my long-time employee pushed to become a contractor … and the relationship fell apart

A reader writes:

I run a small healthcare practice and recently had a difficult transition with a long-time employee that I’m trying to learn from.

Sarah worked for me for about five years as our director of business development and marketing lead. During that time, I invested heavily in her development through training, tools, and absorbing the inevitable mistakes that come with someone growing into a role. She worked remotely, set her own schedule, had significant autonomy, and earned well above the market rate. I also referred clients to a small side business she ran.

About six months ago, she told me she had “outgrown” the organization professionally and wanted to change the relationship from employee (W-2) to contractor (1099). I raised some concerns about that transition, which led to an emotional conversation. Shortly afterward, she followed up with an email summarizing the conversation as though I supported the transition.

As we tried to work out the details, it became clear she didn’t fully understand the legal and structural differences between W-2 and 1099 work. Once we started mapping out the contract, she realized that many of the duties she previously handled could not legally remain part of a contractor relationship, meaning the scope and compensation would likely be smaller than she expected. She was upset and accused me of not being supportive.

After a lot of negotiation, we eventually arrived at a contract that met the legal definition of a 1099 relationship, and my company became one of her clients for several marketing services (social media, blog writing, online ads, and outreach).

Almost immediately after the transition, the quality of her work dropped significantly. When I raised concerns about deliverables, she responded by unilaterally removing two services from the agreement. Our contract allowed 30 days’ notice to terminate the agreement but did not allow individual services to be withdrawn while the contract remained active. At that point, I concluded it made more sense to transition to a new marketing firm rather than continue the relationship.

The whole situation has been frustrating because I feel like I lost someone I invested heavily in and tried to support. In hindsight, I also suspect she may not have actually wanted the contractor arrangement once she understood the implications, but by that point the relationship had already shifted.

My questions are:

When a valued employee pushes for a transition from employee to contractor, how should a manager handle that conversation?

Is it generally a mistake to agree to become a client of a former employee to preserve the investment you’ve made in developing that employee?

How do you avoid entirely losing someone you’ve invested in when they push for a change like this?

I’m trying to understand what I could have done differently so I don’t repeat this situation in the future. As a small business, a loss like this is huge. I feel nervous investing in the future, and I can’t shake the feeling I should’ve handled this differently.

The first thing is to accept that you will always lose employees who you invested in eventually, and that’s okay! If you try to stop that from happening at all costs, you can end up making choices that don’t serve the organization well. So first and foremost: be okay with the idea that people will move on and that it’s a natural and unavoidable thing that will happen in running a business.

I say that because it sounds like this all stemmed from you trying to find a way to hold on to Sarah, even if that arrangement didn’t make sense for the business. Instead, when Sarah told you she felt she’d outgrown the organization, it probably would have been better to wish her well and make a clean break.

There are times when converting a valued employee to contractor status can make sense for all parties. If you look at what the employee is proposing and can come up with an arrangement that makes sense for both of you — not just “we’ll agree because we’re desperate to keep them,” but truly makes sense — then great. But you shouldn’t agree just because they suggest it.

In Sarah’s case, it sounds like you were searching for a way to make things work even when you had significant reservations. It would have been okay, and probably better, to turn down the contract conversion — if not at the start, then definitely after your conversations revealed that you were so out of sync on what it should look like. You could do that without it being adversarial; it’s perfectly supportive to say, “I would love to keep working together, but we really need the person doing this work to be an employee. If that can’t be you anymore, I understand.”

You’ve framed this as wanting to figure out how not to lose the investment you’ve made in a good employee. But benefitting from your investment in a good employee doesn’t mean “they stay here forever.” It means your investment pays off in their good work while they’re there and in how their work hopefully sets the next person up for success. It also might pay off in the satisfaction it brings you to work with someone who you’ve seen grow and develop. But they will eventually find other opportunities and move on, and that’s just inherently part of running a business and employing people. You will make better decisions for the business and for yourself when you’re okay with that.

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