Direct Hire vs Contract Hire: Which Is Better for You?
A client came to us with an urgent need for a highly specialized IT professional. During our conversations with them, it came to light that they were reluctant to actually go through with hiring someone. They felt that as a small business, they couldn’t justify bringing on a full-time employee in such a niche capacity. Not only that, they had no idea whether their needs would be the same a year from now.
This was the perfect opportunity to discuss the pros and cons of contract versus direct hiring. While direct hiring might make their company more competitive as an employer and guarantee long-term access to the skills they needed, contract hiring would give them access to those same skills on an immediate basis without the long-term commitment and expense of a permanent hire. In this instance, contract hiring won out, but the best option could change based on the circumstances and employer.
Contract hiring and direct hiring are two types of staffing that can help your organization achieve different goals. One type of employee may be preferable to the other, depending on your needs. The question is, “Which hiring process is best for my organization?” To help you answer this question, let’s compare direct hire vs contract hire processes, defining both as well as contrasting their unique advantages and disadvantages for different situations.
Direct Hire Definition
Direct hire is sometimes called direct placement. In the direct hire process, a staffing agency works to find, qualify, and hire permanent staff members on behalf of their client. These are usually full-time positions with benefits, but direct hire can also be used to fill part-time positions.
While the staffing agency handles the direct hire recruiting tasks, the new hire goes straight onto the client’s payroll and becomes an employee of that company once an offer is made and accepted. A direct-hire search typically means the company is committed to a long-term relationship with their staffing partner. Under this partnership, the recruiters can thoroughly find and interview the best candidates for the role.
Contract Hiring Definition
A contract hire process looks a lot like a direct hire process in terms of how the recruiting is conducted, but there’s less of an up-front commitment on behalf of the client when it comes to hiring the chosen candidate. In a contract hire scenario, the selected candidate begins their employment on the staffing agency’s payroll rather than the client’s.
Whereas direct hire recruiting immediately makes the new hire an employee of the end-user client, the contract process offers more flexibility by providing an option to hire the contractor directly after the end of the contract period or decide not to move forward. Contract lengths vary greatly from short-term to indefinite. In nearly all situations, the client will have an opportunity to convert the contractor to an employee at a time that best meets their individual needs.
Traditionally, roles like administrative assistants and customer service agents were commonly filled with contract workers. Today, we see contract hires all over the spectrum. Recently, for example, my team has seen a big uptick in contract-to-hire project managers, data analysts, and legal consultants.
Understanding the Difference Between Direct and Contract Hiring
Here are the primary differences between direct and contract hiring.
Speed
Contract employees are placed through a staffing agency, which means companies can take advantage of that agency’s speed to bring in new talent quickly. The hiring process for direct hires is typically slower because an employer has a heavier involvement, often taking part in the interview process and ultimately selecting the final candidate.
Flexibility
Contract hiring is highly flexible, giving companies a chance to assess a candidate’s performance and the ROI of the role before committing to full-time employment. It’s like a trial period, and if a person doesn’t work out, there’s no harm in discontinuing the relationship.
Direct hire offers less stability, and the company is making a permanent, long-term commitment to the hire. If they don’t perform as expected, termination can be costly and time-consuming.
Employment duration
With direct hiring, employees are permanent team members from day one with no predetermined end date. Contract hires have a fixed start and end date (three—to six-month stints are common). Employees are hired on a contract basis, and if both parties agree, they may transition into a full-time role.
Payroll responsibility
A direct hire is immediately placed on the hiring organization’s payroll, with that company being responsible for salary, taxes, and benefits. In a contract-to-hire relationship, the staffing agency responsible for hiring the employee also handles payroll and taxes for them.
Benefits
Direct hires receive access to full benefits like health insurance and retirement plans per the company’s policy. Contract hires do not receive benefits or receive benefits provided by the staffing agency, which are typically more limited.
| Contract hire | Direct hire | |
|---|---|---|
| Speed | Streamlined and generally faster | Generally more complex and time consuming |
| Flexibility | Ability to “test out” a candidate with a trial period before committing to full-time employment | Sacrifices flexibility in favor of greater stability |
| Employment duration | Short-term, defined by contract terms | Long-term, permanent |
| Payroll responsibility | Staffing agency | Employer |
| Benefits | Employee is not eligible for employer benefits, or is limited to those offered by staffing agency | Employees eligible for company benefits like retirement plans and health insurance |
Pros of Direct Hire Recruiting
Promotes loyalty
One of the greatest benefits of direct-hire recruiting is that it allows your new hires to feel that they are “part of the team” from day one. This promotes a sense of loyalty to the company and can lead to greater retention over time.
Certain positions, like leadership roles and those that spend a lot of hands-on time with clients, aren’t well-suited to a large amount of turnover. Direct hire recruiting can help you fill positions that call for a long-term commitment from the candidate being hired.
Facilitates speed
Working with a direct hire staffing firm allows you to fill permanent, full-time roles more quickly than you’d be able to do on your own, keeping productivity high and downtime to a minimum. 4 Corner Resources, for example, aims to deliver a qualified candidate for every non-executive role within 48 hours. This gives you the advantage of responding rapidly to market fluctuations and tracking down niche skills faster than if you had to start the search from scratch using only your internal resources.
