You cannot change employment status from Contract to another type.
to make the change you will need to delete all existing pays to the employee and then you can delete the employee. Create him again and run the pay for him.
Have you reported a PayEvent through STP? Contractors are not included in STP Reports. After you process the pay for the employee with his rightful employee status you will have to make an Update Event for this employee to include him on your previous PayEvent to the ATO.