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5 things to know before converting independent contractor

Independent contractors

Hiring independent contractors is an ideal option when a company requires professionals with specific skill sets for certain projects. Among independent contractors, global businesses mostly prefer to work with full-time external contractors when hired beyond borders. There are two core reasons businesses choose a full-time independent contractor. Firstly, these contractors have the required skill set and prior experience handling similar projects for years. Secondly, businesses have no legal entity to hire permanent or full-time employees in the target country.

Working with full-time external contractors, however, still has some challenges for overseas businesses. A high attrition rate, work alignment problems, a lack of control, and confidentiality issues are major challenges associated with independent contractors. Moreover, as a business owner, you’re likely to face additional challenges, such as work culture differences and compliance risks, when hiring independent contractors outside your country. 

So, businesses often consider converting their existing professionals into full-time employees to address such formidable challenges. Before you finally decide on the conversion, however, you must prepare well to ensure that your employee transition is smooth and effective. 

Through this blog, we’ll guide you on how you can prepare for a seamless transition from contractors to employees. There are five crucial factors you need to consider before converting your independent contractors into full-time employees. Let’s first understand the meaning and differences between independent contractors and full-time employees to gain a better perspective on why you need this transition. 

Independent Contractor vs Employee: meanings and differences

Once you have a clear understanding of both terms, you can easily comprehend the benefits and challenges of converting their existing professionals into employees.

Who is a full-time independent contractor?

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A full-time independent contractor is a type of employment arrangement in which an individual agrees to work for a company on a full-time basis for a certain duration. Unlike freelancers or part-time contractors, a full-time contractor needs to complete the stipulated time mentioned in the terms and conditions of the contract. For instance, a full-time contractor typically works for 30–35 hours a week. This type of arrangement is widely applicable in project-based work, consulting, and temporary staffing. Depending on the nature of the 

projects, a full-time contract position can be short-term  (which may last for a few weeks or months) or long-term (which can extend for a year or more).

For instance, companies hire full-time employees for a long period, say four to five years, as the project demands. However, a contract can be terminated at any time in the event of non-fulfillment of terms and conditions signed between employers and individual contractors. Otherwise, once the project is completed, the contract expires. If agreed upon by both sides, a contract can be renewed and its time duration can be extended. 

How are full-time independent contractors different from employees?

The key difference between a full-time contractor and a full-time employee lies in the way the employment arrangement is structured. We can further distinguish them in terms of tenure, work engagement, job security, and benefits. Unlike regular employees, independent contractors are hired for a fixed term per project, and they aren’t considered to be part of their employers’ organizations. Therefore, contractors miss out on several benefits and privileges given to full-time employees.  

Let’s explore four characteristics that make contract professionals different from full-time employees. 

  • No monthly salary: Unlike employees, full-time independent contractors don’t work in the regular timing of a 9 to 5 job cycle. However, these contractors are required to complete the stipulated time, mostly measured in terms of a week. They receive their payment on an hourly or project-wise basis but don’t receive a monthly salary like a full-time employee does. However, they may receive a higher hourly or project-based rate to compensate for the lack of several benefits. 
  • No employee benefits: In a full-time contract position, the specific benefits and rights can vary depending on the terms of the contract and the laws and regulations of the country or jurisdiction. Typically, professionals in full-time contract positions are not eligible for benefits such as health insurance, retirement plans, medical benefits, or paid time off from the employer. On the other hand, a full-time employee usually gets benefits, including health insurance, medical benefits, bonuses, paid leaves, retirement funds, gratuity, etc. 
  • Not eligible to apply for loans: Since independent contractors have no regular income and are not considered to be regular employees of an organization, they aren’t eligible for loans. For employees, loans can be approved and granted easily as their employers act as financial guarantors of the loans taken. 
  • No job security or career growth opportunities: Unlike full-time employees, freelancers don’t have career growth opportunities or job security. Once a contract expires, the employment relationship between contractors and employers vanishes. Career promotion is only possible through regular employee engagement when professionals are hired for long-term relationships.  

