Contract to Hire vs. Direct Hire
Updated March 10, 2023
Not all jobs are created equal.
If you’re currently looking for a new role, it’s important to understand the different types of employment you may run into. Two popular types of employment are direct hire and contract-to-hire. In this article, we’ll explore what these types of employment are and the benefits of each to give you a better understanding of which might be best for you.
What is contract-to-hire?
A contract-to-hire position is a short-term role with the opportunity to become a full-time employee at the end of the contract. This type of position can last anywhere from three months to three years, depending on the contract.
Contract-to-hire positions allow both parties, the employee and the employer, to try each other out and determine whether it’s a good fit. People in a contract-to-hire position do not work for the company directly but instead work through a staffing firm. The staffing firm pays the employee’s wages, billing that cost to the client organization with an additional markup fee to turn a profit.
How does contract-to-hire work?
Contract-to-hires technically work through a staffing and recruiting firm. Staffing agencies help connect people looking for contract-to-hire roles with companies looking to fill them. Throughout all assignments, the contract-to-hire employee is on the payroll of the staffing agency.
At the end of the contract period, the employer will evaluate the worker’s performance. If both parties agree that the contractor is a good fit for the role and company culture, a permanent offer will be made. Once accepted, the worker transitions from hourly to salary pay and is added to the company’s payroll. At this point, the staffing agency is no longer responsible for the worker’s pay or benefits.
How is contract-to-hire different from temporary work?
People often confuse contract-to-hire with temporary workers. While these two concepts are similar, they have one key difference.
Companies hire temporary workers knowing there’s a set time limit on the job with no option to continue the position afterward in most cases. According to the U.S. Department of Labor, “a temporary appointment is an appointment lasting one year or less, with a specific expiration date. It is appropriate when an agency expects there will be no permanent need for the employee.”
Companies hire temporary workers for seasonal work, project work, or to fill in during a full-time employee’s leave of absence.
While there’s no explicit option to continue the role after a temporary gig ends, companies do sometimes bring on temporary workers as full-time employees. If an organization decides to bring a temporary worker on as a permanent employee, some recruitment agencies charge a contract-to-hire fee. The organization pays this additional, one-time fee to the agency in order to employ the worker directly.
What is direct hire?
Direct hire employees are what they sound like— a company hires directly. Direct hires don’t work through a third party staffing firm or on a contract basis. This type of employee starts immediately on the company’s payroll, rather than on a staffing firm’s payroll, although employees can engage the services of a recruitment agency to source and interview talent for full-time employment.
In a direct hire arrangement, recruitment agencies typically charge a percentage of the employee’s first year base salary. Most agencies charge between 20 and 35 percent, but that’s subject to change for more challenging hires.
For example, let’s say your company partners with a recruitment agency to hire a solutions architect. The agency charges a 25 percent recruiting fee of the talent’s first year base salary. If a candidate accepts an offer of $140,000, the recruitment fee would be $35,000.
Billing practices vary by agency, but most will bill this fee:
- In multiple stages after fulfilling certain deliverables
- Only if the agency successfully fills the role
Tip: Good recruitment agencies will also have a guarantee policy—a written agreement between both parties saying the agency will replace any hires for free who quit within a certain window of time.
What is the difference between contract-to-hire and direct hire?
There are several key differences between contract-to-hire employees and direct hire employees. Some of these differences include:
Contract to hire
- Temporary, short-term contract positions
- Faster hiring process because it’s a short-term commitment
- Not eligible for company benefits, but may receive benefits through their staffing agency
- Allows you to vet a company before you commit to it
- Full-time positions
- Slower hiring process because it’s a long-term commitment
- Eligible for company benefits
- Does not allow you to vet a company before you commit to it
Benefits of direct hire vs. contract-to-hire
Now that we understand the difference between these two types of employment, let’s take a look at some benefits of each one.
Benefits of direct hire
There are multiple benefits to joining a team as a direct hire, but some of the main advantages include:
- Builds loyalty. Hiring employees directly makes them feel like they’re part of the team from the very beginning. This sense of belonging builds loyalty to the company and leads to greater retention and higher employee satisfaction. This is especially important for positions where high turnover is detrimental, such as leadership and customer-facing roles. Direct hires help you fill these types of positions with a longer-term commitment from the candidate you hire.
- Cost-effective. Direct hire employees go directly onto your payroll, so you avoid additional cost markups associated with hiring people who are on a staffing agency’s payroll. It’s typically more cost-effective in the long run to pay a recruiting agency a one-time fee to find you a long-term direct hire.
- Attract the best talent. A permanent, long-term role offers a greater sense of job security than a contract position, so direct hire roles are often more attractive to top talent. This is especially true for candidates who need more incentive to be persuaded to leave their current role than people who are actively job hunting. Top talent will also be more attracted to direct hire roles because they offer immediate eligibility for your company’s benefits and perks.
Benefits of contract-to-hires
If you’re considering the contract-to-hire route, these are some of the benefits that you’ll enjoy:
- Opportunity to vet the candidate. Contract-to-hire positions allow you to assess a prospective full-time hire in action without committing to having them on your payroll. It involves less risk on the company’s part, giving you a chance to determine culture fit and effectiveness before taking on the costs of a new full-time employee.
- Faster interview process. Because you’re not assessing candidates who will be full-time employees on your company’s payroll, the hiring process for contract-to-hire positions is much shorter.
- Budget flexibility. If you’re working with a restrained budget, contract-to-hire can minimize expenses in the short term. Contract-to-hire employees are typically not eligible for company benefits and they’re paid hourly rather than receiving a fixed salary, so they’re cheaper to hire than full-time employees.
- Accommodates growth. Contract-to-hire helps your team stay productive during unprecedented growth, extending a project, or catering to a new customer on short notice. During these bursts of growth, contract-to-hire makes it possible to quickly hire the help you need.
- Staffing flexibility. Contract-to-hire helps companies avoid overstaffing or understaffing by meeting the exact capacity needed, especially when the demand for resources fluctuates due to seasonal or project-based needs.
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