A cost-cutting shorthand for US firms in India might secretly turn out to be a compliance nightmare.

American firms establish businesses in India, and in many cases, they begin with independent contracting. The contractor can be flexible, easy to onboard, and have low start-up costs, which makes them an alluring solution to entering a new market at an early stage.

Nonetheless, what appears to be a quick and easy way could prove to be a liability in the long run. The misclassification risks, disengagement, and compliance exposures might silently develop into business-related problems that are critical.

The solution? Turn the contractors into employees through a valid Employer of Record (EOR) model. This move enhances staff retention and also makes legal liability in the complicated Indian labor market secure. That’s how, under the brand-led and compliance-first strategy of Kaamwork, U.S. companies can build in India without being forced to lose control, culture, or compliance.

Let’s dig into this article, which discusses why converting contractors to employees is not only a compliance issue but also a business strategy towards long-term expansion. It further shows how Kaamwork facilitates this smooth transition.

Contractor vs. employee: What Indian laws say

According to the Indian labor law, there is a distinction between the contractor and the employee:

  • Contractor (independent worker): This is usually employed on a fixed project or short-term assignment. They have no right to social security, such as Provident Fund (which is a 401k in the U.S.) or Employee State Insurance (health insurance).
  • Employee: This is a permanent employee who was hired under a company or EOR and who has the benefit of statutory benefits, structured pay, and is subject to labor law protections.

Key misclassification risks

Incorrect categorization of employees as contractors would result in:

  • Back payments and Heavy financial penalties (Provident Fund, Gratuity, insurance, taxes).
  • Legal investigations and audit issues with the Indian authorities.
  • Damaged reputation in the talent market of India.

The new labor codes reshaping compliance

The four new labor codes of India, which are due to be implemented by 2025, can be seen to have unified 29 laws into a simplified framework. These include:

  • Wages Code (combined description of wages).
  • Universal PF (universal PF, gratuity, insurance).
  • Stricter norms of termination (Industrial Relations Code).
  • Code of occupational safety (protections at work).

This regulatory change renders compliant employment indisputable. Firms that are dependent on long-term contractors have a greater risk of failure unless they change.

The hidden downside of long-term contractor engagements

The current assumption of many companies in the U.S. is that retaining employees as contractors is the most agile method. As a matter of fact, it builds quite a few blockades.

Team cohesion and accountability

Many clients are handled by the contractors. This eventually waters down accountability, collaboration, and cultural belonging. Employees, in their turn, establish routines, rituals, and accountability. When your team is streamlined with your mission as a company, the productivity and innovation naturally increase.

Intellectual property (IP) risks

The IP ownership may be disputed without the agreement of the employees. Contractors can let code, designs, or processes be reused across clientele, exposing U.S. companies to IP leakage. In a business such as software, healthcare technology, or fintech, this risk is particularly harmful and may affect the valuation when raising funds or acquiring a company.

Tax and payroll complexity

Any payment to the contractors attracts tax withholding and GST (like sales tax), which adds an overhead to the administrative work. Worse still, if authorities redefine contractors as employees, it will mean that companies would have to pay social contributions backdated. There were instances where the companies were compelled to make three to five years of back-dated Provident Fund contributions, a huge liability to them.

Missed opportunities for career development

Contractors are not usually welcomed to formal training or promotion routes. This is because their abilities can stagnate, and your firm will not have long-term leaders. On the contrary, the chance of such employees remaining and building institutional knowledge is higher with employees who are trained.

Weak employer branding

Trying to rely on contractors excessively is a message to the talent market: We are temporary. Long-term job security is one of the important aspects of professional choices for ambitious professionals in India. Those companies that do not do it stand to lose the best candidates.

A PwC Survey 2025 shows that compliance complexity is materially affecting companies—77% of respondents have said they have been negatively impacted, and workforce changes are reported as a major compliance area in which organisations need assistance.

Why employees stay engaged and loyal?

