for the overall employee experience. So it’s important to get it right.

Having a detailed checklist ensures that nothing is missed during the onboarding process. This leads to happier employees and reduced staff turnover.

Read more: Sample Onboarding Plan for New Employees: Your Ultimate Resource

How Deel EOR can help

Based on our estimates, businesses can save an average of $210,000 per country by using an EOR instead of setting up an entity.

With legal entities up and running in over 100 countries, we make it easy to transition contractions to full-time employees anywhere in the world.

We handle onboarding, offboarding, and everything in between—all in one platform. That includes employment contracts, minimum wage requirements, paid time off, health insurance, and other key benefits and regulations.

If you’re rehiring the same contractors time and time again, want to retain talent, or need more control over schedules, transitioning to full-time employment might be the right move. Deel EOR is here to help you make that shift effortlessly.

Want to find out more? Book a demo today.