Independent contractors vs. employees - What do you need to know?
Independent contractors and employees are, at their most fundamental level, alternate classifications of a working relationship between a business or organization and an individual providing their services to that organization.
Independent contractors are, as the name implies, independent from the organization. They are expected to manage their own time, utilize their own equipment, and be responsible for their own tax liabilities. Employees, meanwhile, are tied to the organization by employment contracts and are paid a recurring hourly wage or salary.
What’s the point of converting contractors?
There are a few reasons to convert independent contractors to permanent employees, however, some of the most common reasons are as follows:
1) The risks of misclassification
The answer to whether or not an individual should be classified as a contractor can be a tricky one, however, the risks of misclassifying a worker are clear. Hefty fines, the repayment of back taxes, and the ever present threat of a lawsuit all represent significant business risks for organizations that improperly classify individuals as independent contractors.
If you answer yes to any of the following questions, your organization may want to consider converting your contractors to employees:
- Do you supervise contractors while they are working?
- Can the contractor be fired at any time?
- Is the work being performed a necessary part of the business?
- Do you have employees performing similar labor?
- Do you provide the tools, equipment, or general supplies needed for the contractor to get the job done?
- Do you provide any training for the contractor?
2) Build a strong team
Some contractors go above and beyond expectations. If an independent contractor you are working with is consistently exceeding their targets, repeatedly delivering high quality work, and providing value to the organization, it may be worthwhile to convert them to an employee.
You should especially consider their other contracting relationships. Are you worried about losing access to their talents? It could be time to think about making them a full member of the team.
3) It’s what they want
While acting as an independent contractor provides significant benefit in the form of increased flexibility and autonomy to workers, full employment status guarantees workers certain protections.
Although employment laws vary from country to country, employees are often entitled to a minimum wage, statutory and/or sick leave, workers’ compensation insurance, supplemental health care, and company sponsored retirement plans.
With these entitlements, it’s clear why some individuals would prefer to serve as employees and may ask to be converted from contractors as a condition of any future working relationship.
Converting IC’s Internationally
While the process of converting independent contractors to employees varies country to country, there are a few key steps to keep in mind that are common across the globe.
Write it in ink
The first key step to any conversion process is to make sure the conversion is communicated, in writing, to the independent contractor(s).
This step is crucial as it will help your organization answer any future questions surrounding financial or labor regulation.
Ensure proper documentation
Every country requires certain documentation in order to hire an individual as a full employee. These regulations, of course, can vary. For example, in the United States, an individual needs to provide a photo ID and federally approved identification that demonstrates their right to work in the country.
Get them on the payroll
After your new employee is fully onboarded, their payments will need to be transitioned to a full payroll system.
Your organization is expected to deduct certain benefits and taxes from employees' paychecks in order to operate fully compliantly in many countries. It’s imperative that any former independent contractor receive their first post-conversion payments appropriately to ensure that your organization does not owe any back taxes in the future.
Welcome them to the team
The transition from independent contractor to employee can be confusing for many workers. While you may think that they already understand the organization and your team, put yourself in their shoes and it's easier see why they may feel a little lost.
They may be working with new people, their role may comprise a larger scope than their previous work as a contractor, and they may not understand all of your policies.
Be sure to onboard a recently converted contractor the same way you would a new employee - formally introduce them to the whole team, consider appointing someone to be their mentor, give them the company handbook, and provide them with all the equipment they’ll need to be successful!
Get your tax forms in order
Given that, generally speaking, countries require different tax documents for independent contractors and employees, an employment conversion can quickly become a complicated task for your accounting and HR departments. This complicated process only becomes more intricate when you factor in international employment and the tax reporting requirements of multiple countries.
Take the United States. Organizations hiring independent contractors in the United States must complete a 1099 form for tax purposes while employers hiring in the United States must complete a W-2 form for each employee. Further, American employers hiring outside of the United States must complete Form 1042-S for any international hire.
With all the complexity tied to tax reporting for independent contractors and employees, it’s crucial that your team be proactive from day one of a conversion to make sure your organization is ready for tax season.
Converting contractors with Borderless
Borderless can help you and your team to manage your compliance risk, be ready for tax season, and decide whether converting contractors is right for your organization. With our proprietary, contractor-oriented platform, Borderless can eliminate busywork and let you focus on what you do best - building and supporting your team.
About Borderless
Borderless is a global company of passionate people brought together by the conviction that hiring local talent anywhere in the world can be the greatest form of opportunity equalization.
Organizations that choose to look beyond their brick-and-mortar offices will not only have access to a wider talent pool of highly qualified individuals, but will also be supporting emerging local economies, improving their workforce diversity, and contributing to emission reduction by removing the daily commute. All while increasing their bottom line and reducing their legal liability.
Borderless enables you to become a distributed organization whose members will be empowered to lead the lifestyle they desire without sacrificing their career opportunities or feeling like 2nd class citizens.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