1. Benefits that drive satisfaction

Indians receive statutory and fringe benefits not available to the contractors, including:

  • Provident Fund (PF): It is a compulsory retirement savings plan that resembles the U.S. 401 (k).
  • Employee State Insurance (ESIC): Health insurance supported by the government.
  • Paid leaves and holidays: Maternity, sick, and annual leaves.
  • Group and health insurance (insurance provided by the company).
  • Gratuity: A retirement award upon 5 years of service.
  • Career development and training.

These advantages enhance financial security, health cover, and work-life balance, which are major retention facilitators in the long run.

2. Belonging and alignment

Workers have a sense of belonging to the culture and vision of the company. They associate with your brand, they go to team rituals, and they are driven by career development. Contractors, on the other hand, tend to view your company as any other customer.

3. Retention through stability

In a LinkedIn post, companies highly rated in compensation and benefits experience 56% less attrition compared to those rated poorly, which points to the important role of relevant benefits in employee retention. The employees enjoy predictability in their wages, career development opportunities, and the feeling that they are contributing towards something larger.

4. Higher productivity and innovation

Employees are more creative, committed, and energetic in their jobs when they are sure about their future in the long term. This has a direct influence on the bottom line and the innovation ability of your company.

Compliance benefits of converting contractors to employees

Eliminate misclassification risk

When you convert contractors to employees, you establish audit-proof constructions that can satisfy the Indian labor standards.

Audit-ready employment

The onboarding of employees is done in compliance with contracts, payroll, and filings. This ensures:

  • PF and ESIC deposits are timely.
  • Income tax deductions(TDS) are correct.
  • Contracts in employment are conformed to the statutory laws.

Protect intellectual property

Employees make NDAs, IP agreements, and confidentiality arrangements that assure your ownership of the innovations and limit the chances of leakage.

Enhanced employer reputation

Compliance is an indicator of reliability to Indian regulators, talent, and clients. In the competitive talent market of India, American firms that take the initiative to turn contractors into employees are outstanding. It also helps to assure investors and other stakeholders that your operational activities in India are viable and legally safe.

Deloitte states that the top three risks exposed to the U.S. company in an international outsourcing related to IP security, and thus, compliant employment is the safer option.

Conflicts with contractors may lead to legal proceedings over non-payment of benefits or property rights in contention of ownership of work. Under clear contracts and statutory benefits, employees will minimize the chances of litigation that is expensive to defend.

How Kaamwork simplifies the conversion in India?

The EOR-first model of Kaamwork makes it easy to convert contractors to employees without having to establish a subsidiary.

1. EOR-First model

  • Kaamwork uses your contractors to work on your brand.
  • Offers HR, payroll, compliance, and benefits management.
  • Provides audit-ready filings and statutory compliance on the first day.

2. Transparent flat-fee model

  • $599 per employee/month.
  • Includes HR, payroll, compliance, background checks, branding, and 24/7 support.
  • No exorbitant prices, no vendor overheads.

3. Brand-Led hiring

We hire under your brand and employ talent compliantly through EOR since day one. Kaamwork hires and hires talent under your brand name, as a permanent employee, not as a contracted employee, increasing ownership and long-term interaction. This involves maintaining cultural stability and Kaamwork, taking care of the back-office complexities.

4. White-Glove HR support

Kaamwork offers hometown advice, whether it be labor law advice or background checks and employee engagement programs, your team will have a sense of support.

5. Seamless transition to your own entity

When you are willing to create a localized presence in India, Kaamwork assists in the process in a way that will not interrupt the process, but will assist you in owning your team.

A conversion roadmap: The Kaamwork playbook

Making contractors employees does not need to be disrupted. Kaamwork offers a 30-60-90 day plan:

0–30 days: Preparation

  • Determine the eligibility of contractors for conversion.
  • Match compensation packages.
  • Start negotiations and post suitable job opportunities.
  • Make contractors understand the advantages and long-term development.

31–60 days: Execution

  • Introduce full-time employment agreements.
  • Fully compliant onboarding.
  • Begin payroll integration.
  • Conduct knowledge transfer programs to enhance unity.

61–90 days: Stabilization

  • Activate benefits (PF, ESIC, insurance).
  • Sign NDAs and IP agreements.
  • Check compliance and make audits ready.
  • Introduce employee engagement programs to develop a culture.

