Converting from contractor to employee: A roadmap for global employers

January 28, 2022

Converting from contractor to employee

Attracting and keeping talented employees is critical to success at any organization—so much so that selecting the right talent could lead to 33% higher revenue.

For companies with their eyes on global growth, some of the most talented workers may be international independent contractors, and the key to retaining them—and helping to build upon a culture that attracts even more valuable talent—is converting them to employees.

Differences between contractors and employees

The key difference between international independent contractors and employees is “independence.” Contractors are often freelancers with specialized skills. They are responsible for paying taxes on their income, and they don’t receive employee benefits like healthcare or a retirement plan.

Unlike a contractor, an employee works for an employer according to the specific terms laid out in the employment agreement. In return, employees are paid a salary or an hourly wage, and they have taxes taken out by their employer. Those employees are often eligible for—and, depending on the local employment laws, entitled to—benefits, bonuses and regular raises, as well.

Why move from contractor to employee?

Companies with trusted contractors in various countries may want to convert them into employees for various strategic reasons.

Company culture and talent retention. Converting contractors into employees says a lot about a company’s values—which are the basis of any company culture. When an organization converts contractors into employees, it shows it appreciates the workers’ contributions to the organization and wants to reward them with regular pay and benefits. Converting contractors to employees helps contribute to a strong company culture and helps the organization attract and retain better talent. When there’s a strong culture, people feel like they belong, and that means they’re more likely to stick around for the long term.

Competitive advantage. In addition to the advantage of attracting top talent, converting contractors to employees helps protect your organization from losing out on that talent—potentially to your competitors. The rise of remote work and the notion that organizations can find the best talent for their needs anywhere in the world works in favor of both employers and contractors. Employers can find the right talent, and contactors have access to a much broader availability of work. If you’ve established a relationship with a valuable contractor, converting them to an employee keeps their talent with your organization and not with other employers.

Employment compliance. If your contractors live and work in a country where you’re not familiar with employment laws, it’s likely they will pose a compliance risk to your company. The scope of contractors’ work for your company, how you pay them, and how you manage their projects all play a role in how the local government classifies their work. If the government deems the contractor is misclassified, not only could you face fines and penalties, but also the payment of back wages, overtime pay, bonuses, and employee benefits. Converting from contractor to employee helps you avoid the regulatory complexity surrounding contract worker misclassification.

Successfully converting from contractor to employee

Keep the following in mind to reduce compliance risks and onboard the new employee efficiently.

Understand your options for employment. To hire an international contractor as a full-time employee, you must have a legal mechanism to do so. There are two common approaches:

Establishing a legal entity in a foreign country is often the more costly option—in both time and money. Depending on the country in which you wish to hire your contractors as employees, the entity setup process can take anywhere from six to nine months, and upward of $25,000.

An employer of record, sometimes referred to as international PEO, already has an entity in your contractor’s country and can hire them on your behalf—often in as little as two weeks and for a low monthly cost. It handles the administrative requirements, such as payroll, benefits and tax withholding, and leases the employee back to you through an employee lease agreement to manage their day-to-day work and contributions. Although legally employed by the employer of record, for all intents and purposes, they’re your employee.

Know your local country employment laws. If your organization decides to go the entity route in order to convert contractors to employees, it becomes liable for the payroll, tax and benefit obligations that come with a new employee hire. So, in addition to hiring contractors, you may need to consider bringing on workers with local HR and payroll expertise to ensure ongoing compliance with the country’s employment laws.

With the employer of record approach, local employment compliance is part of the deal. The employer of record is responsible for complying with all regulations in the country, and they often provide expert HR and payroll consultation as part of their agreement with you.

Issue a compliant contract. Employment contract rules vary by country. In France, for example, employment contracts must be written in French. So even if your company conducts business in English—and your workers are multilingual—the employment contract is only legal if it’s in French.

Beyond country-specific requirements, if you’re converting from contractor to employee, it’s a good start if your contract spells out the terms of the employment relationship, including salary and benefits, and makes clear the obligations of both the employee and the employer. An employer of record will ensure compliant employment contracts—likely in both English and the local language—that take into account the needs of both the client and employee.

If you’re considering converting international contractors to employees, learn more about how to start the conversation with them in our “Independent contractor or employee?” ebook. If you’d like to learn more about how our employer of record solution, GEO, can help you convert your contractors quickly and compliantly, speak with one of our global solutions advisors today.

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