You can convert a contractor abroad into an employee without opening a local entity, by having an Employer of Record (EOR) employ them for you. The EOR becomes the legal employer, issues a local employment contract and runs payroll, while the person keeps doing the same work for you. It usually takes a few weeks.
The harder question is whether you have left it too long already. Updated 9 November 2026.
Look at how the work actually happens, not at the contract. Every country runs its own test, but they ask broadly the same things: who controls the work, whether the person is part of your organisation, and who carries the business risk.
| What you see | What it suggests |
|---|---|
| They work hours you set and report to your manager | Convert now. Control is the strongest employment signal in almost every test. |
| You are their only client | Convert. Economic dependence counts against you. |
| You keep renewing the same contract | Convert. A 24-month "project" with no end date is a job. |
| They use your laptop, email address and systems | Review. One factor among several, but it adds to the picture. |
| They deliver a defined result, choose their own method and invoice several clients | A genuine contractor. Leave it alone. |
In practice the drift is gradual. Someone is hired for a three-month integration project. Eighteen months later they attend the weekly stand-up, appear in the org chart and take holiday by asking their manager. Nobody decided to employ them, but on paper you now do.
The tests overlap, but the enforcement and the bill differ a lot by country. These four are where we see the most conversions.
| Country | Who decides status | What you risk if it is wrong |
|---|---|---|
| United Kingdom | Under the off-payroll working rules (IR35), public bodies and medium or large private-sector clients decide the status of contractors working through their own company, and must issue a Status Determination Statement | Income tax and National Insurance the client should have deducted, plus interest and penalties |
| Germany | The Deutsche Rentenversicherung (DRV), through its status procedure (Statusfeststellungsverfahren, §7a SGB IV), or in an audit | Employer and employee social contributions for four years, 30 where intent is found (§25 SGB IV), late surcharges of 1% a month, and criminal liability for withholding contributions (§266a StGB) |
| Netherlands | The Belastingdienst, under the Wet DBA, applying the Supreme Court's 2023 Deliveroo criteria | Payroll tax and premium back-assessments from 1 January 2025. Fines for non-deliberate cases are deferred to 1 January 2027; deliberate cases can be fined now |
| United States (California) | The state's ABC test for most work, applied by the Labor Commissioner and the courts | Civil penalties of $5,000 to $15,000 per violation for wilful misclassification, $10,000 to $25,000 where there is a pattern (Labor Code §226.8) |
Misclassification is one of the five compliance risks of hiring abroad, and two points catch foreign companies out. Germany treats the employee's share of contributions as your debt too, so you cannot pass it back to the worker later. And in the Netherlands the end of the enforcement pause means inspections now look at engagements that started years ago.
Chart: California penalties for wilful misclassification
Civil penalty per violation under Labor Code §226.8, minimum and maximum. Scale: $0 to $25,000.
Penalties apply per violation, on top of back pay and other penalties. Source: California Labor Code §226.8(b) and (c).
Take a Dutch software company that has paid a developer in Berlin €5,000 a month as a freelancer for 30 months. She works only for them, joins the daily stand-up and uses a company laptop.
If the DRV reclassifies the engagement, the company owes employer and employee social contributions for the whole period. In 2026 the combined German rate for pension, unemployment, health (with the average top-up) and long-term care is 42.3% of gross pay, and €5,000 a month sits below every contribution ceiling. On €150,000 of fees, that is roughly €63,000, before late surcharges of 1% a month. It can be higher still, because the fee already paid may be treated as net pay and grossed up.
Converting her through an EOR at month six would have cost the employer contributions from that point on, and nothing for the months before.
More each month, and you should budget for it before you make the offer. A contractor's invoice already covers their own social contributions. Once they are employed, the employer pays a share on top of the salary, plus statutory benefits and, with an EOR, a monthly fee.
| Country | Main employer costs on top of salary (2026) |
|---|---|
| United Kingdom | Employer National Insurance of 15% on earnings above £5,000 a year, plus at least 3% employer pension contribution on qualifying earnings under auto-enrolment |
| Germany | About 21% for pension, unemployment, health and long-term care, up to the contribution ceilings (€8,450 a month for pension and unemployment, €5,812.50 for health and care), plus accident insurance and sick-pay levies |
| United States | Social Security and Medicare (7.65% combined, Social Security up to an annual wage cap), federal and state unemployment tax, and usually health insurance, which is not statutory but expected |
Then there is the salary itself. A contractor's day rate is not a salary, because it had to cover their own contributions, unpaid holidays and equipment. Most conversions land on a gross salary noticeably below the old annual invoice total, with the employer costs above taking up the difference. Work it out per person rather than applying a rule of thumb (our employment cost calculator gives the employer cost for a given salary in each country), and show them the comparison: paid leave and sick pay are worth money to them too.
Removing the liability is usually what starts the conversation, but it is not the only gain.
Before anyone asks. A conversion you choose is a payroll change; one forced by an audit comes with a back-assessment attached.
Three moments should trigger it:
Through an EOR it usually takes a few weeks from decision to first payslip. The steps:
Do not copy the contractor agreement across. Check that the new contract deals with each of these:
When you are building a team in one country for the long term. An EOR charges a fee per employee each month. Your own entity has setup and running costs but no per-head fee, so past a certain headcount it becomes cheaper.
Our view: for one to about ten people in a country, or anywhere you are still testing the market, an EOR is the faster and lower-risk route. Beyond that, plan an entity and move people across. A good EOR should tell you when that point arrives, rather than keep billing you.
Through an EOR, usually a few weeks, depending on the country and how quickly right-to-work and payroll registrations clear. Setting up your own entity first takes months in most countries.
No. An Employer of Record employs the person on your behalf in countries where you have no legal presence. You direct the day-to-day work; the EOR holds the employment contract.
No. Converting stops the exposure growing from that date, but authorities can still assess the period before it. In Germany that is normally four years. This is why converting early matters more than converting neatly.
The monthly cost is usually higher, because you now pay employer contributions, statutory benefits and the EOR fee. Against that, you no longer carry the misclassification liability, which is the larger number if it is ever assessed.
Usually not. The contractor rate had to cover the person's own social contributions, unpaid holidays and equipment. Agree a gross salary that leaves them no worse off once employment benefits are counted.
Yes. Some people prefer contracting for the rate or the flexibility. If the relationship is employment under local law, though, carrying on as before leaves the risk with you, not them. Have that conversation early.
Yes. Either side can apply to the DRV's clearing office for a status determination under §7a SGB IV. A ruling at the start of an engagement costs far less than one after four years.
Have contractors in Germany, the Netherlands or the UK? Tell us where they are and we will tell you how exposed each engagement is and what converting would cost.