Contract-to-Hire Pros and Cons You Need to Know

Professional shaking hands with HR professional above a contract to hire agreement that was just signed

The demand for contract and temporary employees has been on a noticeable uptick in recent years, signaling a shift in how companies approach staffing. This trend is gaining momentum, and industry experts and staffing agencies are also optimistic about its continued growth in the coming years. The increase highlights an evolving workforce landscape where flexibility and adaptability are becoming more valued by employers.

Contract positions and freelance roles are expected to account for half of all jobs within a decade.

So, what is contract staffing, and why is it becoming increasingly popular? It essentially allows businesses to hire “on-demand,” enabling them to meet their exact capacity at any given time with contract employees vs. permanent roles. The flexibility and scalability that contract staffing offers can help drive your business growth strategy – essentially providing limitless workforce options for both short-term needs and long-term planning.

Wondering if you should join this trend and leverage contract-to-hire positions in your business? There are numerous pros and cons of contract employment. To help you make an informed decision, we will outline the basics of contract-to-hire, along with its primary pros and cons.

What Does Contract-to-Hire Mean?

Contract-to-hire is when an employee (or contractor) begins working in a new role through a staffing company, expecting to be hired as a full-time, direct employee at the end of the contract term. Contract lengths can be pre-predetermined or open-ended, but in every case, the end-user employer (i.e., the staffing company’s client) intends to ultimately hire or convert the contractor to become a direct employee. Contract-to-hire employees should not be confused with freelancers or independent contractors who are self-employed.

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 to be interviewed. The end-user company will then 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.

Contract-to-Hire Versus Direct Hire

The primary difference between contract-to-hire vs. direct-hire employment lies in payroll structure. Whereas in a direct hire recruiting scenario, the new hire will be immediately onboarded as an employee of the end-user company, a contract hire will be on the staffing agency’s payroll for the duration of their contract. Once a full-time hire offer is made and accepted at the end of the contract, the employee will be converted to the client’s payroll at that time.

Contract-to-Hire Pros

Expedited interview process

The hiring process can be incredibly time-consuming and tedious — and HR departments are often so busy with other tasks that dedicating ample resources to making strategic hires can be difficult. This is why more employers are turning to staffing agencies to help place contract-to-hire employees – it eliminates many stages of the hiring process. The staffing agency will handle the time-consuming effort of finding the perfect candidate among hundreds or potentially thousands of qualified job seekers.

Making a contract-to-hire vs. full-time offer is perceived as less risky because the employer is not initially committing to hiring a new salaried employee and the associated costs of onboarding, perks, and benefits. This often reduces the length of the interview cycle, meaning contract employees can start working and producing value for your company sooner.

Contract-to-hire recruiting may be the right option for your business if you need to quickly add talent to your roster to fill an immediate need or capacity gap.

The ability to experience a trial run

Hiring a new full-time team member is a big commitment for your organization and a drastic life change for the new employee. It has happened to every employer: you go through a lengthy hiring process, consuming valuable time and resources to train a promising new employee, only to realize they will not be a fit long-term.

A major benefit of contract-to-hire is minimizing this risk by “trying before you buy.” The contract-to-hire process is essentially a test drive to ensure that a candidate lives up to their resume and interview, meaning fewer poor hires that 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 provides the new employee with a trial period of their own 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.

Suppose you need that additional time to assess an employee’s skills and personality before committing to a full-time arrangement. In that case, contract-to-hire positions may solve your hiring needs.

Financial benefit

Contract-to-hire positions can offer a monetary advantage when working with a limited budget. A significant advantage of contract-to-hire positions is that they can allow companies to work a new full-time employee into the budget while still getting the work done. Employees in a contract-to-hire position typically do not receive benefits and remain ineligible for a healthcare plan or retirement savings contributions until they become direct employees. Additionally, contract hires are typically only paid for their work hours rather than receiving a fixed salary.

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.

If your budget keeps you from making a much-needed hire, but you need a role filled sooner rather than later, contract-to-hire is an option worth considering.

Staffing flexibility

Being over-staffed and paying salaries and benefits for employees you do not really 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. This staffing method is a great way to combat seasonal hiring challenges, which are very common in the hospitality and retail industries. By bringing in additional employees you need specifically to handle the busiest shopping or travel seasons, they will not be sitting stagnant on your payroll once the slow season returns.

Savings on specialized skills 

Completing a unique project will often require skills you do not already have in-house. Hiring a permanent employee doesn’t make sense if you only require these skills to complete a short-term project. Instead, contract staff can complete projects that require skills and experience your full-time staff does not have. This way, specialized jobs can be completed in a cost-effective way — you will not need to spend time and money training the employees you do have on additional skills they will only use once. Especially if you have a project that requires highly in-demand or very niche skills, contract workers can help you get the job done efficiently and effectively without having to pay them for more time than you are actually using.

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

The possibility 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, it is best for both parties to find a better fit for the future than sticking with a scenario that isn’t ideal.

Perceived lower job security

Some job seekers may hesitate to accept a contract-to-hire position due to concerns over job security. If candidates are too worried about losing their position after the contract ends and have to start the job hunt again, they may prefer to look for a direct-hire position.

This will depend on the mindset of each individual candidate, so while it’s not something to stress about, it is worth keeping in mind when considering how to hire. The key is to ensure that your staffing agency partner is clearly relaying timeframes and expectations to the candidates they are interviewing for your contract-to-hire positions.

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.

Option for a permanent role

Last but not least, 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

Staffing agencies

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 especially helpful if you’re new to contract-to-hire and want to ensure a streamlined recruitment process.

Utilize job boards specializing in contract roles

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 even 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.

College and university 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?

For success with contract-to-hire positions, it is vital that you work with recruiters who have taken the time to understand your company and its culture so they can place candidates with the most potential to be aligned with your long-term workforce goals.

Our experts have exemplified this candidate-focused and client-driven work ethic for nearly two decades. We’re a national firm recently named to Forbes as one of America’s Best Staffing and Recruiting Agencies, with an unparalleled flexible and agile approach to serving clients.

Have you decided that contract-to-hire employment is right for your business, or do you need additional guidance to reach a conclusion? Get in touch with our staffing experts today and experience the 4 Corner Resources difference when it comes to filling your contract-to-hire positions.

Pete Newsome

About Pete Newsome

Pete Newsome is the President of 4 Corner Resources, the staffing and recruiting firm he founded in 2005. 4 Corner is a member of the American Staffing Association and TechServe Alliance, and the top-rated staffing company in Central Florida. Recent awards and recognition include being named to Forbes’ Best Recruiting Firms in America, The Seminole 100, and The Golden 100. Pete also founded zengig, to offer comprehensive career advice, tools, and resources for students and professionals. He hosts two podcasts, Hire Calling and Finding Career Zen, and is blazing new trails in recruitment marketing with the latest artificial intelligence (AI) technology. Connect with Pete on LinkedIn