Beyond 90 days

Compliance monitoring, HR support, and keeping the employees engaged through a regular feedback loop, training, and cultural integration are still under the watch of Kaamwork.

Business signals that it’s time to convert

You are not sure when to transition. Watch for these indicators:

  • You possess 5+ contractors, and intend to expand.
  • You have heard of the risk of misclassification or have been asked compliance questions.
  • You desire greater retention, responsibility, and cultural congruency.
  • What you are dealing with is sensitive IP that should be guarded.
  • You are creating a long-term India strategy, and you require a solitary base.
  • You are after investor confidence. Investors like having businesses that have a compliant long-term employment structure.

These are some of the signals that indicate that it is time to convert an employee to contractor status without necessarily having to form a full legal entity.

Case Example: Regie AI — Scaling Compliantly with Kaamwork

Background

Regie is a tech startup led by a serial investor/entrepreneur based in the Bay Area. They wanted to expand their team remotely, but they had two big concerns: IP protection for remote hires, and legal compliance. Their existing contractor model had been flagged by a law firm (Orrick) for risks around classification, contracts, and IP ownership.

Challenge

  • Contractors working globally posed serious IP and data risk under their previous arrangements.
  • There was no consistent, enforceable mechanism for IP assignment and confidentiality in many of their agreements.
  • The risk of misclassification, and possibly legal exposure, was concerning.
  • Voluntary attrition was a risk, especially in uncertain global job markets.

Kaamwork’s Solution

  • Regie leveraged Kaamwork’s Employer of Record (EOR) model to shift from contractors to full-time employees, under Kaamwork’s compliant legal entity framework.
  • All required legal/contractual protections (IP assignment, data confidentiality, statutory employment compliance) were embedded in the employment contracts.
  • Kaamwork handled payroll, benefits, tax, statuary filings, and maintained local legal compliance.

Outcomes

  • 100% Compliance & IP Protection: Regie now has full legal compliance and IP protection for its remote hires.
  • Zero Voluntary Attrition: Even during times of high global uncertainty, Regie has had zero voluntary attrition among those hires under the Kaamwork EOR model.

Why Kaamwork is different

Kaamwork in contrast to outsourcing vendors:

  • Does not mark up salaries. Workers are recruited under your brand.
  • Flexibility of EOR-first. You can change into your own entity in the future.
  • Supports culture-building. It is not a third party that identifies with your brand; teams identify with your brand.
  • Delivers local expertise. Kaamworks India's first HR and compliance team is such that the details are overlooked.

Kaamwork is not an outsourced business—it is a matter of ownership, compliance, and retention.

Additional considerations for U.S. leaders

Cost efficiency

In India, the average wage is ₹19,010 (approximately $230–250), as compared to the United States, where it is approximately $4,784 (per month). This implies that the cost of salaries in India is relatively less than in the United States, roughly 19-20%. This corroborates the idea that operating costs, including salaries, are way cheaper in India.

Strategic workforce planning

Succession planning, leadership pipelines, and scalable team structures are all possible through employees. Contractors are likely to abandon their work without giving prior warning, which disrupts projects and institutional knowledge.

Cultural integration

In India, employees would be brand ambassadors. They represent your values, do local employer branding, and get more top-grade talent.

Investor relations

Clean compliance records in offshore operations are an issue with U.S. companies in the process of preparing IPOs or fundraising rounds. Investors would choose those companies that are structured well, employment compliant, and whose liabilities are reduced to a minimum.

Take away

On the one hand, a decision to start India operations with contractors might appear easy; however, it has long-term risks: compliance liability, IP exposure, and poor employee engagement. The sustainable solution is to turn contractors into employees- by bringing about compliance, retention, and cultural integration.

Kaamwork achieves a smooth transition through its EOR-first model, flat-fee pricing model, and brand-led onboarding. Within 90 days or so, your Indian team can transform their contractor-based insecurity into compliant, loyal, and involved employment.

Ready to secure your Indian workforce? Explore Kaamwork’s model now!