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Everything You Need to Know About Contract to Hire

If you’re thinking of using a contract-to-hire arrangement for your business, you’re not alone. An NPR/Marist poll found that 20% of American workers in 2018 were employed on a contract basis, with both employers and employees looking for more flexible employment methods. However, this term covers a wide range of working arrangements, including contract to hire, independent contractor, and temporary workers. Make sure you understand what’s involved in contract-to-hire employment before you start looking for your next star employee.

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What is contract to hire?

Contract to hire is when a person is hired to work for a short period of time, with the possibility that they may be converted into a direct employee at the end of the contract. This is done through a staffing agency, not directly through your company.

How does it work?

You contact a staffing agency and describe what you’re looking for, and they take care of all the hiring tasks, such as advertising, sourcing candidates, reviewing resumes and the initial screening. The agency sends the qualified candidates to you for the final interview and the ultimate decision on who to hire.

Once you’ve made a decision, your new contractor is put on the staffing agency’s payroll. You pay the agency, and the agency takes care of paying the new employee, as well as any benefits they may be eligible for. You’re charged a premium above what the employee is receiving in wages to account for other costs involved in hiring them, as well as for the profit of the staffing agency. For example, if your new contract-to-hire employee is paid $20 per hour, you may be charged $30 per hour.

The contract duration varies, but it’s generally between 3 and 12 months. If the contractor meets your needs, you can convert them to a direct employee at the end of the contract. Otherwise, you can choose to end or extend the contract.

Contract to hire vs. direct hire

The main difference between contract to hire and direct hire is in the payroll structure. A direct hire goes on your payroll, while a contract-to-hire employee is paid by the agency. You should also be aware that contract-to-hire staff are paid hourly, so if you hire them for a project with a lot of extra hours, the overtime won’t be covered by a salary.

Contract to hire vs. independent contractor

Independent contractors works for themselves. They’re generally hired as consultants and bill the company for the work they do, or the hours they spent at a workplace. As a consequence, they’re not on anyone’s payroll, and they manage their own benefits, taxes and health care coverage. Independent contractors can help you get access to specialized skills for projects, but they can be an expensive option if their expertise is highly sought after.

Contract to hire vs. temporary worker

The terms contract to hire and temporary employee are often used interchangeably. Many temporary workers are also hired through a staffing agency, and in both cases, the employee expects that the job will not last indefinitely.

The difference between the two is that with a temporary employee, there’s no expectation of transitioning to a permanent role. Contract-to-hire appointments are generally used when the employer has the intention of converting them to direct-hire employees if the initial contract period goes well.

Where is contract to hire used?

Contract-to-hire arrangements are used in many industries, but they’re most popular in project-based roles, software engineering and business analysis. In these roles, people are brought in for a specific project, and if they demonstrate their value to the company, they’re converted to a permanent employee for future contracts or to fill ongoing needs.

Why use contract to hire

Whether you use contract-to-hire employees or not depends on your business and needs. Businesses most commonly use this arrangement for the following reasons:

  • You can avoid bureaucracy: In many businesses, budgeting processes make it difficult to bring in a direct hire, but there are separate funds for contracting services that can be utilized. A contract to hire means someone can come in and do the job without all the direct-hire red tape.
  • You don’t have to do the hiring: The staffing agency takes care of the time-consuming part of hiring a new employee, including advertising and screening. This leaves your HR department free to concentrate on other tasks, and often reduces the length of the hiring cycle so you can have someone working for you sooner.
  • You get a trial run: A contract-to-hire arrangement allows you to see how a potential employee fits into the team before you go to the expense of hiring them. You can also make sure they can provide what your business needs. This can save you time and money compared to the cost of hiring a replacement after letting the initial employee go. Employees also benefit from this trial run and can leave with no lasting negative impact if the job ends up being a bad fit.
  • You can budget better: Contract-to-hire employees typically don’t receive benefits, which can save you money. They’re also only paid for the hours they work, so you don’t need to continue paying them if a project finishes early or there’s not as much work as expected. This arrangement allows you to continue getting work done while you make room in the budget for a permanent employee.

Drawbacks of contract to hire

Despite the many benefits of contract-to-hire employees, there are drawbacks to consider before choosing this option.

  • The need to start over: If the employee isn’t a good fit, you may still need to start over to find the right person. However, this is generally not as big a burden as it would be with a direct employee, because the staffing agency takes care of most of the process and they already know what you’re looking for. They may even have possible candidates on their books from the initial hire.
  • Difficulty getting employees: Some people prefer job flexibility, but others are looking for security. The contract-to-hire format may stop some qualified people from applying, which limits your candidate pool. However, with the increase in flexible and short-term positions, more employees are becoming accustomed to this sort of contract.

How to do contract to hire right

If you decide to use contract-to-hire arrangements, it’s important to pay attention to the details so it goes smoothly.

  • Choose an experienced agency: Look for a staffing agency that’s experienced in offering contract-to-hire services, so you can be assured that the logistics are taken care of properly. You should also find an agency that regularly works with your industry so they know the skills and qualities required and know how to source qualified candidates.
  • Understand what the agency is offering: Read the contract you have with the agency carefully so that you know what you’re getting for your money. What services do they provide after the employee is hired? Does the agency offer their contracted staff health care or other benefits? Do they manage time off? What do you have to do to ensure staff are paid the correct amount? Ask questions so there are no surprises once your new contractor is in place.
  • Be up front about your needs: If you have no intention of converting the position to a direct hire, it’s often better to advertise it as a temporary position. This will help you manage employee expectations and maintain your reputation as a good employer.

Contract to hire FAQs

How do job candidates see contract-to-hire roles?

Whether a job candidate wants a contract-to-hire role will depend on what they’re looking for in a job, but these positions do have benefits for employees. Candidates can try out different roles and gain experience quickly through contract-to-hire positions and fill gaps in their resume while looking for a permanent role. Many employees also like the flexibility offered and prefer to try a new job so see if the company culture and work is what they want moving forward. Candidates who don’t like contract-to-hire work are generally looking for benefits or greater security from a position.

Do contract-to-hire employees receive benefits?

Each contract-to-hire arrangement is different, but in many cases employees in these situations do receive health care or other benefits. These are provided by the staffing agency, and the costs will be passed on to you. Often the health care provided is not as robust as that provided to permanent employees, and staff may not be offered sick leave. The pay offered to contract-to-hire employees is generally higher than that provided to direct-hire staff to make up for the lack of benefits, which is another reason these positions are attractive to candidates.

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