Contractor to Full-Time Employee: A Full Guide

If you're a business owner or manager, you may have hired contractors to work on specific projects or tasks for your company. Contractors are independent workers who provide services to clients on a contractual basis, usually for a fixed period of time or a defined scope of work. Contractors are not employees of the company they work for, and they have different rights and obligations than full-time employees.

However, there may come a time when you want to convert some of your contractors to full-time employees. Maybe you're impressed by their skills and performance, and you want to retain them for the long term. Maybe you need more stability and consistency in your workforce, and you want to reduce the hassle and cost of hiring new contractors every time. 

Whatever your reasons, converting contractors to full-time employees can be a great way to grow your business and build a loyal and engaged team. But it's not as simple as just offering them a job. 

There are legal, financial, and practical considerations that you need to take into account before making the switch. In this blog post, we'll guide you through the process of converting contractors to full-time employees, and help you avoid some common pitfalls along the way.

Differences between Contractors and Full-Time Employees

Signing a Contract Agreement

Before we dive into the details of how to convert contractors to full-time employees, let's first review the main differences between these two types of workers. 

  • Contractors: They are self-employed individuals who work for themselves or through an agency. They typically have multiple clients, and they set their own rates, hours, and terms of service. They are responsible for paying their own taxes, insurance, and other expenses related to their work. They also have more flexibility and autonomy in how they do their work, as long as they meet the expectations and deadlines of their clients.
  • Full-time employees: They are hired by a company to work exclusively for them on a regular basis. They usually have a fixed salary or wage, and they receive regular paychecks from their employer. 

They are entitled to certain benefits and protections from their employer, such as health insurance, retirement plans, paid leave, workers' compensation, unemployment insurance, and overtime pay. They also have to follow the rules and policies of their employer, such as working hours, dress code, performance reviews, and disciplinary actions.

Benefits of Conversion from Contract to Full-Time

There are many benefits for both contractors and employers when they decide to convert from contract to full-time status. 

Here are some of the most common ones:

  • For contractors: Converting to full-time can provide more job security, stability, and career growth opportunities. It can also give them access to more benefits and perks that can improve their quality of life and well-being.

For example, health insurance can help them cover medical expenses in case of illness or injury; retirement plans can help them save for their future; paid leave can help them balance their work and personal life; and stock options can help them share in the success of the company.

  • For employers: Converting contractors to full-time can help them retain top talent and reduce turnover. It can also help them save money on hiring costs, such as recruitment fees, training expenses, and background checks. 

Moreover, it can help them improve productivity, efficiency, and quality of work by having more dedicated and committed workers who share the same vision and goals as the company.

Legal Considerations

One of the most important aspects of converting contractors to full-time employees is complying with the relevant laws and regulations that govern employment relationships. Failing to do so can result in serious consequences, such as lawsuits, fines, penalties, audits, or even criminal charges.

The main legal issue that you need to consider is whether your contractors are actually misclassified as independent contractors when they should be treated as employees. This is a common problem that many businesses face when they hire contractors without following the proper guidelines.

The IRS and other federal and state agencies use various tests and criteria to determine whether a worker is an independent contractor or an employee. These tests vary depending on the context and purpose of the classification, but they generally focus on three main factors:

  • Behavioral control: This refers to how much control the company has over how the worker does their work. 

For example, does the company provide instructions, training, supervision, evaluation, or feedback to the worker? Does the company set the schedule, location, or methods of work for the worker? Does the company require the worker to follow its rules and policies?

  • Financial control: This refers to how much control the company has over the financial aspects of the work relationship. 

For example, does the company pay the worker a fixed amount or by the hour? Does the company reimburse the worker for any expenses related to their work? Does the company provide the worker with any tools, equipment, or materials needed for their work? Does the company have the right to fire the worker at any time or for any reason?

  • Relationship type: This refers to how the company and the worker perceive and define their relationship. 

For example, does the company have a written contract or agreement with the worker? Does the company offer the worker any benefits or protections that are typical of employees? Does the company expect the worker to work exclusively for them or to be available for other clients? Does the company consider the worker as part of its team or as an outsider?

The more control and involvement the company has over the worker, the more likely the worker is an employee rather than an independent contractor. Conversely, the more independence and autonomy the worker has over their work, the more likely they are an independent contractor rather than an employee.

If you're not sure whether your contractors are correctly classified, you should consult with a qualified attorney or accountant who can help you review your situation and advise you on the best course of action. You should also check with your state's labor department or agency for any specific rules or requirements that apply to your industry or location.

If you find out that your contractors are misclassified as independent contractors, you should take immediate steps to correct the situation and avoid any potential liabilities. 

