convert independent contractors to employees
HR, Insights

Benefits of converting independent contractors to employees

If your company is constantly looking for specialized talent in certain areas, you may choose to convert independent contractors to employees. This ensures the recruitment of trained staff whose work you already know and have proven yourself.

In this article, we offer you the opportunity to learn in detail what the benefits of doing this are. At the same time, you will be able to know how this procedure is carried out, the risks involved, and the tools to do it. Let us take a look:

1. Independent contractor vs employee

2. What are the benefits obtained when you convert independent contractors to employees?

3. When to make this conversion?

4. Common challenges when you convert independent contractors to employees

5. Turning contractors into employees

6. How is the new compensation and benefits package calculated?

7. What can we do to help you make this conversion?

1. Independent contractor vs employee

There are some notable differences between independent contractors and employees of a company, especially because of the term “independent”. These contractors (they may also be known as “freelancers”) are workers with specific skills not attached to an organization. Moreover, they have no employee benefits like social security, health insurance, or retirement plans, and also pay their taxes.

By contrast, the relationship of an employee with a company is through the terms of a contract made between them. This guarantees a salary according to the law, in addition to the fact that the employer takes care of taxes. Likewise, these employees are eligible for compensation, bonuses, regular salary increases, and other benefits.

Thus, the differences between an independent contractor and an employee are quite evident. Therefore, based on these same differences, it is where both the benefits and the challenges that will arise when seeking to carry out this conversion get established.

2. What are the benefits obtained when you convert independent contractors to employees?

There are many reasons why a company wants to convert independent contractors to full-time employees. For example, they are flexible, have skills in specific areas, and can often be cheaper than permanent employees. 

However, hiring this type of worker is not always the best thing for certain companies. There are many risks when you decide to bring an independent contractor into your organization. However, you will also find certain benefits when you decide to make this conversion, such as the following:

2.1 Company culture and talent retention

The process of converting independent contractors to employees will increase the valuation of your company, which benefits the company culture. This is because when an organization determines to employ a contractor, it shows appreciation for their work by wanting to offer them regular pay and legal benefits.

In this way, the business culture of the company is further reinforced, helping to make it more attractive and retain the best talent. When this happens, employees become more ingrained in their sense of belonging and are more likely to stay longer.

2.2 More satisfied employees

Undoubtedly, the greatest advantage of being an employee of a company is the benefits that they get. Independent contractors do not enjoy employment benefits such as health insurance, social security, vacations, parental leave, pensions, among others. Therefore, when they can access them, you will get satisfied and even more productive employees.

Nevertheless, many independent contractors may consider that is not the best choice for them. This can happen for several reasons like they lose flexibility, their salary will decrease, or do not want to be under contract. This is why the employer has to be clear with the contractor about the benefits they will get.

2.3 Competitive advantage

Another advantage of converting independent contractors to employees is that your company will ensure not losing potential talent. In this sense, by establishing a relationship with a valuable contractor, you will avoid the flight of that talent to another company.

Of course, it is not that the competition does not have a specific talent, but that your company gets it. Ideally, your organization should have the best possible staff and this is not only the option of turning a contractor into an employee.

2.4 Employee compliance

You have to know and apply the employment laws established in the country or region where your company is located. Otherwise, there will be the possibility that the employee will file labor compliance. This occurs because the local government will classify the work of the contractor based on length, payment, and project management.

Consequently, the incorrect classification of these workers could lead to fines and penalties for the payment of labor benefits. That is, you must pay the independent contractor with returned wages, overtime pay, bonuses, among others.

Therefore, converting independent contractors to employees will help you avoid the complexity of regulations around misclassifying workers.

3. When to make this conversion?

Normally, this conversion should take about a year. However, you are not required to go through this process, even if you are completely satisfied with the work that the contractor has been doing. The main reason would be, as stated above, to avoid misclassification of that particular worker.

In the first section of this article, we explained the differences between an employee and an independent contractor. The above must be clear to employers, as it is critical for conversion and thus avoid misclassification.

Also, another aspect of converting is when you require the employer to keep to a schedule, use company equipment, or need to constantly report to your company. This is because, when your organization has any kind of control over the contractor, the law no longer considers him a contractor but a regular employee.

