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How (And Why) to Transition from Contractors to Employers of Record

Working with independent contractors has its benefits – especially for short-term projects.

Table of contents

Key Takeaways

  1. Contractors can provide a good short term workforce solution
  2. Companies need to understand the risks and penalties of contractor misclassification
  3. Transitioning contractors to EOR can secure full legal compliance and project continuity
  4. Transitioning to EOR involves: partnership with the EOR, contractor communication and new employment contract

But as tasks get longer and more complex, companies require more than temporary help. They need people who will be involved day-in, day-out. There is a need for supervision and guidance as the volume of work increases. In other words, at some point, growing companies need employees. And that’s where the risk of misclassification comes in.
Turning contractors into EOR workers can be a simple way to avoid this risk. In this guide, we’ll show you what’s involved in making this transition.

Understanding Contractor Misclassification

While misclassification is a global problem, and governments – eager to protect the rights of employees and to collect employer taxes – have been cracking down on the practice in recent years with greater intensity.

The primary difference between contractors and regular employees is autonomy. Contractors are independent. Employees are under the control of the employer. The IRS, for example, lists three categories to explain the differences in the two designations:

  1. Behaviour Control – if an employer has the right to direct and control how work is performed or where it is performed, such as by providing office space to the worker, the worker may be an employee, not a contractor.
  2. Financial Control – employees are paid in regular intervals, receive reimbursements for expenses, and if they require specialized equipment, it is provided by the employer. Contract workers are paid in one lump sums, do not receive reimbursements, and invest in their own equipment.
  3. Nature of Relationship – if a worker is providing a service that is vital to the business on a regular basis, and especially when the relationship is viewed as permanent between the worker and the company, the probability is high that the worker should be classified as an employee.

Governments across the globe take classification laws very seriously. Violating them can result in multiple fees and penalties. Unfortunately, as companies grow and require more involvement from their contractors, it becomes much harder to separate the line between contractor and employee, exposing themselves to fines.

Challenges with employing contractors

Limited control
Contractors generally have their own schedules and processes – giving the employer less say their approach.

Short-term focus
Because contractors are brought on for short-term projects, there’s little opportunity to expand on the finished tasks, as this could lead to a breach in contract and misclassification accusation.

You’re likely not your contractor’s only client – meaning they could be juggling multiple projects at once. That means the task you hire them for might not be their top priority. That, in turn, can influence quality and reliability.

IP protection
Working with contractors means exposing company information. If done incorrectly, this can put intellectual property at risk.

When is an EOR a good choice?

Turning to an Employer of record allows you to hire overseas faster, while maintaining the benefits of bringing on employees rather than contractors.
If you’re looking to bring on a steady workforce overseas, while retaining talent and keeping compliance in check, Employer of record is your best choice.
From the perspective of the employee, it improves trust and security.

Benefits of Transitioning Contractors to EOR

If your company wants to maintain control of the workplace and how the employees carry out their tasks, relying solely on independent contractors may not be the best route. Reclassifying all or some of the contractors already working has a number of advantages:

  1. Ability to attract a higher caliber of motivated employees because of an improved compensation package, including benefits.
  2. Full legal compliance.
  3. Maintaining continuity on projects already in the works.
  4. Securing the services of skilled employees through long-term contracts.
  5. Easier global payroll management
  6. Better intellectual property and data security
  7. Smoother management of your employees and payment process

Steps in the Transition Process

Step 1 – Partnership with EOR

The transition begins when a company partners with an EOR (global peo) to hire abroad. The EOR will then direct the company in the necessary documentation and the operational steps, since contractors in most countries require different tax forms than employees. In the US, for example, the is replaced with the filed by the EOR for each employee.

The EOR will set up accounts for each employee with all of the local tax authorities and social security offices, and provide all of the mandatory benefits. It will track time and attendance for each employee.

As the local expert, the EOR will also help smooth the transition for people who are accustomed to the autonomy of self-employment and provide representatives to answer any questions for the new employees.

Step 2 – Communication with the Contractors

The process of moving contractors over to a new designation requires careful and sensitive communication with all of the people impacted by the move. In most cases, the contractors will benefit from the move and welcome the change.

Be as transparent as possible with the employees, and let them know why you decided to make the change, what it means for the company, and how both the company and the employees will benefit from the move.

It is important to explain specifically what the change in status will mean. Some of the benefits employees may receive (depending on location) include paid time off, maternity/paternity leave, sick leave, pension, termination rights according to labor laws, and participation in the company health insurance plans.

It will also place the employees under greater control from the employer than they are accustomed to. Show them how their projects require a deeper collaboration between the company and the employee than possible under a contractor relationship.

Step 3 – The Employment Contract

Once the contractors agree to the proposed change, they need to sign an employment contract with the local company that will serve as the legal employer. The contract must be in the local language and list the terms of employment. These will vary from country to country, but each will be in compliance with the full legal requirements for each country.

The EOR will provide the contract, with all of the elements required in each location. The contract, however, serves as an excellent opportunity to approach each employee personally and explain the change directly.

Make sure that each employee knows where to turn if there are any questions or problems with the payroll. Contractors are used to being in full control of all aspects of their professional lives. Transitioning to employees can add levels of security and increase benefits. The more connected they feel to the company and the process, the more comfortable they will be with the change.

Transitioning from contractors to EOR workers with Papaya Global.

Once you’ve chosen to transition your contractor into an EOR worker, you’re likely to be faced with a whole lot of siloed data to navigate.
Unless, that is, you’re using Papaya OS to manage your global workforce.

In that case, you’re able to rely on a single platform to manage your entire workforce – supporting all types of global workers (payroll, EOR, and contractors).This automated, cloud-based SaaS platform provides an end-to-end solution, from onboarding, to ongoing management, to cross-border payments. Schedule a demo to learn more.