This may include:

  • Paying any back taxes, penalties, or interest that you owe to the IRS or other agencies for failing to withhold and report payroll taxes for your workers.
  • Paying any back wages, overtime pay, benefits, or damages that you owe to your workers for violating their rights under federal or state labor laws, such as minimum wage, overtime, workers' compensation, unemployment insurance, or anti-discrimination laws.
  • Revise your contracts, agreements, policies, and practices to reflect the true nature of your employment relationship with your workers.
  • Communicating with your workers and informing them of their new status and rights as employees.

Steps to Convert Contractors to Full-Time Employees

Step-by-step Guide 

Once you've resolved any legal issues and decided to convert your contractors to full-time employees, you need to follow a clear and consistent process to make the transition as smooth and successful as possible. 

Here are some steps that you should follow:

1. Determine Employee Status

The first step is to determine whether your contractors are eligible and willing to become full-time employees. Not all contractors may want to make the switch, especially if they value their flexibility and independence more than the benefits and security of full-time employment. You should also consider whether your contractors meet the qualifications and expectations of the full-time positions that you're offering them.

To determine employee status, you should:

  • Review your contractors' performance, skills, experience, and fit with your company culture and values.
  • Assess your business needs, goals, and budget for hiring full-time employees.
  • Identify which contractors are most suitable and valuable for your business in terms of their contributions, potential, and alignment with your vision and mission.
  • Reach out to your contractors and discuss with them their interest and availability for becoming full-time employees. Explain to them the benefits and drawbacks of making the switch, such as salary, benefits, responsibilities, expectations, and policies. Be transparent and honest about what you can offer them and what you expect from them.
  • Get feedback from your contractors and address any questions or concerns they may have. Listen to their preferences and needs, and try to accommodate them as much as possible. Negotiate with them on the terms and conditions of their employment contract.

2. Communicate with Contractor

Before you make any decisions, you should communicate with your contractor and find out if they are interested in becoming a full-time employee. Some contractors may prefer the flexibility and independence of their current status, while others may welcome the opportunity to join your team permanently. You should also discuss their expectations and goals, and see if they align with your company's vision and culture.

3. Negotiate

Once you have established that your contractor is willing to convert to a full-time employee, you should negotiate the terms of their employment. This may include salary, benefits, hours, responsibilities, and any other aspects that are relevant to their role. You should aim to offer a fair and competitive package that reflects their skills, experience, and value to your company. You should also consider any legal implications of changing their status, such as taxes, insurance, and contracts.

4. Paperwork Required

After you have reached an agreement with your contractor, you should complete the necessary paperwork to formalize their conversion to a full-time employee. Depending on your location and industry, this may involve different forms and documents, such as:

  • An offer letter that outlines the details of their employment, such as start date, salary, benefits, and policies.
  • A new employment contract that replaces the previous contractor agreement and defines the terms and conditions of their employment.
  • A W-4 form that allows your company to withhold the correct amount of federal income tax from their paycheck.
  • An I-9 form that verifies their identity and eligibility to work in the United States.
  • Any other forms or documents required by your state or local laws, such as workers' compensation, unemployment insurance, or health insurance.
  • You should also update your payroll system and records to reflect the change in your contractor's status. You should also inform them of any orientation or training programs that they need to complete as a new employee.

How to Calculate a Fair Salary for the New Employees

The Employer Giving the Employee his Salary

One of the most challenging aspects of converting contractors to full-time employees is determining how much to pay them. You want to offer a salary that is fair, competitive, and consistent with your company's budget and compensation structure. However, you also want to avoid underpaying or overpaying them, as this could lead to dissatisfaction, turnover, or legal issues.

There are several factors that you should consider when calculating a fair salary for your new employees, such as:

  • - The market rate for their position and industry. You can use online tools such as Glassdoor or to research the average salary range for similar roles in your area.
  • - The value that they bring to your company. You should evaluate their performance, skills, achievements, and contributions as a contractor, and see how they compare to your existing employees or competitors.
  • - The cost of benefits. You should factor in the cost of providing benefits such as health insurance, retirement plans, paid time off, and other perks to your new employees. You may need to adjust their salary accordingly to account for these expenses.
  • - The cost of taxes. You should also consider the difference in taxes between contractors and employees. Contractors typically pay higher taxes than employees because they are responsible for both the employer's and employee's share of Social Security and Medicare taxes. Employees only pay half of these taxes, while the employer pays the other half. Therefore, you may need to lower their salary slightly to account for this difference.

Need Help Converting Contractors to Full-Timers? Recruitery’s Solutions

Converting contractors to full-time employees can be a complex and time-consuming process that requires careful planning and execution. If you need help with this transition, you can rely on Recruitery. We are a professional recruitment agency that specializes in helping businesses find and hire qualified candidates for various positions. Whether you need temporary or permanent staff, we can help you find the best talent for your needs.

We have extensive experience in working with contractors and employees across different industries and sectors. We can help you streamline the conversion process and ensure a smooth transition for both parties.

If you are interested in our services or want to learn more about how we can help you convert contractors to full-time employees, please contact us today. We would love to hear from you and discuss your hiring needs.