Transitioning Contractors to Employees: Advantages and Best Practices
Time to renew contracts with your contingent workforce? There are several ways that you, as an employer, would benefit by hiring your contractors as employees. Employees provide greater continuity, control, and often higher productivity! It’s also easier for you to boost retention through improving perks and benefits. On other other hand, contractors aren’t easily swayed by perks. Instead, they are always looking for more projects, both with you and your competitors.
In this blog, we’ll look at why it might be time to convert your contractors to employees. And why converting your contractors into employees will benefit your company in the long run!
1. They’ve Asked You to Convert Them Into an Employee
One of the most common reasons for companies to convert contractors into employees is worker outreach. When a contractor has had a good experience working with you, they often look to stay with your team long term. That means looking for a full or part time position within your company – not just reupping their contract. Rather than being intimidated by the change or cost (we’ll explain why you don’t need to worry about that!), you should be excited that you’re able to retain skilled workers!
While some contractors, especially those who’ve incorporated, intend to keep working for themselves long term, others are eager to go back to being an employee. There are advantages to being a contractor, including independence and variety, but these can actually be disadvantages for people who want stability and support. Unlike employees, contractors have to file personal and business taxes, keep track of their expenses, and purchase their own benefits and insurance. Contractors are also always looking for work and chasing down payments.
While the lifestyle is great for some, it’s not for everyone!
2. You Need A Core Team Member You Can Direct
Another reason to convert contractors into employees is that they are growing into new role in your company, one where you’ll need direction and control over their work. Or conversely, over the course of the contract, you’ve learned that the work they’re doing is too important to outsource.
One of the key differences between employees and contractors is direction. Fundamentally, businesses have more control over employees than they do contractors. A contractor can take other assignments, subcontract aspects of their work with you, and end their contract with you on short notice. You direct your employees, define their working hours, and can boost their productivity with good management and perks.
Unlike employees, you don’t direct the day-to-day work of contractors. Typically they define their own working hours, supply their own tools, and approach the work on their own terms. While contractors provide great value on project-based work with defined parameters. But your day-to-day business operations should be performed by employees.
Your core business is too important to leave vulnerable or to outsource.
3. You Are Not Compliant With Employment Law or Tax Law
For many businesses, engaging a contract or consultant workforce seems like an easy way to save costs. Independent contractors, whether they’re sole proprietors or incorporated contractors, aren’t on your payroll. They’re businesses you’ve engaged to perform a service. Because of this, business owners don’t pay payroll taxes on contractors. That might sound like a great deal but classifying your employees to avoid paying taxes is called tax evasion!
What Is Employee Misclassification?
Employee misclassification includes:
- Hiring or reclassifying employees as contractors to avoid paying benefits
- Hiring or reclassifying employees as contractors to avoid employer taxes
- Hiring or reclassifying employees as contractors so the employee can get contractor tax breaks
Labour laws in Canada and the US classify workers based on the nature of the relationship you have with them, not the nature of your contract with them. You can’t just decide who’s who!
Authorities look at a variety of criteria to classify workers, including direction and control, exclusivity, the ability to subcontract, and ownership of tools.
What Is an Employee?
Employees are directed by their employers. They don’t own the computers they work on or the forklifts they drive. Typically they don’t set their own hours or work for multiple employers in the same industry, at the same time. Employees are protected by labour laws and employment standards. And most importantly, they can’t send in a friend to do their job for them.
What Is a Contractor?
Not so for contractors, who can subcontract, operate with a high level of independence and can end their contract with you at any time. They are responsible for handling their own personal and business taxes, aren’t covered by your worker’s compensation premiums, and are ineligible for most benefits that employees take for granted.
What Are the Consequences of Misclassification
Many companies hire workers as contractors and tread them as employees so that they can avoid paying payroll taxes. Or they’re trying to avoid making certain employees eligible for health benefits. They figure the cost savings are worth the risk – but they aren’t! A misclassification investigation can start in several different ways, none of them fun.
- A team member can complain to the labour board.
- The Canada Revenue Agency, or other tax authorities, can discover your misclassification during an audit.
- Worker’s compensation can discover your misclassification during an investigation.
- Team members can work together to file a class action lawsuit.
Once a misclassification investigation starts, you and your workers are at risk of being hit with fines and having to make back payments of taxes.
4. You Benefit from Offering Employee Benefits
Some employers look at hiring as purely a cost-benefit analysis. Because employers don’t pay employer taxes or offer benefits for contractors, they assume that contractors are the cheaper option. But they aren’t! Highly skilled don’t come cheap – after all, you’re paying for their work and the cost of maintaining their business.
Converting your best contractors into employees can save you money and boost your retention in the long run. Here’s how!
