Making a Switch: Converting Contractors to Employees

A contract is an agreement signed between a company and a contractor, with the contractor agreeing to produce a desired result. But the idea of a contractor is not an entirely new concept. For ages in history, armies comprising individuals on contract have attempted at least to topple large kingdoms and powerful monarchs.

An example is that of the ‘Ten Thousand’ a group of ten thousand Greek soldiers who tried to help Cyrus, a Persian prince overthrow his elder brother Artaxerxes II, the then ruler of Persia.

Though this attempt was not a success, many mercenary armies have succeeded in history. In the true sense of the word ‘contractor’, mercenary soldiers were perhaps the first in history from an occupation that was ‘not construction’ to become contractors.

Contractors have existed in battlefields long before the corporate battlefield came into being, and some of the reasons for their presence in a modern-day company overlap with those from the ancient era.

Why do companies award jobs to contractors?

When you hire a contractor for a role, it is, as Don Corleone said in The Godfather, all about “making an offer they cannot refuse”.

It could be a techno-functional consultant for your Oracle Netsuite or SAP implementation, a data analyst with experience in Microsoft’s Power BI or a network architect; companies are clearly on the lookout for such enterprising talent as contractors.

And this is so because it is not so easy to procure such enterprising talent in a regular job setting. But why exactly do companies hire contractors for certain job roles?

Help Meeting Fast Approaching Deadlines

Whether it is a prince who has no time to waste in bringing his brother’s kingdom down or a company that has to battle the odds in as short a time as the project nears completion, both have promises to keep.

Many companies today are bound by tight deadlines on the projects they pick and sometimes, internal resources may prove difficult to manage or may not be dependable because of reasons that are very human and circumstantial. This is where a contractor can help you meet that difficult deadline.

Access to a Global Talent Pool

Sometimes independent contractors tend to work better than regular full-time hires, because they bring with them a different viewpoint and different set of skills and learning they have acquired in long hours of work by themselves.

This talent is also accessible from anywhere in the world, which has led to a growth in the number of contract workers and jobs. So, it is not uncommon today as it was not to recruit Greek Soldiers in Ancient Persia.

Reduced Onboarding Time

You don’t need to train a soldier on how to use a gun. They would have already done it a hundred times as they have served in combat. You only need to offer them project specific knowledge, let them know what is expected of them, what the deadlines are and what you will offer them.

That’s it, and after that you take a step back and let them work their magic. Be it their superior skills at managing time or their uncanny ability to do some great problem-solving, they can help bring your project to completion.

Corporate Agility

Contractors today are brought onboard by staffing companies to ensure that the organization they are working for is able to meet fluctuations in market needs, bring the products to market faster, have flexibility in cost models and better manage their turnover and capital, as in the amount of money taken by an organization to manage its business during a period.

This is still very similar to soldiers adapting to changes on the battlefield at the spur of the moment, bringing their years of experience and their superior thinking and strategizing prowess on the field, when the nation they are fighting for most desperately needs it.

Legal Differences Between a Contractor and an Employee

The Contract Labour Act of 1970, India’s law for contract workers defines a contractor as anyone who works to produce a given result and which does not involve the mere supply of goods or manufacture to the establishment.

An employee on the other hand is defined by the Minimum Wages Act as someone hired by the company to perform skilled or unskilled labour and provided with wages and other benefits. When a contractor becomes an employee, they:

1. Work exclusively for you
2. Can be assigned specific work hours and locations
3. Will sign a non-compete agreement
4. Will gain benefits like employee provident fund and health insurance

Benefits of Converting a Contractor to an Employee

1. Avoids misclassification: There are clear differences between a contractor and an employee. It is yet possible by way of a contract itself to make room for the wrong interpretations with regards to benefits offered or targets or goals set for them.Since it is highly probable that you will misclassify contractors as employees, so why don’t you do it already and gain the benefits that comes from bringing them on your full-time payroll, if that offers a reasonable advantage to you?
2. Contractors may have inalienable rights in their countries: Sometimes, even though you do not offer them the right to do so as an organization, contractors may have intellectual property rights to what they do in their country.This is definitely not favourable and might lead to a contestation if the rights are not clearly defined in the agreement. This is just one example of what can happen if you do not have a contractual agreement that clearly defines individual boundaries and what each party is entitled to.
3. It might be cheaper to make them employees: If you have a good volume of work still left unaddressed, then you can convert the contract labour to full-time employees to ensure that their talent is better utilised, and this arrangement could cost less than the contractual one.You may be able to pay them more cost-effectively if not less once they are part of your team and offer them significantly higher benefits to balance the reduction in pay, if it so happens.
4. You can provide them job-specific training and equipment: No man’s an island. The same is true for a project and client requirements. Client requirements are subject to change and sometimes the project agreement lays down ways to accommodate them. When this happens, you would wish you could train a contractor on a new technology or requirement.The fact that you can provide job-specific training once they are part of the company can up the ante for your team, increasing productivity levels as the new employees become more familiar with the work environment and bring more strength through collaboration and co-creation.

6 Steps to Convert a Contractor to an Employee

If you do have a local entity in the hiring country, here are the steps you’ll need to take to convert your contractor:

1. Research the laws around employment in the country of the contractor.
2. Review the changes you would have to make to your present hiring strategy.
3. Negotiate work hours, benefits and the salary you can provide to your future employee.
4. Draft an employment contract that is compliant with the laws in the country.
5. Verify candidate background details once the contract is signed.
6. Onboard the new employee into the company and register on the payroll.

When working in a country like India, it helps to have some HR services, or the above work outsourced to an HR consulting company such as Alp Consulting. They can manage payroll for your contractors’ turned employees and ensure that compliance is maintained as well.

If you do not have a local entity, then you can work with an employer of record in most countries around the world. The employer of record (or EOR) will employ the contractor as an employee on their record and will administer payroll and even take care of compliance for you.

Conversion Complete: What Do We Do Now?

Now that you have got them onboard, it’s time to rethink your workforce management strategies and how best to utilise the new talent. Converting a contractor to an employee has its benefits. And these benefits do not have to come at a loss of productivity. If you feel that your core tasks can be handled better by a contractor than people already in your company, we hope this article helps you make that choice. We wish you all the success in the corporate battlefield.

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Rajkumar Shanmugam

Head of HR

Rajkumar Shanmugam is the Head of HR at ALP Consulting, bringing over 19 years of comprehensive HR leadership experience across India and international markets. His expertise spans talent acquisition, employee relations, performance management, compliance, and HR transformation. Rajkumar has a proven track record of driving people-centric initiatives, enhancing workplace culture, and aligning HR strategy with business goals. With extensive experience in US staffing operations and global mobility, he continues to lead organizational excellence through innovation and employee engagement.