Changing someone’s status from contractor to employee isn’t just a matter of ticking boxes. It’s a meaningful shift that can raise questions about compliance, costs, and communication. If you’re feeling unsure about how to handle it the right way, you’re not alone.
But the effort is worth it. Getting worker classification right helps you avoid penalties, builds long-term trust, and creates a stronger foundation for your business. It also gives your team the clarity and security they need to do their best work.
In this article we’ll cover the practical steps to take. You’ll learn how to review your current roster, update agreements, adjust your payroll system, offer appropriate benefits, communicate clearly with your team, and stay compliant at every stage.
Before reclassifying anyone, take a step back and assess how they actually work.
Look at day-to-day behavior. Do they follow your instructions, work set hours, or report to someone on your team? These signs point toward employee status. The IRS and Department of Labor look at behavioral and financial control, along with how integral the role is to your business.
Also consider the cost. Employees come with payroll taxes and benefits, so reclassification affects your budget too.
Start with the clearest cases. If a contractor is working like a full-time team member in a long-term role, that’s your signal to reevaluate.
Once you’ve decided to reclassify someone, you need to make it official. That means replacing contractor agreements with proper employee documents, not just editing the old version.
A compliant offer letter should clearly outline the job title, responsibilities, hours, pay, benefits, and how the relationship can end. This sets expectations and protects both sides.
There are also key documents you cannot skip. Collect these during onboarding:
You also need to file new hire paperwork with your state. Most states require this within a few days of the employee’s start date.
This is also a good time to update or create your employee handbook. Use plain language to explain your company policies and culture. It helps new team members feel grounded and gives your business added legal protection.
Once someone becomes an employee, their pay structure changes. They no longer invoice you. Instead, they receive a regular paycheck with taxes already withheld.
What your payroll system needs to do for employees:
Options like Gusto, ADP, and Paylocity can help simplify this process. Look for one that automates compliance, saves time, and works well with your existing setup.
Employees are entitled to benefits and legal protections that do not apply to contractors. Some are required by law, while others are part of building a competitive workplace.
Benefits to consider offering:
How to set these up:
You will also need to make sure your business is compliant with employment laws around overtime, sick leave, and equal opportunity. If you are unsure, a benefits broker or payroll provider can walk you through it.
Changing someone’s status affects more than paperwork. It can bring up real anxiety about income, job security, and what the future looks like. A clear, respectful rollout makes all the difference.
Here’s how to approach it:
Don’t blame government rules or suggest this is temporary. Stick to facts and be confident in your direction. Your team will respond to honesty and leadership.
Once someone becomes an employee, the legal responsibilities shift too. Even small oversights can cause big problems later, so now’s the time to double-check the details.
One of the most common issues is treating an employee like a contractor out of habit: expecting the same flexibility or forgetting to update systems like payroll and insurance. Make sure all your paperwork reflects their new status, including things like workers’ comp, unemployment coverage, and how their time is tracked.
You’ll also want to hold on to the right documents. That includes offer letters, employment agreements, I-9 forms, and any paperwork related to pay or benefits. As a general rule, keep these for at least three years. For I-9s, the requirement is three years after hire or one year after they leave, whichever comes later.
If you’re ever in doubt, ask for help. Talking with an HR pro or employment attorney can clear up confusion and help you avoid costly missteps.
Converting contractors into employees takes work, but it pays off. You’ll reduce your risk, build a more stable team, and create a business that people trust.
This isn’t just about staying compliant. It’s about building a company that’s ready to grow. Not sure if you’re on the right track? Schedule a call with DiMercurio Advisors and get expert help with your next steps.
You’re not just making a change, you’re building a better business.