If you’re a company that hires independent contractors on a regular basis but are looking to secure their employment with your company, then converting your contractor or freelancer to a full-time employee is your best bet.
This is a win-win situation for both parties as your contractor will receive employee benefits and will no longer have to manage their own taxes. On your end, you will be able to secure specific skills and lock in top talent for your company.
But is conversion from an independent contractor to a full-time employee easy? What are the necessary steps you should take? Is there a specific time that it must be done? We’re answering all of your questions below:
What are the benefits of converting my independent contractor to a full-time employee?
There’s a reason why many companies around the world hire independent contractors: they’re flexible, skilled in a certain area, and are sometimes cheaper than paying for a full-time employee. But hiring independent contractors is not the end all, be all solution for everyone. There are plenty of risks involved and you need to consider a few important before hiring them.
Contractor payroll software comes in handy to digitize payroll for independent contractors otherwise known as freelancers. Payroll software for contractors saves a lot of time and manpower for companies that hire them to cater to their business needs at large. Independent contractor payroll software suits small, medium and large-scale business units alike.
PEO companies are companies that handle administrative matters between business owners and independent contractors and freelancers, such as payroll-related taxes and human resources, and provide these services to both parties.
However, you can also minimize these risks by converting your independent contractors to full-time employees. Here are some advantages you can gain by doing so:
- Highly satisfied employees: One huge advantage of full-time employees is their access to benefits. Benefits like healthcare, health insurance, social security, sick, vacation, and parental leave, even pension and housing insurance are all benefits that employees have a right to, which independent contractors do not. Having access to all these benefits will result in highly satisfied employees and possibly even more productive ones.
- Talent retention: By converting your independent contractor to a full-time employee, you’ll be able to secure their skills for the growth and benefit of the company. Instead of having limited access to their skills because of the contractual and per project nature of their job, you’ll be giving your company a competitive advantage by locking in your top talent.
- Employment compliance: When it comes to independent contractors, compliance is a slightly grey area. It is understood that the independent contractor must pay for his or her own taxes; however, many contractors either forget or skip paying taxes which raises questions regarding tax compliance. Employees may also give independent contractors work that is actually qualified as work for a full-time employee, thus skirting around the taxation and benefits requirement. If you do convert an independent contractor to a full-time employee, you will not have to worry about compliance issues as the employer is mandated by law to provide benefits and pay taxes.
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When should I convert my independent contractor to a full-time employee?
Ideally, you should be able to convert independent contractors to full-time employees within a one year time period. If you are highly satisfied with the work that your freelancer or contractor provides you with, you might already want to consider offering them a full-time position. While not mandatory, the reason it is ideal to convert your independent contractor within a one year time period is to avoid misclassification risks.
Employers must be aware of the definitions and differences between an independent contractor and a full-time employee. They are critical to conversion and will help you avoid misclassification.
Generally speaking, the main differences between the two can be outlined as follows:
- Independent contractors are paid per project, pay their own taxes, use their own equipment, work offsite, and can usually work when and where they want
- Full-time employees are paid a regular wage, have their taxes withheld, use company owned equipment, report to a company office or facility, and have a working schedule that is dictated by their employer
Once you start requiring your independent contractors to go to the office, use company owned equipment, or follow a certain schedule, we recommend converting your independent contractor to a full-time employee immediately. As per the law, if you have any control over the performance of the contractor, he/she can no longer be called as an independent contractor and should be given full time employment status.
What happens if I don’t convert my independent contractor right away?
If you don’t convert your independent contractor right away but are requiring them to do work that can be considered full-time, you are at risk of misclassification. Misclassification happens when a governing body deems the nature of an independent contractor’s job as that of an employee. The consequences of misclassification usually result in heavy fines on the company’s end.
Unfortunately, misclassification in Asia is not uncommon. In 2018, the Philippines’ Department of Labor and Employment cracked down on the Philippine Long Distance Telephone Company, mandating that they regularize over 8,000 contractual workers, and pay a settlement fee of approximately $1.8M USD. In 2019, the Indian multinational company Infosys, was fined $800,000 USD for worker misclassification and tax fraud.
What are the challenges of converting my independent contractor to a full-time employee?
- Change in pay: This is inevitable. If you do decide to convert your independent contractor to a full-time employee, you will have to expect change in costs from your end. You will be paying for their benefits as well as their taxes, and this will be coming out of your company’s budget.
- Taxation compliance: Independent contractors are expected to pay their own taxes. However, once you convert them to full-time employees, employers are responsible for withholding taxes on behalf of the employee.
- Local labor law compliance: One challenge when it comes to labor law compliance is local knowledge. (This includes information about national holidays, laws on vacation and sick leaves, overtime pay, severance pay, etc.) Employers will have to be familiar with the local labor laws, which might require heavy research, local agency partnerships, or legal consultation, all of which may also be quite costly.
On top of that, compliance with tax and labor laws may be even more difficult if you have full-time employees from different countries. Each country will have its own set of laws, which may make it difficult for an employer to comply with, organize, and set up.
If you want to avoid the headache and stress that comes with copious research and paperwork, you can use companies like Multiplier that allow you to effortlessly comply with local tax and labor laws.
How do I convert my independent contractor to a full-time employee?
To hire any full-time employee, you must have a legal presence or entity in the country where your soon-to-be full-time employee resides. If you do have a company entity present, you can simply follow the labor laws and employment requirements when it comes to full-time hires.
However, because many startups hire independent contractors from around the world, setting up an entity in multiple countries will be an exceptionally costly endeavor. The finances, legalities, and local groundwork required is also extremely stressful and might not be worth it in the long run.
Is there an easier way to convert my independent contractor to a full-time employee?
Yes, there is an easier way to convert your contractor to a full-time employee, and it is called a Professional Employer Organization (PEO). What PEOs do is they essentially act as the entity in the country of your full-time employee, making it possible for you to hire them legally and without the stress and hassle.
If you use a PEO platform like Multiplier, you can easily hire and pay your full-time employees and comply with local labor laws. You won’t need to worry about establishing a local entity or have to figure out how to comply with the local labor laws. With a few clicks you can onboard, manage, and pay your international team in any country with Multiplier. You focus on your business, and Multiplier will take care of the rest.