The demand for contract and temporary employees has been on a noticeable uptick in recent years, signaling a shift in how companies approach staffing. Contract roles have become a cornerstone of workforce strategies as companies adapt to changing market demands. With contract-to-hire positions offering flexibility for employers and employees, their popularity continues to rise.
Recent data from the Bureau of Labor Statistics (BLS) shows that temporary and contract jobs now make up 15% of the U.S. workforce, a number expected to grow by 5% annually through 2030. But what does this model entail, and how can businesses leverage it effectively? Let’s break it down.
What is Contract-to-Hire?
Contract-to-hire is a staffing arrangement where an employee begins working for a company on a temporary contract, typically facilitated by a staffing agency. The goal is for the employee to transition into a permanent role at the end of the contract period, assuming both parties find the arrangement mutually beneficial. While the employee is on contract, they remain on the staffing agency’s payroll.
This model differs from direct hire, where an employee joins a company immediately as a permanent staff member. Instead, contract-to-hire provides a “trial period” to evaluate fit, performance, and long-term potential.
How Does Contract-to-Hire Work?
When leveraging a staffing agency to fill contract-to-hire positions, they will handle the front-end recruiting tasks, such as sourcing candidates, reviewing resumes, and conducting initial screenings. Once a candidate has moved through these process stages with the staffing agency, they will be submitted to the client for consideration. The end-user company will interview and make the final decision, with insights and guidance from the staffing agency if needed. Once a candidate has been selected and their offer has been accepted, they will begin their employment contract on the staffing agency’s payroll rather than the client’s.
The duration of a contract-to-hire position can vary from short-term as one month to indefinite, but they most commonly run from three to twelve months. In nearly all situations, the client will have an opportunity to convert the contractor to a full-time hire in a manner that meets their unique needs at the time.
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Contract-to-Hire Versus Direct Hire
The key difference lies in payroll and commitment:
- Contract-to-hire: The staffing agency handles payroll and benefits during the contract period.
- Direct hire: The employee is immediately onboarded as part of the employer’s team.
Contract-to-hire offers a lower-risk solution for employers, especially in uncertain economic climates or when assessing a candidate’s fit.
Contract-to-Hire Pros
Accelerated hiring process
Contract-to-hire reduces the time and effort needed to fill a position. Staffing agencies streamline recruitment by managing the sourcing and initial screening, allowing employers to focus on final interviews and selection. This is especially valuable for roles requiring immediate staffing. According to a recent study by CareerBuilder, companies leveraging staffing agencies for contract roles cut hiring timelines by an average of 45%.
“Try before you buy”
Contract-to-hire offers a trial period for both employers and employees to evaluate fit. Employers can observe a candidate’s performance and cultural alignment, while employees can assess whether the job meets their expectations. This minimizes the risk of costly hiring mistakes. Data from the Society for Human Resource Management (SHRM) reveals that 74% of employers using contract-to-hire models report reduced turnover rates within the first year of employment. It’s also worth noting that poor hires lead to further costs when their replacement must be hired and onboarded.
The benefit of contract-to-hire also extends to the candidate. The modern employee wants flexibility in their work life — and no one wants to be stuck in a job where they are not a good fit. The short-term nature of a contract-to-hire position gives the new employee a trial period to get a feel for both their position and the company. If they are not enjoying the role or are not a culture fit, they can move on to something else after their contract has ended — without any lasting negative impact on either party.
Cost savings
During the contract period, employees are typically not eligible for full benefits through the employer. Instead, they may receive benefits through the staffing agency. This arrangement allows businesses to manage budgets effectively while filling critical roles. On average, contract-to-hire positions can save employers up to 30% in initial hiring costs compared to direct hires.
You may be concerned these restrictions will deter top talent from applying to contract-to-hire positions, but the inverse is often true. Contractors can receive benefits through the staffing agency when working as W-2 employees, and many workers relish the idea of being paid for each hour worked.
Workforce flexibility
Being over-staffed and paying salaries and benefits for employees you do not need is wasteful. At the same time, you do not want to risk being understaffed and unable to complete your current workload. Contract hiring allows your business to avoid these two extremes by meeting your exact capacity — especially when it fluctuates due to seasonal or project-based needs.
For example, if a client asks you to work on an especially large assignment or you have a unique one-time project, flexible recruiting can help you fulfill those needs immediately. You will have access to the additional brainpower and hands you need to get the job done and then be able to scale back once it has been completed.
Access to specialized skills
Need expertise for a short-term project? Contract-to-hire enables businesses to tap into a skilled talent pool without needing permanent hires. This is particularly useful for roles requiring niche or in-demand skills. According to CompTIA, the tech industry sees an especially high demand for contract-to-hire roles, with nearly 40% of IT positions filled through this model.
Accommodate growth
You cannot always predict the future, especially in business. If you secure a new client, extend a project, or expand the scope of an existing contract, you may not be prepared to meet capacity. So, you may be wondering how to scale up your business on such short notice. One potential solution? Contract staffing! This solution helps you stay productive during these times of unexpected growth by making it possible to hire the help you need quickly.
Even if you can predict when growth or expansion is coming, it can be difficult for your full-time employees to take on that additional work themselves. After all, they already have a full workload. When this occurs, you can leverage contract staffing and freelance positions to complete any extra work necessary during rapid expansion. This way, if your business is expanding into a new territory or introducing a new product or service, you can fill immediate capacity gaps — then scale back down once start-up tasks have been completed and the dust has settled on that big new project or offer.