These are some major reasons why overseas businesses often face challenges in handling international contractors. In many cases, several ongoing projects get hampered due to the frequent switching of jobs by contractors. Therefore, it’s essential to convert your existing international contractors into full-time employees. Now, let’s dive into five crucial factors to ensure a smooth transition for your professionals. 

Five factors to know before conversion of independent contractors to employees

Make sure you prepare well to consider all five factors before you convert your existing contractors into full-fledged employees. 

  • Assessing talent performance: Retention of highly skilled talent is a major asset for an organization. You must thoroughly evaluate the performance of your existing resources to see if they can fill the talent gap in your organization. If you find the right talents who are reliable and ensure work quality and alignment, you can persuade them to join your team as full-time employees. Converting highly skilled contractors into regular employees will enhance productivity and ensure effective business operations.
  • Requiring legal expertise: Employee conversion requires a clear understanding of the local employment laws and regulations of the country where your contractors are based. You must seek advice and consultation from legal experts to ensure all necessary documents and policies are prepared that meet regulatory compliance during conversion. With the right legal assistance, you can easily minimize compliance risks associated with permanent establishments (PE).
  • Evaluating tax implications: Before conversion, you need to understand the tax implications of the target country for both businesses and employees. Every country has different tax systems and mechanisms in place that can affect the overall income of businesses and employees. Before you initiate your transition process, you must understand various tax implications, like income tax withholding, medical and health insurance taxes, state and national tax, and employee benefits tax. 
  • Setting employee benefits and salary: Deciding on what types of benefits and salary compensation you plan to offer to your employees is a vital aspect to consider before conversion. In general, policies towards employee benefits differ from one country to another. You can explore the best way to offer employee benefits using the expert services of the target country. For instance, in India, employees prefer companies that provide medical and health insurance coverage for their parents. Also, establishing a fair and competitive salary structure can attract employees to the conversion.  
  • Calculating conversion costs: You also need to know the overall cost of converting contractors into employees. Conducting a proper cost-benefit analysis of the financial implications will help you decide rationally and logically. You need to assess the impact of your budget allocation, as it’s likely to affect the financial conditions of your company. The budget constraint remains a crucial factor since employee conversion will be costlier compared with hiring them as independent contractors. 

EOR services: the best solution for a seamless employee conversion

It’ll be more challenging for businesses to handle a group of contractors based in another country as compared to handling contractors residing in your home country. Working with an employer of record (EOR) can be the best solution. EORs act as a legal entity that allows your full-time contractors to function without PE risks and continue their productivity with peace of mind. With employer of record services, you can easily retain highly skilled contractors and minimize the attrition rate since they will receive the maximum 

Independent contractors

employee benefits once they convert into EOR  employees. Also, with the help of EOR’s legal expertise and local market knowledge, you can easily frame the policy guidelines and convert the contractors into employees that align with the local employment laws and regulations. By accessing the wide knowledge and expertise of EOR services, you can take advantage of handling tax obligations, payroll, and benefits administration.

So, the best way to convert contractors into full-time employees is by using EOR services. One major advantage of using EOR services is that you can avail yourself of all-in-one solutions for challenges that act as roadblocks to your employee conversion. In a nutshell, with the help of EOR services, you can enhance your control, manage, and align with your resources effectively when converting independent contractors into full-time employees.  

Author's Profile Picture

Roshan Mayanglambam

He is the senior specialist of Remunance’s content writing team. His expertise lies in meticulous research and developing authentic ideas to showcase the uniqueness of addressing clients’ pain points through blogging. As a seasoned content writer with 4 years of experience, he delivers excellence in content curation, review, and editing. With nearly a year of experience in the PEO/EOR industry, he’s mastered his knowledge on subject matters like employer of record, professional employer organization, remote work, freelancing, outsourcing, etc. He also loves reading books, watching movies, and playing guitar whenever he gets free from his writing engagements.

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