Attracts stronger talent
Since a permanent role offers a greater sense of job security than a contract one, direct hire positions can be more attractive to top talent. This is particularly true for passive candidates, who may need more incentive to consider leaving their current job than those who are actively job searching. Full-time candidates also like the appeal of direct hire roles because they offer immediate access to your company’s benefits program.
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More cost-effective
Because direct hire candidates go directly onto your payroll, you’ll avoid any additional cost markups associated with the staffing agency keeping the new hire on their payroll. While it doesn’t offer you as much flexibility, paying a one-time fee to a recruiting agency is typically more cost-effective.
In sum, direct hire recruiting is a great option when you want to add permanent staff, find qualified talent quickly, and attract candidates who are invested in staying for the long term.
Related: The Pros & Cons of Direct Hire Staffing
Pros of Contract Recruiting
Opportunity to assess the candidate
Contract-to-hire recruiting gives you a chance to assess a prospective hire in action without committing to putting them on your payroll. There’s less risk on the employer’s part, allowing you to assess culture fit and effectiveness in the role before assuming the added costs of a new full-time hire.
On the flip side, it also gives the candidate a chance to assess you, which can also be seen as a positive as it lowers the likelihood of the wrong candidate ending up in a position where they’re not happy or productive.
Faster interview process
Though working with a staffing firm is a proven way to reduce your time to hire for direct hires, its impacts are even faster for contract hires. This involves a shorter interview process, accelerating the hiring cycle.
Control benefits costs
Since contract workers remain on the staffing agency’s payroll until the point that you decide to hire them, there’s no need to add employees still in the assessment period to your benefits program. Contract employees are paid only for hours worked and do not go on your benefit plan until they become a direct employee, which can help control costs.
Adapt to uncertain timelines
Contract-to-hire is a good option if you’re dealing with an uncertain workload or timeline, such as a new vertical that requires a niche skill or a client contract that may or may not come to fruition. Using a contract-to-hire arrangement gives you the opportunity to get someone up and running to fill your immediate need and the option to keep them on full-time if and when the demand for their skills persists.
However, it’s best not to use contract-to-hire to fill a staffing need, which you know will be temporary, such as a seasonal or purely project-based position. Candidates who accept a contract-to-hire assignment will expect an opportunity to become a direct employee if they perform well, so it’s best to use temporary staffing to fill short-term staffing needs.
Related: Contract-to-Hire Pros and Cons You Need to Know
Other Considerations When Choosing Between the Different Hiring Solutions
Loyalty
One aspect of these different staffing solutions that’s hard to quantify but important to consider is loyalty. I always urge our clients to be honest with themselves about the level of loyalty they’re expecting, which sometimes leads to a candid conversation about what’s reasonable.
Take two employees: one who’s been hired into a permanent, full-time role with benefits and another who’s been hired into a contract, 20-hour-per-week position with no benefits. Which one do you think is going to feel a greater sense of loyalty to their job? In a perfect world, both workers would be equally committed, but in reality, the second employee might not stick around if a better opportunity comes along. That’s something an employer must be comfortable with when hiring contract workers.
Cost
There are various ways to look at the cost of direct hiring versus contract hiring. Contract hiring is typically more affordable upfront because it requires no recruitment costs from the end-user company. However, it does come with the longer-term expense of a staffing agency partnership. It’s also less predictable, since an employee can negotiate their term every time their contract ends.
Direct hiring comes with greater upfront/overhead costs like recruiting expenses, training, development and benefits. Since the hire is a long-term employee, those costs are more predictable and consistent than in a contract arrangement.
Team cohesion
How important is it that your team work together as a cohesive unit? If it’s very important that each employee is integrated within the larger team, direct hiring may be a better choice because a permanent hire has the opportunity to become part of the company fabric. If your needs require more independent work or projects that can easily be handed off, contract hiring may be more suitable.
Clarity of needs
Direct hiring is most effective when you have concrete, predetermined requirements for a role. In fact, we consider getting clear on these needs an essential part of any new client relationship. You need this clarity to be able to tell a permanent hire ‘here’s what we expect of you’ and ‘here’s what success in this role will look like.’
This is less important in a contract role; or, to be more precise, sometimes contract hiring is an asset if you lack this kind of clarity. For example, if you know you need more help in the administration department but you’re not exactly sure what the job duties should look like, a contract worker with admin experience could come in and lighten the workload while helping you establish a more concrete scope of work.
Examples of When You Should Choose Direct Hire or Contract Hire
Consider direct hiring if…
- You have a well-established, long-term staffing need
- You need to fill a core business role
- Stability and culture fit are high priorities
- You’re committed to training and developing a new employee
Consider contract hiring if…
- You have a short-term or project-based staffing need
- You need to quickly fill a skill gap
- You’re responding to fluctuating conditions like a changing business model, rapid growth, or seasonal swings in demand
- Uncertainty is a factor, like with your budget or if you’re experimenting with a new role
Find the Right Staffing Fit with 4 Corner Resources
If your objective is to hire the best possible candidate for every open role (and who doesn’t want that?), choosing the right contract staffing partner is just as important as interviewing the right candidate and choosing the right staffing arrangement. Depending on your specific situation, either one of the staffing processes discussed here may be better for your needs than the other.
Need help deciding between direct hire vs contract staffing solutions? The staffing professionals at 4 Corner Resources are eager to help. Our team of hiring experts will ask questions to better understand your unique business, needs, and goals, then make recommendations tailored to your timeline and budget.
Contact us today to schedule your free consultation.