4. Common challenges when you convert independent contractors to employees

The process of turning independent contractors into full-time employees is not an easy one. There will be some challenges that your organization must deal with. Among these, we find:

  • Changes in payment: one of the substantial changes will be that your company will now have to manage the salary and benefits of the new employee. This change is logically unavoidable, since before this was done by the contractor without the intervention of the organization.
  • Taxes: Where before the contractor handled their taxes, now the company will take care of it. Nevertheless, the companies already have some personnel specialized in this matter, thus this is not a big problem.
  • Compliance with local labor laws: This is one of the biggest challenges employers face. You must be fully aware of the labor laws of the country or region where you are established. These include national holidays, vacation periods, sick leave, overtime, etcetera.

To achieve this goal, companies must conduct extensive research, partner with a PEO, conduct legal consultations, among others.

On top of that, companies that have employees from different parts of the world may find this process even more difficult. This is because the company must deal with different laws in each host country.

5. Turning contractors into employees

There are a few considerations to keep in mind when converting independent contractors to full-time employees.

5.1 Understanding employment options

There are two ways to gain an understanding of employment options at the time of this conversion. These are:

  • Establishing a business entity in the place where the contractor resides: It is the most expensive option to carry out this process, in terms of both money and execution time. This can take your company between six and nine months, depending on the country where you want to carry it out.
  • Hiring an Employer of Record (EOR): This type of organization, sometimes known as an international PEO, is already established in the country where the contractor wants to employ. Typically, you can complete the hiring process in a few weeks and for a lower cost than the previous process.

Likewise, an EOR will be in charge of the entire legal process in the host country, since it knows each one of them. This will ease the burden of all these procedures on your company, as it also handles administrative matters such as payroll, benefits, taxes, etc. As well, even though the EOR is the employer, in all respects they will be the employees of your business.

5.2 Know the laws of your country

If your company has decided to take the business entity route, you must take responsibility for payroll, taxes, and benefits. For this reason, you should consider hiring local HR and international payroll experts. In this way, it ensures that it complies with the labor obligations of the hosting country.

On the other hand, with the use of an EOR in said country, labor commitments enter into the contract. In addition, they provide the Human Resources experts as well as the payroll consultants, as they are part of the agreement.

5.3 Make a compliance contract

Employee contract rules vary from country to country. For example, in some countries business contracts must be written in the language of each of them to be legal. As a result, it does not matter if your language differs from that of the host country, the contract must be written in the language of the latter.

For this reason, if you want to turn independent contractors into employees, you must establish a clear and specific contract. This should include the relationship terms between the company and the employee such as salary, benefits, in addition to the obligations of both.

In the case of an employer of record, they take care of this entire process, including establishing a contract in both English and the local language.

6. How is the new compensation and benefits package calculated?

Once you have gone through the process of converting independent contractors to employees, you need to know how to calculate the benefits and compensation of the new employee of your company. Before making these calculations, you must take into account the following:

  • Something quite noticeable when making these calculations is that the hourly valuation of an independent contractor is higher than that of an equivalent employee. This compensates for the fact that he does not receive statutory benefits, pays his taxes, and assumes significant risks if the client does not make the payments.
  • The contractor who has become an employee may be expecting a compensation package because of reduced income due to deductions. This can happen because the contractor was not paying taxes for some particular reason. For example, the individual tax residence was not clear or simply took the risk of not doing it.

Another reason the contractor-turned-employee requires compensation is because of trade restrictions. This particular point refers to the fact that an employee cannot work for the competition according to his contract. Therefore, this new worker will lose the flexibility to work in the place that he wants.

7. What can we do to help you make this conversion?

When it comes to going through this conversion process between a contractor and an employee, many things need to be considered. Although this process is not an easy and quick one, it can bring benefits to the business you run. Take into account each one of those that have been exposed here to know if to do it and when you can do it.

Therefore, when you want to do this in the Middle East, you can count on the best PEO (Professional Employment Organization). In addition, we offer the best Employer of Record service to make your recruiting process easier in this part of the world. This is thanks to our years of experience in the labor market.

Do you want to know more about converting independent contractors to employees? Do not hesitate to contact us through the email [email protected].

Also, if you want to be part of our qualified staff, you can enter website, leave us your CV and we will contact you shortly. Another way to contact us is by using the email [email protected], do not miss this opportunity.

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