When does it make sense for a contractor to become an employee? There’s far more to consider than just legal and regulatory compliance (though that, of course, is paramount).
In this article, we’ll take a look at when it might be appropriate and beneficial to transition a contractor to an employee, how to make the decision in a wise and informed way, and what to do if it doesn’t make sense to transition from 1099 to W2 status.The transition from independent contractor to full-time employee is significant for both the company and the potential hire, and needs to be considered carefully to ensure the best outcome for everyone. Click To Tweet
Contractor-to-Employee Factor #1: Legal / Regulatory Compliance
When a company considers moving a contractor to employee status, it’s often for legal reasons. There are penalties – which vary from state to state – for treating an independent contractor as a full-time employee without paying the required taxes or providing certain benefits. Business owners will, of course, want to comply with regulations.
If, for example, it becomes necessary for the person in the contractor role to work specific hours, they either need to be converted to employee status or the role for the contractor needs to change so that working those hours is not required.
Factor #2: Clear Evidence of Skills and Qualities Needed for ALL Aspects of the Job
If the employee position will include any additional responsibilities that aren’t part of the contractor role, it’s essential to get evidence that the contractor actually has the skills and qualities needed for the additional duties.
It’s extremely common for companies to assume that because someone is good at one thing, they will also be good at another. This assumption is often wrong and comes at a high price.
For example, a contractor may produce outstanding deliverables and be transitioned to employee status to manage other contractors that produce those same deliverables. This person might have even served in a managerial role like that at another company. But that doesn’t mean they were good at it, or that they will have the same performance elsewhere.
If a contractor hasn’t yet performed responsibilities that would come with an expanded employee role, then a well-designed simulation paired with an in-depth interview can give powerful insight into whether or not they would be a good fit in the new role. A simulation is a short, time-boxed experience designed to comprehensively mimic the nature of the job in the hiring company. It will not only demonstrate how well the contractor would perform in the context of this expanded role…it will give them an idea of how well they might actually like the new responsibilities.
Factor #3: The Contractor Embraces and Implements Feedback
Providing a contractor with ongoing instructions or training could cause the government to view it as breaching the line between contractor and employee (resulting in potential penalties). Because of this, and because of the more independent nature of contractor relationships in general, a contractor may not have received much constructive feedback. An employee, however, likely will receive feedback and be expected to implement it.
If a contractor hasn’t been provided a great deal of feedback, it’s a good idea to explore that dynamic with the contract before transitioning them to employee status. Selecting something that wouldn’t cross legal boundaries and providing them with the type of feedback they might receive on the job is key.
The degree to which the contractor non-defensively embraces and implements this feedback is a great indication of how well they’ll work with that dynamic on the job. Are they a flexible, adept learner, willing to adjust to company standards, workflows, and style? Do they learn from the experience? If not, that will likely come up on the job as an employee.
Factor #4: Alignment on Goals and Preferences
One of the most critical pieces of making a decision about whether to move a contractor to employee status is having an honest, in-depth discussion about their professional goals and preferences, and what will change. It’s a big change for both parties, and important for both parties to think things through fully and discuss concerns.
Here are some questions to ask a contractor before transitioning them to employee status:
- What concerns do you have or what challenges do you imagine there might be when thinking about transitioning to being an employee of this company instead of a contractor? What do you think might change, and what do you think might stay the same as it is today? [Outline changed expectations clearly] How would you feel about that? What concerns would you have? What might not work for you?
The nature of the relationship and expectations for the team member will change when they become an employee. It can be a huge adjustment to go from being one’s own boss to having a manager, for example. Many people quickly find out it’s not for them because they didn’t fully think it through or didn’t realize how expectations would change. Avoid this mistake by talking about changes in advance.
- What are your long- and short-term professional goals?
If the growth path of the company doesn’t align with the contractor’s goals, the relationship will likely not work out long-term, or the employee may become disengaged. Explore how the contractor would feel with the growth path that is available. Also, discuss how the company might indirectly contribute to those goals or to professional growth in a different way. Both parties should be making a fully informed decision.
- If you were an employee at this company, what would make you want to stay long-term?
The company should, of course, be certain that they can accommodate these desires before transitioning to an employee relationship. Hiring an employee that quickly churns costs an extraordinary amount in money, time and resources.
- If you were an employee, what would make you start looking for another opportunity?
Under what circumstances would the contractor look for different employment, or for a different professional opportunity? It’s beneficial to know this information up front, so that nobody is blindsided by resignation.
- It’s been a while since you’ve been an employee. How would it feel having a manager again? What about that might feel challenging or be a tough transition?
Many independent contractors are accustomed to working for themselves, with their own hours, scheduling, and ability to accept or deny projects. The contractor should be honest with themselves (and you) about how it might feel to transition back to employed status.
The new arrangement should be mutually beneficial.
Finally, consider whether or not taking the contractor on as a full-time employee would be beneficial for both parties.
The interview described above will provide insight into whether or not the new job role would be a win for the potential hire.
Next, it’s important to consider whether or not the situation would be beneficial to the hiring company. What value would this hire add to the company? How much would you manager and team enjoy working with them?
Hiring a contractor as a FT employee with Scalability Solutions.
Scalability Solutions helps companies to vet and test contractors before taking them on as employees by designing custom, insightful, high-value interviews and simulations, and evaluating results. If you’re interested in gaining greater insight into a contractor’s potential on-the-job performance and fit before hiring them as an employee, click here to learn more about how Scalability Solutions can help you.