In this article, we are going to cover converting contractors to full-time employees in your business.
In some situations, a business who currently hires contractors might find it more agreeable to work with a full-time employee instead. So the process of converting a contractor to an employee must begin.
This simple guide will walk you through that process.
This guide can help both workers and employees navigate this precarious situation, including legal implications, tax implications and employment legality.
- What are the benefits of converting a contractor to an employee?
- What are the legal differences between an employee and a contractor?
- What is the onboarding process for contractors to employees?
- How do we negotiate salary?
What Are The Benefits Of Converting A Contractor To An Employee?
Switching an independent contractor to a full-time employee can be both beneficial for the worker and the company alike. If you’re reading this, there’s a good probability you have independent contractors that you are considering onboarding as full-time employees.
Here’s a few things to consider before you do that:
- Company Culture
One of the main reasons a business might take on a contractor as a full-time employee is that it strengthens company culture. It’s long been a buzzword in the tech space, but the phrase “company culture” has trickled down into almost all areas of corporate life. In practical terms, the phrase company culture or corporate culture is the process of how things get done around the workplace. But the invisible essence of corporate culture is now based firmly on the belief systems and ideals the company has. Therefore, switching contractors to full-time employees is a positive move. Fostering security and cohesiveness of the work environment, along with a feeling of inclusivity.
- Competitive Advantage
It’s also seen as a competitive advantage. Companies that take on contractors that have a habit of converting them to full-time employees, gain an excellent reputation amongst prospective talent. This can make hiring easier in the future and so the circle of positive employer reputation continues.
- Minimize Risk
Reduction of compliance risk is also a major factor in modern companies switching employees from contractor to full-time employee. In the ever changing landscape of tax and labor laws, it’s very easy for the line between contractor and employee to become blurred. We’ve seen this before in major public cases like Uber, where they had to defend themselves in court because of local employment laws. The UK considered their drivers as employees, not contractors. It might be beneficial to employ the contractor as an employee and mitigate the risk altogether.
- Added Security
A lot of independent contractors have career goals and plans. Among these goals, some usually want to become a full-time employee, partly because they want stability. They might also want access to benefits, bonuses and vacation pay that their full-time employee counterparts have. This will play a big role in the coming months as a looming recession forces a lot of contractors to consider if they should take a full-time position for a little added security.
Other factors play out on both sides of the fence as an employer and an employee.
It’s worth considering:
- Streamlining Workflow
Is another reason to convert a contractor to an employee. If a business is employing the same contractors repeatedly to fulfill the same work continuously, that’s probably a good indicator there is a full-time position there and not necessarily a temporary one.
- Cost Saving
When a company or an employee decides it might be a good idea to transfer their contractual status to full-time employee status, the sticky issue of compensation comes up. Contractors handle their own taxes, their own expenses and typically have to charge more for their services because of this. Bringing them on as an employee can actually save money.
- Benefits Access
Although this might seem like a net loss for the employee, having access to benefits and other forms of compensation, like bonuses, can make up the shortfall. This is especially true in the US, where healthcare is prohibitively expensive for an independent contractor.
- Training Access
Contractors have little to no access to workplace training. If a business implements large systemic changes across the board, it could be hard for any independent contractors to keep up. Since they are not included in the training that full-time employees would have.
- Tax Considerations
Employees usually have very little responsibility with taxation. The polar opposite to a contractor who is completely responsible for their own taxation at state and federal or country level. This is something that must be discussed at length with the contractor.
What Are The Legal Differences Between A Contractor And An Employee?
Well, there are practical differences between an employee and a contractor that we have listed above. But there are also some important legal differences and whilst every country and jurisdiction is different, they all have pretty similar guidelines for the definition of a contractor versus employee.
Governments around the globe have been clamping down on contractor status employees and the gig economy in particular. It’s why converting your contractors to full-time employees has become a hot topic.