What is Total Compensation?
Total compensation for employees can get complicated. A good total compensation package can also give your CFO sticker shock. But a well thought out package will help you recruit and most importantly retain the best of the best. By working with an Employer of Record, you can deliver that package at a cost that won’t scare your CFO. Total compensation can include:
- Salary and bonuses
- Vacation, paid sick days and leave top ups
- Retirement matches
- Stock Options
- Health insurance and benefits
- Employee assistance plans, training opportunities, education credits
- Free or subsidized cars, phones, or parking
- And more!
These benefits and perks represent part of the “hidden paycheck” for employees that independent contractors can’t enjoy.
Some Contractors Are Losing Out
In order to make competitive offers to contractors, many organizations offer high rates of basic compensation. The assumption is that contractors use this higher rate to buy their own benefits and handle their own retirement savings. And hopefully everything works out the same in the end!
But one of the least understood items in that “hidden paycheck” is the actual value of employee benefits. Because employers are buying benefits and perks in bulk, they can negotiate better rates and more features. Most contractors have worse medical benefits than do employees in an equivalent role. Contractors also can’t access the tax advantages of employer sponsored pensions or RRSPs.
By extending an offer of employment to your best contractors, you can provide them with better benefits and peace of mind. You will also save money in the long run! That may sound counterintuitive but you need to look deeper than surface costs.
Hiring employees may look more expensive but direction and retention are huge cost savers. You hire contractors to work on specific projects or tasks. You hire employees to fill a role in your company and contribute to it in a myriad of ways. As new projects come up, you can assign them to employees without signing a new contract. When you identify gaps in your org chart, you can encourage existing employees to grow into those roles. An employee workforce saves your company thousands of dollars every year in hiring, training and legal costs.
How to Convert Contractors to Employees
Convinced it’s time to convert some of your contractors into employees? That’s great! Doing so will bring great benefits to your business. But there are some risks to consider and things to watch out for.
- Worker Tenure. When converting contractors to employees you must consider their tenure with you and even with your subsidiaries. Tenure can have implications for severance pay and payouts from lawsuits. Consult with an employment lawyer or Employer of Record on how to handle worker tenure.
- Salary and Total Compensation. Employers and contractors are paid at very different rates, and with very different types of packages. Your HR team or local EOR should conduct a market study to put together a total compensation package that makes sense for your company and your team members.
- Legal Review. When converting contractors to employees you obviously want a fresh, locally compliant contract. But you should also review your past old contracts as they can also pose future risks. If you were out of compliance in the past, you may want to offer special consideration in your new contract. Consult an employment lawyer or Employer of Record before signing your new contract!
- Equipment and Training. Unlike contractors, employees typically receive training and equipment from their employers. Create a checklist for what equipment you will be providing your new employees and what internal training they should receive. This should be ready well in advance of their start date.
- Payroll and Onboarding. The most important part! Add your new employees to payroll, benefits, and get them onboarded! If they are local to the rest of your team, that process should be easy (but don’t forget your checklist!). If they are remote, you may need to open a local subsidiary or engage an Employer of Record to handle payroll for you.
What if I Don’t Have a Local Subsidiary?
Many companies have adopted a more global view of the employment market. If you can’t find the right candidate close to home, you look abroad. As an Employer of Record that makes perfect sense to us! Larger companies that have branches all over the world can easily hire workers compliantly, whether contractors or employees. But what if you don’t have a local subsidiary or branch? Many companies that regularly work with foreign contractors don’t realize that they can hire remote, foreign employees, even if they don’t have a local subsidiary.
What Is an Employer of Record?
An Employer of Record (EOR) is a specialized HR and payroll outsourcing firm that helps you hire abroad. Employers of Record hire employees on your behalf and contract them back for you to direct. They handle onboarding, payroll, taxes and compliance, and help you create benefit packages that fit your unique business needs.
Employees hired through an EOR enjoy the full employee experience, including on time payroll, tax deductions and forms, and employee benefits. Unlike contractors, they can fill core roles in your company and be developed into long term resources. They can be trained, promoted, and provided incentives.
But most importantly, Employers of Record provide the local expertise you need to convert your contractors to employees!
How Canadian Payroll Services Can Help
Canadian Payroll Services is an Employer of Record that specializes in the Canadian market. We hire, onboard and payroll Canadian talent on behalf of global companies. Our Human Resources and Payroll Practitioners are experts in Canadian payroll and employment law. We’ll help you hire employees in Canada without having to open a local subsidiary or bank account. And we’ll keep you compliant with local employment laws every step of the way.
If you’d like to move your contract workforce in house, but don’t know how to get started, we can help!
Get in touch today to discuss your options.
