8 Signs to Convert your Contractor to an Employee

The debate between hiring employees or independent contractors is still ongoing. Each option comes with its pros and cons, so it is up to the employer, the current situation in the company, and the hiring budget to decide which option would be the best fit.

In some cases, the decision to turn independent contractors into employees makes itself. In certain situations, turning your independent contractor into an employee is a must.

Let’s do a quick recap and go over those signs that it is time to turn your independent contractor into an employee.

What is the difference between independent contractors and employees?

An employee is a permanent member of your company. As an employer, you are required to pay them their salary, withhold their tax, and meet the required labor and wage laws. In return, the employee completes their daily tasks, and you have the right to dictate where, how, and when they complete these tasks.

Independent contractors on the other hand have their own business, and they will perform tasks for you as a service provider. They usually have niche expertise. They also set their hours, hourly wage, and decide where they would like to work. Generally, they enter into contracts with companies and are paid based on the terms of their contract.

The differences are also important from the legal standpoint. The United States Internal Revenue Service (IRS) has guidelines to determine if an independent contractor is that, or is an employee. It looks at where the person works, whether they are using their tools and equipment, who controls the workload, and how the person is being compensated.

When should you turn an independent contractor into an employee?

There are several circumstances where you should turn your independent contractor into an employee. Some of them have legal requirements involved, changes in the scope of work the contractor does for you, or simply, one or both parties think it a good idea. Let’s get into detail.

1. The contractor is already an employee of the company

As mentioned before, there are certain guidelines that the IRS uses to determine if the worker is an employee or an independent contractor. Try to take a look at the independent contractors hired to help you out - do they meet all the requirements?

If your independent contractors don’t have a contract or specified set of tasks they need to do to complete it, or if they are working full-time for your company, they may already be employees everywhere but on paper. They are not independent if you dictate how, when, and where they should do the job.

Even if you or your contractor are fine with this, it is legally considered to be a misclassification of an employee. You may face significant penalties and fees if you’re found guilty of classifying an employee as an independent contractor.

So, if your contractor already checks the boxes for employees, it is a sign that it may be time to convert them into an employee in your company. This may be tricky if your contractor is from another country, as hiring abroad can be complex. If this is the case, then choosing the right Employer of Record service could be a good idea.

2. When you want to include the contractor in your core business

Some contractors are simply the key to the success of your business. Their contribution can be what drives your company forward. In those cases, it is only normal to want to include the contractor more and rely on their expertise for more than they are doing for your company right now.

If you want to include your contractors in your company operations, show them the bigger picture, and ask them to contribute more, you should hire them as employees. As a contractor, they typically operate on a need-to-know basis and are not invested in the future of your company as an employee would be.

3. When you want to turn your working relationship into an indefinite one

Independent contractors are usually hired on a per-needed basis. Their contracts typically have deadlines or expiration dates. After these set dates, your contactor no longer works for you. They are free to pursue other jobs and gigs.

If this is something you are no longer interested in, then it is time to hire them as your employee. This will remove the time stamp on your collaboration, and allow you to rely on the contractor for as long as needed and wanted.

4. When you want more control over their work

Contractors typically come with niche expertise, and they handle the tasks they were assigned by the contract in their own way, using their equipment, tools, and methods. Employers, on the other hand, may offer guidance, but it is up to the contractor whether they will accept it or not.

If that’s something you are not comfortable with as an employer, you might consider hiring them as an employee. With an employee, you can set the rules and guidelines you want your employees to follow when they complete their tasks.

5. When you want them to work exclusively for you

The independent contractor, as their name suggests, is independent. That means they can have multiple clients at the same time. You are likely not the only employer benefiting from their expertise and experience.

If you would like to be the only employer of such great talent, the only solution is usually to hire them as full-time employees. Most employment contracts have non-compete clauses and other provisions that forbid your employees from sharing sensitive information and data from your company.

6. When you need to have ownership of their work

With an employee, the intellectual property of their work belongs entirely to your company. Similarly to the other protection clauses in their employment contract, this is also a given. In case your employee gets disgruntled and tries to get back to your company, you know your company’s data, their work, and the rights to the IP.

While you can set protections in place with independent contractors, you owning the intellectual property rights is not a given. You need to protect the intellectual property and set ownership rights in the contract with your independent contractor.

7. When you would like to dictate the work hours of independent contractors

Work hours can be a difficult thing to navigate, especially if you have remote employees working globally in different time zones. Add to that independent contractors who set their hours, and communication within your team becomes tricky and forcefully asynchronous.

If you’d like to be the one who sets the rules on when, or where, the work is performed, you should hire your independent contractor as an employee.

8. When they ask you to turn them into employees

If your independent contractor initiates the option of turning them into employees, you should consider it. It shows they would like to be a bigger or more significant part of your company and contribute better to its success.

They also might feel more comfortable being on the payroll instead, or may need the benefits typically given to full-time employees. This can prompt them to be more engaged with their work and company.

Is it better to have employees or contractors?

This is a question with no universal answer. Whether your company or business would benefit from either one of the choices depends on a lot of factors.

However, as a business owner, you should be familiar with the pros of having employees instead of contractors. There’s a heightened sense of loyalty toward the employer, and you get to have more control over how, when, and where the job is getting done.

On the other hand, the contractor usually already has niche expertise that may take years for your employees to develop. They are also more cost-effective options for short-term projects, or projects that don’t reoccur as often to warrant having the person on the payroll.

If you are unsure, it might be best to consult with an EOR or local expert on the topic. They can provide you with guidance on both hiring and the legalities of the differences between contractors and employees.

Which one is the best option for your company depends on the company. However, if you notice any of these eight signs, it might be worth considering turning your contractors into employees, as it could be the right choice for both your company and the contractor.

FAQ:

What is the difference between a contractor and a partner?

A contractor works for a company temporarily and under a separate business name, while a partner is someone who co-owns a business and shares in its profits and losses. Contractors provide specific services and are not involved in the company’s management. Partners have a say in the company’s decisions and often have long-term commitments.

Can you be an employee and a contractor for the same company?

No, you can't be both an employee and a contractor for the same company at the same time. Employees have a permanent role with specific work hours and benefits, while contractors work independently temporarily. Mixing the two roles can cause legal and tax issues.

What is a contract conversion?

Contract conversion is when a contractor’s status changes to that of an employee. This often happens when a contractor’s work becomes essential to the company or their work period extends indefinitely. Converting to an employee can offer benefits like job security, benefits, and a stable income.