Compliance
Converting Your Independent Contractor to a Full-Time Employee: A Comprehensive Guide

For businesses that frequently engage independent contractors but wish to establish a more permanent relationship, transitioning your contractors or freelancers into full-time employees can be an advantageous move.

This transition benefits both parties involved. Independent contractors become eligible for employee benefits, no longer need to manage their own taxes, and gain greater job security. On the other hand, employers can secure specialized skills and retain top talent within their organization.

But is the conversion process from independent contractor to full-time employee straightforward? What steps should you follow, and is there an optimal timing for this transition? In this guide, we address these questions and provide insights into the process.

The Benefits of Converting Independent Contractors to Full-Time Employees


While many businesses worldwide hire independent contractors due to their flexibility, specialized skills, and potential cost savings compared to full-time employees, this hiring approach is not without risks. Before engaging independent contractors, it's essential to weigh the following factors:

  • Contractor Payroll Software: Utilizing payroll software designed for contractors (often referred to as freelancers) can streamline the payment process. This type of software is particularly beneficial for businesses that rely on independent contractors to meet specific project requirements, enhancing efficiency and reducing administrative burdens.
  • PEO Companies: Professional Employer Organization (PEO) companies facilitate administrative interactions between business owners and independent contractors or freelancers. They offer services related to payroll taxes, human resources, and compliance for both parties, making the engagement smoother and more compliant with regulations.


Despite these advantages, businesses can minimize risks by transitioning their independent contractors into full-time employees. Here are some benefits of making this shift:

  1. Highly Satisfied Employees: Full-time employees gain access to a range of benefits, including healthcare, health insurance, social security, sick leave, vacation days, parental leave, and potentially pension and housing insurance. These benefits contribute to higher job satisfaction and may result in increased productivity.
  2. Talent Retention: By converting an independent contractor into a full-time employee, a company secures their skills for its long-term growth. Unlike contractors who work on a project-by-project basis, full-time employees provide a competitive advantage by ensuring ongoing access to top talent.
  3. Employment Compliance: The classification of workers as independent contractors can sometimes blur compliance lines. Independent contractors are typically responsible for their tax payments, but misclassification can occur, leading to tax and benefits issues. Converting an independent contractor to a full-time employee ensures compliance with labor and tax laws, as the employer becomes responsible for providing benefits and paying taxes.

When Should You Convert an Independent Contractor to a Full-Time Employee?


Ideally, the conversion of an independent contractor to a full-time employee should take place within a year. If you are highly satisfied with a contractor's work and wish to offer them a full-time position, it's advisable to consider this transition within a year to mitigate misclassification risks.

It's crucial for employers to understand the distinctions and definitions between independent contractors and full-time employees to make informed decisions and prevent misclassification. The primary differences between these two categories are as follows:

  • Independent Contractors: Typically paid per project, responsible for their tax payments, use their equipment, work offsite, and have greater flexibility in choosing when and where to work.
  • Full-Time Employees: Receive regular wages with taxes withheld by the employer, use company-owned equipment, work at a company office or facility, and adhere to a set work schedule dictated by the employer.

If your business begins requiring independent contractors to work on-site, use company equipment, or adhere to specific schedules, you should consider converting them into full-time employees. Under the law, if you exert control over a contractor's work performance, they can no longer be classified as independent contractors and should be offered full-time employment status.

The Consequences of Delaying Conversion


Failure to convert an independent contractor who is already performing tasks equivalent to those of a full-time employee can result in misclassification risks. Misclassification occurs when a governing body, such as a labor department or tax authority, deems the nature of an independent contractor's job to be that of an employee. Consequences of misclassification often involve significant fines imposed on the employer.

Misclassification is not uncommon, even in Asia. For instance, in 2018, the Philippines' Department of Labor and Employment compelled the Philippine Long Distance Telephone Company to regularize over 8,000 contractual workers and pay a settlement fee of approximately $1.8 million USD. Similarly, in 2019, the Indian multinational company Infosys faced a fine of $800,000 USD for worker misclassification and tax fraud.

Challenges of Converting Independent Contractors to Full-Time Employees


While transitioning an independent contractor to a full-time employee offers several benefits, it also presents challenges:

  1. Change in Costs: Converting an independent contractor to a full-time employee inevitably leads to increased costs for the employer. You'll be responsible for providing employee benefits and withholding taxes, impacting your company's budget.
  2. Taxation Compliance: Independent contractors are responsible for managing their own taxes, but when converted to full-time employees, employers must withhold taxes on their behalf, introducing a new level of complexity to tax compliance.
  3. Local Labor Law Compliance: Compliance with local labor laws can be challenging, especially when operating in multiple countries. Employers must familiarize themselves with local labor laws, which can require extensive research, partnerships with local agencies, legal consultation, and associated costs.


Additionally, the complexity of complying with tax and labor laws increases when dealing with full-time employees from different countries. Each country has its unique legal requirements, making it challenging for employers to ensure compliance and navigate the related complexities.

To alleviate the challenges and reduce the associated stress, employers can leverage companies like Multiplier, which streamline compliance with local tax and labor laws, enabling businesses to meet their obligations seamlessly.

Converting an Independent Contractor to a Full-Time Employee: How to Do It


Hiring a full-time employee, including the conversion of an independent contractor, necessitates having a legal presence or entity in the country where the employee resides. If your company already has a legal entity established, you can follow local labor laws and employment regulations for full-time hires.

However, many startups and businesses hire independent contractors from around the world, making the establishment of entities in multiple countries a costly endeavor. The financial, legal, and administrative complexities involved in this process can be overwhelming and may not be justified in the long run.

To simplify the transition process and ensure compliance with local tax and labor laws, businesses can turn to companies like Multiplier, which streamline the process and help employers meet their legal obligations effortlessly. This approach allows businesses to focus on their core operations while ensuring a smooth and compliant conversion from independent contractor to full-time employee.

Is there a more convenient method for transitioning my independent contractor into a full-time employee?


Indeed, there is a more convenient option, known as a Professional Employer Organization (PEO). PEOs serve as the legal entity in the country of your prospective full-time employee, simplifying the hiring process and eliminating stress and complications.