Contractor to Employee

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Introduction

When you first expand your team internationally, you might find it easier to hire independent contractors rather than employees. Since the reporting and documenting requirements are significantly less for contractors than employees, it can seem like the simplest method.

However, the easiest way isn't always the right way. Most countries have very specific rules about employee and independent contractor classification. Violating these guidelines can result in significant fines and penalties. You can't just decide that a worker is an independent contractor because the paperwork is more manageable. Employees and independent contractors fulfill different roles, and their classification is based on legal definitions.

Changing from contractor to employee can save you from misclassification penalties, protect your intellectual property, provide a better experience for your workers, and make collaboration easier. When you're ready to make the contractor to employee conversion, Skuad can help.

Difference Between a Contractor and a Full-Time Employee

Although the guidelines vary between countries, most places classify workers as either employees or independent contractors. When you hire a worker, it's your responsibility to understand and follow the classification laws related to employment and tax regulations. Companies have more control over the working conditions of employees than independent contractors. Employees are entitled to more protections and benefits than independent contractors. Depending on the laws of their home country, employees may be entitled to:

  • Minimum wage
  • Overtime pay
  • Unemployment benefits
  • Medical leave
  • Family leave
  • Vacation pay
  • The 13th month of salary
  • Protection from termination

While independent contractors pay their taxes and handle their reporting, you have to do the withholding and reporting for employees. You may also be responsible for paying into health insurance or pension funds for your employees.

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How To Determine Whether a Worker Is an Independent Contractor or an Employee

Whether a worker is an employee or an independent contractor depends on several factors such as how a worker spends their time, their place of employment, payment structure, and whether they're free to pursue other jobs. The more control you have over a worker's daily work activities, the more likely they are to be classified as an employee.

You should check the laws in the home country where you hire contractors, but if you control what work is done and how it's done, your workers are probably employees. Some of the factors that go into deciding whether a worker is an employee or a contractor include:

Control

If you control when, where, and how the work is performed, a worker is more likely to be an employee than an independent contractor.

Training

Independent contractors operate their businesses, so they shouldn't need extensive training from you since you're purchasing their services. Employees, on the other hand, may require a lot of training to do their jobs correctly.

Importance of the Work

Many countries consider the importance of the services a worker provides. If a worker's services are vital to your daily business operations, they're more likely to be considered an employee.

Who Does the Work?

Independent contractors can usually employ others to do the work needed to fulfill a contract, while employees usually have to perform the work themselves. If you expect the work to be performed only by the worker, they're more likely to be considered an employee.

Payment Terms

Employees are usually paid regularly through your payroll system. Independent contractors are usually paid by the job and often submit invoices. Employees don't need to submit invoices in order to be paid.

Work on Premises

Employees often work on your premises or office space, while independent contractors usually perform their work in their own space. However, with the rise of remote workers, this criterion isn't always obvious. While someone who works on your premises is probably an employee, the fact that someone works from home isn't automatically considered a contractor.

Working Hours

You can decide what hours your employees work, so dictating that they work from 9:00 to 5:00 with a 30-minute lunch break is indicative that they're employees. Independent contractors normally set their hours. Employees are expected to spend all their time at work performing their duties. Contractors can work unusual hours and take breaks whenever they want as long as they meet their deadlines.

Expenses

Independent contractors cover their expenses. Employees are reimbursed for their expenses, or the company covers them ahead of time. The employer will pay the bill if an employee has to travel for work.

Length of Relationship

In some countries, an independent contractor may be classified as an employee after a certain amount of time. Some countries use fixed-term contracts, which dictate that a contractor can't sign a fixed-term contract with multiple companies. After the fixed term is up, the company has to either offer the contractor a permanent position or terminate the contract.

Risks of Employee Misclassification

The risks of employee misclassification can be severe. Laws vary by country, but some consequences can include:

Fines and Penalties

Many countries impose stiff fines and penalties. You may owe back taxes, penalties, and late fees.

Back Pay and Benefits

You may be liable for paying a misclassified worker back pay and benefits for the time they were misclassified.

Lawsuits

You might be vulnerable to lawsuits from people who were harmed by misclassification.

Business Ramifications

In extreme cases, some countries may ban you from doing business there. Although this is rare, it's a possibility in some places.

Why Global Organizations Convert Contractors to Employees

Although it may seem more expensive to hire employees than it is to hire contractors, there are some significant benefits, including:

Better Performance

A contractor's loyalties are frequently divided among their clients. An employee is free to devote all of their working time and energy to you. They're also more loyal to your company. Contractors have to constantly worry about where their next job is coming from. Your company may be pushed to the bottom of its priority list if they land a more lucrative client.

Intellectual Property Protection

Contractors function as their entities in some countries. This may entitle them to certain rights over the work they produce. If you commission them to produce work for you, they may be able to claim aspects of the work as their intellectual property (IP). This can be a big concern if the work you commission is part of your company's IP.

Cost Savings

While you may think it's cheaper not to worry about paying benefits for an employee, in the long run, it may be more expensive to keep hiring a contractor. A trusted employee can save you money in increased productivity and stability.

Signs That Show You Need To Convert Contractors to Employees

If you're wondering if you should make the contractor to permanent employee conversion, here are some signs to look for:

Noncompliance with the laws in the contractor's country

If you've misclassified a worker as a contractor, you should convert them to an employee immediately. Noncompliance is a serious legal issue that can have severe financial ramifications for your company.

You Want Your Contractor To Focus Solely on Your Business

Good employees are hard to find. When you find a reliable contractor who delivers quality work, you may want to convert them to an employee. You already know the quality of their work and character, so you won't have to worry about taking a chance on them.

You Need Intellectual Property Protection

Unless you have an ironclad contract, you may be risking your intellectual property rights. Contractors may be entitled to the rights to the work product. When an employee creates something for you, you own the rights to it. Software development teams may be particularly at risk if they're hiring contractors to develop proprietary software.

Your Contractor Wants To Become an Employee

In some cases, contractors prefer to remain independent. However, for most contractors, the benefits of being an employee outweigh the disadvantages. Contractors aren't entitled to the same benefits and protections. If you have a contractor who does great work, offering to convert them to an employee can help you keep them.

How To Convert Contractors to Employees

It's more complicated to hire and onboard an employee than to pay a contractor, but the benefits can be worth the effort and expense. You'll need to consult with a labor and tax expert in your contractor's country if you want to handle it yourself. However, Skuad lets you easily convert contractors to employees.

We simplify every step of the global HR process. You don't have to worry about tax or legal regulations. Our comprehensive platform handles all aspects of onboarding and managing your global teams. We can help you pay and manage employees in one convenient place.

Converting Contractors to Employees With Skuad

Growing your team globally doesn't have to be an overwhelming task. If you've been hiring contractors because local compliance in foreign countries seems like an insurmountable obstacle, reach out to Skuad to find out how we can help. Going from contractor to employee doesn't have to be a challenge. With Skuad, you can mitigate your risks, manage complex compliance issues, and protect your intellectual property rights.

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