- For instance, in the United States of America, companies that use independent contractors use W-9 and W-8 forms for domestic and international contractors. Once you’ve converted this contractor to an employee, companies will need to use a W-2 form for income tax purposes. In the UK, an employee is paid through PAYE, whereas a contractor would have to register any income with an annual self-assessment
- As well as income tax employers have to consider a few more types of payroll tax that didn’t apply to the employee when they were working as a contractor. This can include but is not limited to healthcare taxes, unemployment taxes, Social Security, workers’ compensation and other payroll taxation programmes that can vary, country to country
- Employment labor standards will be different for a full-time employee, too. Considerations like the agreed amount of hours worked, overtime, paid leave, parental leave and sick leave were not a consideration when the employee was a contractor.
What Is The Onboarding Process?
When a company decides to onboard a new employee, there’s a process that has to take place. This process is probably very familiar. The difference between a new-hire employee and a contractor to employee conversion is that the employee knows the company already. The management is completely aware of the employees’ capabilities and skill set. The company won’t need to go through the same interviewing process as a traditional new hire.
However, there are additional steps:
- The first and most obvious step is to determine whether the contractor is a viable employee. At a legal level, governing tax agencies in different countries will have their own specific tests to find out whether the person is currently considered an employee. You’ll have to check with each jurisdiction to see how the local government in that country determines if your contractor is already an employee (in which case, you need to move fast or face prosecution)
- Once the company has decided through the legal channels that it is legally possible to transition the contractor to a full-time hire, the next step would be to inform the prospective employee of their intentions. This will involve things like setting work hours, negotiating salary, deciding upon a location of work, deciding upon expenses, and providing necessary equipment for the job
- Once the contractor has decided that it is in their best interests to become a full-time employee, the next obvious step is to create an employment contract. This will be very similar to a completely new hire contract. If this is the first time you have switched from a contractor to an employee, it might be wise to get some counsel, just in case. Once the employee is covered legally and the employer is covered legally, the contracts can be signed and the employee can be added to the payroll.
As mentioned above, if a company has a system of hiring contractors to test them out and then converting them to employees, this entire process could be automated to an extent or at least systematized to make it easier in the future.
How Do We Negotiate Salary?
Probably the biggest sticking point with converting a contractor to an employee will be remuneration. The package of salary, plus bonuses, plus benefits, is usually the primary consideration. Contractors work hourly or a flat fee per project. It can feel quite unnerving to an employee when they have to sign on the dotted line for a yearly salary. Working contractually allows constant negotiation if the project overruns or the nature of the project changes.
As with everything, there are downsides to working as a contractor. What you gain in flexibility, you lose in benefits and bonuses.
Here are some considerations when converting contractor to salary rate:
- As we covered above, contractors charge more for their work because they have to cover expenses and income tax. Therefore, a straightforward conversion from what the contractor currently earns to the same salary as an employee is almost never financially feasible except in rare circumstances. Employees earn less than contractors simply because they handle significantly fewer overheads. With that said, there are some ways to convert a contractor hourly rate into an employee’s salary package where the employee and the employer both gain.
- The simplest method of conversion is to take the contractor’s hourly rate and multiply it by 2,080 hours, which is the standard full-time employee working hours per year. This now gives you a number to work with, the final salary will be lower, but you have a starting point.
The following expenses also have to be considered when calculating the true cost of hiring the new employee.
- Payroll taxes legally covered by the employer
- Reimbursements for travel and other expenses.
After subtracting these expenses and the tax burden from this salary, the employee will also need to calculate retention costs, things like bonuses, benefits and perks.
- Healthcare ,dental benefits and vision care
- Any paid vacation or sick pay the company offers
- Retirement savings, 401K pension plans
- Performance bonuses, sales commissions
As calculations continue, it means additional expenses. Now we get a bigger picture of the total cost of onboarding this contractor. These calculations are also beneficial for the employee as they can decide if the pros outweigh the cons.
They might take a reduction in overall compensation, but once the above benefits are included minus the tax burden, it might be beneficial for the contractor to convert to an employee after all.
What we do know is that talent retention is a top priority for companies right now. Converting your valued contractor to a secure, perhaps even geographically relocated full-time employee might be the best decision you make going forward.
If the contractor is working through an EoR, it will be much easier to eventually convert them to a full-time employee if required. This is just one of the many benefits of hiring through a company like Emerald.