Why do vendors show up in employee drop-downs?

By default, Core always includes vendors of type Contract Employee and Outside Consultant in the employee drop-downs. However, it includes vendors of type Vendor in the drop-downs only if you select the option Include vendors in employee drop-downs in the User Preferences > General screen. If you do not want a vendor to show up in the employee drop-downs, make sure you change its type to Vendor and un-select the option in User Preferences. Check the Core Help for more on this option.

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