How and when to convert a contractor to a full-time employee

Got a contractor who’s proved to be a great fit? It might be time to bring them on full-time. But making that move involves more than just a new title. It requires careful attention to contracts, salary structures, and compliance. 

Whether you’re rethinking your approach to hiring contractors or ready to formalize a long-term working relationship, this guide explains how and when to convert a contractor to a full-time employee—so the transition goes smoothly for both you and your new hire.

Contractors vs. full-time employees: Key differences

Independent contractors typically work with companies on a project basis. After fulfilling the scope of work, their contract ends, and they move on to another opportunity. 

Conversely, full-time employees are a more permanent part of the workforce. They usually receive an open-ended employment contract and a steady salary.

Here’s a closer look at how contract workers and full-time employees differ in areas like benefits, taxes, and integration into the workplace: 

• Employee benefits: Full-time employees often receive benefits that contractors don’t, such as health insurance, paid vacation, family and medical leave, and retirement plans. Some roles also include perks like stock options and professional development programs.
• Working hours: Full-time employment typically comes with a fixed schedule (like the traditional 9-to-5). But independent contractors usually set their own hours, as long as they meet deadlines and attend required meetings.
• Onboarding: A new employee receives in-depth onboarding and training, along with access to company platforms and tools. When hiring contractors, companies tend to offer only the essentials needed to complete the work, often without full access to systems that full-time employees use.
• Taxes: Companies are responsible for payroll taxes and certain government-mandated contributions for employees, such as Social Security and unemployment insurance in the United States. Employees and contractors work under different tax structures, too: Employers withhold taxes from employee paychecks, while independent contractors handle their own tax payments and reporting. 
• Integration: Full-time employees usually build an ongoing working relationship with their teams. They join regular meetings, contribute to group decisions, and take part in company culture. Contractors often work more autonomously, focusing on deliverables without the same level of team connection.

💡 Learn how Pacific Institute converted their international contractors to full-time employees with Oyster to ensure a consistent employee experience for their global staff.

Why convert contractors to employees?

Contractor or full-time employee: Which is the better fit? The answer depends on your business’s needs and goals. Here are a few signs that it may be time to consider contractor-to-employee conversion.

There’s a risk of misclassification

Businesses can easily cross the line between contractor and employee relationships, especially if they rely on contractor work for an extended period without updating the terms of the arrangement. If you control how and when a contractor works or you fail to provide benefits while treating them like part of the team, you could be at risk for employee misclassification. 

Common pitfalls to avoid include assigning a contractor's hours, extending projects far beyond a project’s scope, or restricting a contractor from taking on other clients.

To avoid the consequences of misclassification, like back taxes and legal action, it may be time to give the contractor employee status.

The contractor fills a talent gap

While a contractor is working on a project, a role may open at your company that aligns with their skills. This can be a happy coincidence: You already know their strengths, and they understand how your company operates. Converting the contractor can save you time on interviewing and onboarding compared to hiring someone new.

You want more exclusivity

Contractors enjoy more flexibility than employees and often take on multiple projects from various clients at once. Unless they’ve signed a non-compete agreement with your company, one of those other clients could be a competitor. Contractors may also retain intellectual property rights to their work, meaning your company doesn’t fully own what they produce.

By extending an employment offer to a contractor, you can secure more of their time and formally limit them from working for competitors or retaining any intellectual property. 

You want to offer the contractor benefits

As mentioned, contractors usually don’t receive benefits or paid time off—they cover those costs on their own. Extending an employment contract can make your offer more appealing because it includes access to healthcare, paid time off, and other employee benefits.

You want to manage costs

Given the uncertainty of project-based work, contractors often charge high hourly rates. Over time, this can add up to be more than what you’d pay a full-time employee to handle the same responsibilities in-house. In other words, converting the contractor to employee status may reduce labor costs in the long run.

How to convert contractors to full-time employees

So, you’re ready to bring a contractor on as a full-time employee. The transition involves a few important steps that you’ll want to carefully follow to comply with legal and tax requirements. 

1. Verify worker classification

Worker classification guidelines determine whether a worker qualifies as a contractor or an employee. These terms vary by region—in the U.S., the IRS provides three main criteria:

1. Behavioral control: Companies can direct when and how someone works if they’re an employee. Contractors have more control over their schedule and processes.
2. Financial control: Employees receive consistent, scheduled payments (like a biweekly paycheck). Freelancers or contractors usually use project-based invoices or alternative payment terms.
3. Relationship: When an employer extends a full-time employment contract, it usually signals a long-term working relationship. The employer offers benefits with the expectation that the employee will stay and grow with the company. In contrast, contractors tend to engage in short-term arrangements and don’t receive the same level of support or perks.
   

2. Make an employment offer 

One key difference between hiring contractors and hiring employees is the style of the offer. With a contractor, you’re proposing an agreement for a temporary arrangement. But with an employee, you’re extending a long-term compensation package. 

When transitioning a contractor to an employee role, start by converting the contractor's pay into an employee’s full-time salary. Then, meet with them to review the new compensation structure and discuss any limitations, such as renouncing intellectual property rights. Be sure to provide all details in writing. 

3. Complete new hire paperwork

Labor laws and tax requirements are different for contractors and employees, so you'll need updated documentation. Ask the contractor-turned-employee to submit their tax information (in the U.S., this includes a W-4 and a withholding certificate) along with a signed employment contract to your HR team.

4. Add the new employee to the payroll

Instead of issuing contractor payments, you’ll now process the new hire through your payroll system so they receive direct deposits. You’ll also want to grant them access to any tools they’ll need, such as time-tracking or attendance software. If you’re working with an employer of record (EOR) like Oyster, onboard the employee into the self-service portal so they can request paid time off and view past pay stubs without needing to go through HR.

Oyster can help you convert contractors to employees

Employment laws and shifting pay structures can be tricky, but you don’t have to navigate them alone. Oyster helps you hire global contractors with confidence and, when the time is right, makes it easy to convert them into full-time employees. 

With Oyster’s global contractor conversion solution, you’ll manage the entire transition process with one platform. Avoid misclassification, stay compliant with local labor laws, and get expert guidance on structuring an employee salary and offering competitive benefits.

Book a demo to learn more.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.