Article
6 min read
Author
Shannon Hodgen
Published
May 30, 2024
Last Update
July 24, 2024
Table of Contents
Why convert independent contractors to employees?
Understanding worker classification in the US
Using PEO services to simplify the process
Steps to transition from independent contractors to employees
Build your US workforce with Deel
Like many companies, you may have initially hired independent contractors for the flexibility and access to specialized skills they offer. However, worker classification in the US is continually evolving, with state and federal regulations becoming increasingly strict—and difficult to stay on top of, without the proper support.
If your business is aiming to enhance compliance and gain more control over your workforce, hiring direct employees might be the right move.
In this guide, we'll walk you through the process of converting contractors to employees and explain how Deel PEO (professional employer organization) and US Payroll services can streamline this transition, ensuring a smooth and compliant experience for your company.
Companies of all sizes often use a mix of employment types to suit different business needs and stages of growth. Once a business starts growing, it often has the financial capacity to handle the increased costs that come with hiring full-time employees. As a result, they can benefit from:
Employers have more control over employees' work schedules, methods, and processes, which helps maintain consistency and alignment with company standards. This direct oversight makes it easier to monitor and improve productivity and work quality.
Managing employees is simpler in terms of following labor laws and regulations, which reduces the risk of misclassification penalties and legal issues. By hiring employees, employers can more easily follow wage and hour laws, workplace safety standards, and other employee protections, creating a fair work environment.
Employees can access health insurance, retirement plans, paid time off, and other benefits, which can boost job satisfaction and attract top talent. Employers can also offer training and development opportunities, helping employees improve their skills and advance their careers within the company.
See also: How to Leverage US Employee Benefits Trends to Shape Competitive Packages
Employees are often subject to stricter security and confidentiality agreements, which protect sensitive company information. Employers typically retain ownership of intellectual property created by employees, protecting company assets and innovations.
Before you convert a worker from contractor to employee, you have to ensure they fit the classification under US law.
The US Department of Labor (DOL)’s new rule for worker classification took effect in March 2024. This rule provides six factors that businesses should consider to analyze their business relationship with a worker and determine the correct worker classification.
These factors, also known as the Six Factors of Economic Reality Test, include:
To help determine the proper classification of a worker, use Deel’s Misclassification Assessment. This assessment combines AI with award-winning research to classify workers with over 90% accuracy.
What if you have the financial capacity to hire full-time, salaried employees, but not the HR or payroll resources to support their classification, HR workload, and payroll management? That’s where a PEO can help.
A professional employer organization (PEO) is a third-party company that provides outsourced payroll and HR solutions to businesses.
To utilize a PEO, your business must have an entity in the state where you intend to hire employees. This ensures that the PEO can legally manage employment responsibilities in that jurisdiction.
Partnering with a PEO requires entering into a co-employment relationship, wherein the PEO shares some of your company's legal and financial responsibilities for payroll, taxes, benefits, and HR compliance. This partnership provides an added layer of protection and expertise, helping to manage compliance risks effectively.
Deel PEO key functions and features include:
With Deel PEO, you get a comprehensive solution for managing HR and payroll functions, aligning your company with local employment requirements and reducing the administrative burden on your business. Learn more about Deel PEO.
Deel PEO simplified and accelerated our hiring process in the US, cutting costs by 50%. Now, managing compliance for our US-based team members is fast, easy, and cost-effective.
—Pierre Puig,
Head of HR, Sim & Cure
If you want to hire direct employees through your own entities, but don’t need all of the support of a PEO, you can use Deel US Payroll. Deel US Payroll takes care of everything from wage calculations and deductions to handling all federal, state, and local tax filings:
Or, you can transition from hiring contractors to employer of record (EOR) employees with Deel EOR. An EOR is a third-party organization that legally employs staff internationally on behalf of client companies. This arrangement involves the EOR handling all employment-related responsibilities, including drafting contracts, managing salaries and benefits, and overseeing tax obligations.
💡 Learn more in our free guide: Everything EOR: A Guide to Employer of Record
No matter which approach to US hiring you take with Deel, you benefit from a completely centralized payroll and HR platform that combines your US workforce with your international workforce.
By centralizing all your administration, you can eliminate multiple logins and reduce manual work and errors. You’ll also be able to seamlessly manage your data by collecting and storing all enrollment and deductions data in one secure location, simplifying payroll calculations globally. With an all-in-one solution, you can empower employees with access to their benefits data, and enable them to enroll in new benefits, decline options, and manage dependents.
An advantage of using Deel PEO is we can keep centralizing all of our global HR processes into one platform that’s easy to use and gives us full visibility of our team's information.
—Pierre Puig,
Head of HR, Sim & Cure
Converting contractors to employees with the help of a PEO can make the transition smoother and keep you compliant with labor laws. Here’s a look at the process:
First, identify which contractor roles are essential to your business and would benefit from being full-time positions. Think about long-term goals, the nature of the work, and how integrated these roles need to be. Conduct a cost-benefit analysis to understand the financial impact, including salaries, benefits, taxes, and administrative costs.
Look for a PEO with a strong track record in managing worker classification and employment transitions. Evaluate their services, industry expertise, and client reviews. Compare what different PEOs offer in terms of payroll management, benefits administration, HR support, and compliance help, and choose the one that best fits your needs.
Outline a detailed timeline for the transition, including key milestones and deadlines. Develop a communication plan to inform contractors about the changes, clearly explaining the benefits of becoming employees and addressing any concerns they might have. With Deel, you receive the support of a dedicated customer success manager (CSM) and onboarding manager (OBM) to guide you through the process and beyond.
Make sure your company is registered in every state where you plan to hire employees. Deel can assist with state-specific registration requirements and entity setup, simplifying the process. You can also use Deel to correctly classify workers according to relevant regulations to reduce misclassification issues and stay compliant with the FLSA.
Compile all necessary employment documents from your now-employees, such as employment contracts, tax forms (W-2, W-4), and I-9 verifications to onboard them into the system. Deel automates these processes, ensuring documents are properly completed and compliant with regulations. You can also collaborate with Deel to set up employee benefits programs, including health insurance and retirement plans, through their benefits provider partners or by integrating your existing providers.
Your PEO will handle all payroll processes, including wage calculations, deductions, and tax payments. This ensures payments are accurate and timely, and taxes are filed correctly. The PEO will also manage direct deposits and payslips, integrating these processes with your accounting systems.
A PEO should provide continuous HR support, including employee onboarding, performance management, and keeping up with labor laws. Deel HR, an HRIS, allows you to manage all HR tasks, from document management and time off tracking to expense handling. This helps new employees settle in smoothly and ensures your business remains compliant with regulations.
💡 Deel’s Compliance Hub helps companies stay compliant with changing regulations with:
Collect feedback from your newly transitioned employees to identify any issues or areas for improvement, and make necessary adjustments to your HR and payroll processes based on this feedback and ongoing business needs. Regularly review and update your practices to stay aligned with regulatory changes and business growth.
When it comes to US payroll, the amount of money saved exceeds thousands of dollars since we didn’t have to hire consultants to set up and maintain our payroll. We can just do it ourselves through Deel’s easy-to-use all-in-one global platform.
—Amir Podensky,
CEO & Co-founder, Strada
Deel makes payroll and human resources management a breeze, whether you’re hiring in one state or all 50. As your forever people platform, Deel scales with your team by providing a full suite of services to help you hire, pay, and manage an evolving workforce.
In addition to Deel PEO, you can use:
Book a 30-minute demo to explore the Deel platform, speak with a specialist, and get all your questions answered.
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