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Contract-to-Hire Cons
Risk of starting over
While one of the most attractive contract-to-hire benefits is the employer and employee’s ability to experience a trial run, there is always the chance that it may not go so smoothly. A new search must begin if the employer decides the contractor is not a successful fit and does not extend a permanent employment offer at the end of the contract period. However, if the employer is unhappy with a contract hire, there is a good chance the employee is unhappy with them. In this case, both parties should find a better fit for the future than sticking with a scenario that isn’t ideal.
Perceived job insecurity
Some candidates may hesitate to accept contract-to-hire roles due to uncertainty about long-term employment. Clear communication about expectations and the potential for conversion is essential to mitigate this. A Glassdoor survey found that 60% of job seekers are more likely to consider a contract-to-hire role if provided with conversion timelines upfront.
Limited candidate pool
Employment benefits such as paid vacation time, sick days, health insurance, and retirement savings plans are typically reserved for direct employees. Contract hires would only be eligible for these perks if and when they receive a full-time position at the end of their contract. For this reason, some candidates may not be interested in a contract-to-hire position, meaning your staffing agency could be working with a slightly more limited candidate pool than they would be for a direct-hire position.
Components of a Contract-to-Hire Agreement
Duration of the contract
Possibly, the most critical element in a contract-to-hire agreement is the duration. Typically defined in terms of weeks, months, or hours worked, this period allows the employer and employee to evaluate whether a long-term relationship is feasible. New hiring managers should pay special attention to setting a reasonable duration. Too short, and you may not have enough time to assess the candidate properly; too long, and you risk losing a potentially good employee to another opportunity.
Scope of work
Clearly defining the scope of work is essential in setting the expectations right. This section will outline the roles and responsibilities of the position. It should be specific enough to provide guidance but flexible enough to accommodate slight changes that might be required as the role evolves. Remember that a well-defined scope of work can mitigate potential conflicts later.
Compensation and benefits
This component outlines the salary and any benefits that may or may not be included during the contract period. Contract-to-hire positions typically don’t offer the full suite of benefits that come with a permanent role, so transparency around what is and isn’t being offered helps manage expectations.
Performance metrics
This part of the agreement specifies the metrics that will be used to evaluate the contract employee’s performance. Not all agreements include details about performance metrics, but if there are measurable areas of the job, you can include them here. These could range from project completion rates to key performance indicators (KPIs) relevant to the role. The metrics should be fair, achievable, and aligned with what is expected from a direct employee in a similar position.
Termination clauses
Both parties should be aware of any circumstances that could lead to the termination of the contract. This includes not meeting performance metrics, violating company policies, or even external factors like budget cuts. Clarity on these points can offer a safety net for the employer and employee.
Conversion terms
Lastly, the contract should address what happens once the contract period is over. Will there be an option for a permanent position, or is the role strictly temporary? If there is an option for permanent placement, the terms under which this transition can occur should be clearly stated.
Understanding these components can help new managers craft a fair and transparent agreement for both parties, allowing for a smoother transition from contract to permanent employment, should that be the desired outcome.
How to Find Contract-to-Hire Candidates
Partner with a staffing agency
This is the primary way that people utilize the contract-to-hire format. Working with a staffing agency specializing in your industry can significantly reduce the time and effort required to find suitable candidates. Agencies often have a pool of pre-screened candidates, allowing them to match you with potential hires who fit your requirements quickly. This option is beneficial if you’re new to contract-to-hire and want to ensure a streamlined recruitment process.
Post on freelance sites
One of the quickest and lowest-effort ways to find contract-to-hire candidates is by posting the job vacancy on job boards that cater to freelance or temporary roles. Websites like Upwork, Freelancer, and even Indeed have filters for contract positions. By posting your opening on these platforms, you directly target candidates interested in or with contract work experience.
Leverage social media
Platforms like LinkedIn and Twitter can be excellent tools for finding potential candidates. Use these platforms to advertise job openings and interact with industry professionals. The LinkedIn search function, for instance, allows you to filter candidates based on skills, past job titles, and locations.
Tap into career services
Young professionals and recent graduates are often open to contract-to-hire arrangements to gain experience and prove their worth. Reaching out to career services at educational institutions can help you tap into this demographic. Some colleges even offer job-posting services where you can advertise your contract-to-hire roles to students and alumni.
By exploring these avenues, hiring managers can cast a wider net and increase the likelihood of finding candidates who are not only qualified but are also interested in a contract-to-hire arrangement. This approach gives you diverse options, allowing you to find the candidate who best fits your company’s needs.
Why Partner With a Recruiting Agency for Contract-to-Hire Staffing?
Recruiting agencies simplify the contract-to-hire process by managing everything from sourcing to onboarding. They’re also invaluable for navigating market trends and ensuring a smooth transition from contract to permanent employment.
At 4 Corner Resources, we specialize in matching businesses with top-tier talent through contract-to-hire staffing. With nearly two decades of experience and recognition from Forbes as one of America’s best recruiting firms, we’re here to help you build a team that drives success.
Ready to explore contract-to-hire for your business? Contact us today to find out how we can help you meet your staffing needs.
