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Paris graduated Starfleet Academy, and had a rank before being jailed. They don’t say it outright, but I think Janeway got Starfleet’s permission to commute his remaining sentence in exchange for being an “observer” on her ship. But even without being part of her crew officially, he was part of Starfleet again (uniform) so she had the power to promote (and demote) him at her discretion.
Ah I think you’re right. I think she says that at the prison colony, that he’ll be free to do whatever he wants in exchange for guiding them through the badlands.