What is a contract to hire?
What are the contract to hire pros and cons?
How does the process work?
In this article, we will break down the notion of “contract to hire” so you know all there is to know about it.
We will look at what is the contract to hire meaning, its definition, how the process works, what are the advantages and disadvantages of contract hires, contract to hire vs independent contract or temporary worker and more.
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Table of Contents
What is a contract to hire
A contract for hire (also known as contract hire, temp to hire or C2H) is a contractual arrangement where a staffing agency provides a person or resources to a company to fill a short-term position or need.
It’s important to note that a contract to hire position is not an independent contractor arrangement.
The person who is placed in a company is actually an employee of the staffing agency “borrowed” by the company needing to fill a short-term position.
When the borrowed employee works for a given company, he or she will assume the same tasks and functions as a regular employee and work under the company’s supervision and governance.
Depending on the person’s effectiveness and the company’s staffing needs, a company has the option of hiring the staffing agency’s employee at the end of the contract to hire agreement.
A temp to hire job is a short-term position that can eventually evolve into a permanent full-time position depending on the candidate’s performance and the company’s needs.
Contract to hire roles are common in many business sectors such as:
- Software companies
- Sales operations
- Manufacturing plans
- Information technology firms
- Marketing firms
- Graphic design firms
- Project management firms
- Accounting firms
- Seasonal retail
Contract to hire definition
What does contract to hire mean?
How do you define contract to hire?
Contract to hire means a staffing arrangement between a staffing agency and a company where the staffing agency provides qualified staff to the company to fill an open employment position for a fixed period of time.
In other words, C2H means that there is a triangular relationship between a company, staffing agency and a candidate.
The staffing agency hires a candidate and places the same person in a company to fill an open position.
Contract to hire process
The contract to hire process is quite simple.
In this contractual setup, you have three parties:
- A company having a short-term open position (the company is the client of the staffing agency)
- A staffing agency (middle person between a contract to hire candidate and the company)
- The employee of the staffing agency (candidate or person borrowed to the company for some time)
A staffing agency will typically go through the heavy-lifting of handling the recruitment process to fill contract to hire positions.
In other words, the staffing agency will:
- Look for a candidate
- Source candidates
- Publish job postings
- Review submitted resumes
- Screens and interview candidates
- Refer candidates with the best fit to the company
Once the agency finds a candidate who may be a good fit with its needs, the candidate is referred to the company for interview and selection.
If the company is also interested in the candidate, then the person will be officially hired by the staffing agency but required to work under the supervision of the company and in their offices.
In many cases, the staffing agency will pay its employee a certain amount of money but will charge a premium to the client.
For example, if the staffing agency pays the employee $20 per hour, it will charge the company $30 for every hour worked by the employee keeping the difference as fees for its services.
According to a 2018 report, approximately 16.8 million workers were in a contract to hire role in the United States.
Many candidates and companies are opting for this type of work arrangement.
Contract to hire agreement
There are two contract to hire agreement layers in a contract to hire structure:
- Contract to hire agreement between the staffing agency and candidate
- Contract to hire agreement between the staffing agency and company
Candidates looking to enter into a contract to hire contract with a staffing agency should carefully read the terms and conditions of their employment.
A contract to hire job is a W-2 contract.
This means that unless it’s specifically mentioned in your contract, you will not necessarily be entitled to the employment benefits of a regular employee.
Candidates should carefully review their contract to understand its key terms such as:
- Job description
- Contract start date
- Contract end date
- Options at the end of the contract
- Vacation pay
- Sick days or sick leave
- Healthcare plans
- Retirement plans
Candidates should also get clarity on the following aspects:
- What is the process for a company to hire a candidate on a full-time basis?
- What happens if the company does not hire the candidate at the end of the contract?
- What happens if the candidate does not believe the company’s job is not what was initially presented on paper?
- How will the company evaluate the candidate for a permanent position?
Candidates should ask all their questions before accepting a contract to hire position.
Companies looking to enter into a contract to hire agreement with a staffing agency should also carefully examine their contract.
Essentially, the contract is a typical B2B contract where one business entity enters into a commercial arrangement with another business entity for staffing.
As part of this agreement, the company will pay certain fees to the staffing agency in exchange for the presentation of suitable candidates that can quickly get to work.
Companies look at many factors to see if the cost is justified such as:
- Recruitment cost
- Human resource capacity bottlenecks
- Business workload affecting current employees
- Onboarding costs of a new employee
- Additional costs in hiring a permanent employee
- Company’s headcount budget and strategy
In many cases, companies may find it worth it to on for a contract hire.
Contract to hire advantages
There are several key contract to hire pros and cons to be aware of.
A contract to hire arrangement allows businesses to quickly fill short-term open positions without going through a heavy recruitment process.
Let’s look at the primary advantages of a contract to hire relationship.
Quick interview process
One important advantage for companies in working with recruitment and staffing agencies is to find a candidate quickly without having to go through an extensive recruitment process.
By outsourcing the recruitment process to a staffing agency, a company’s human resource department can reduce the recruitment cycle.
When a business needs to fill in a short-term position, staffing it through an agency can lead to an expedited interview and recruitment process.
Reduce hiring risk
Contract to hire staffing allows companies to mitigate the risk of directly hiring a poor candidate.
In some cases, a candidate appears to be a great fit when assessing the person’s resume and evaluating the interview.
However, after you hired the person and spent time, money and costs on onboarding the person, you realize that they do not deliver what they promised they can deliver.
With a contract to hire contract, you can test the candidate before hiring the person full-time.
Consider it as a candidate test-drive.
This will dramatically reduce the risk of selecting the poor or wrong candidate for the job.
Every company needs to manage its budgets.
Money is a scarce resource that should be managed carefully.
Contract hires allow a company to handle the business needs while having tight control over its budget.
In fact, contract to hire provides you with the following financial advantages:
- Cost savings for not having to pay employment benefits
- Cost savings in not having to pay for healthcare plans or retirement savings
- Staffing costs are driven primarily by the number of hours worked by the contract staff as opposed to a full-time or fixed salary
What’s notable is that the candidates hired as W2 employees by the staffing agency will receive their benefits from the agency and not the company.
This cost is factored into what the company pays.
Contract staffing allows companies to deal with fluctuating workloads and business needs without having to consider the costs associated with a full-time direct hire.
If business needs change due to seasonality or if the company has a short-term project that requires more resources than it has available, staffing the project or bringing additional resources to handle the workload without having to hire a permanent employee is a great option.
A company outsourcing its recruiting to a staffing agency can better focus on strategic hires for their business.
Human resources professionals are very busy with heaving recruitment processes and workload.
As a result, spending a lot of time and energy for a short-term position may not be something that they may be inclined to handle with the same vigor and energy as a strategic hire.
A contract to hire advantage is that it allows companies to save time by not having to deal with heavy recruiting to fill a short-term need.
Instead, they can focus on the hiring of key personnel and strategic hires.
C2H staffing provides for a more flexible approach for companies experiencing growth and operational expansion.
In some cases, a company may have signed a new client or won a big contract.
However, although the company is seeing growth, it is not yet prepared to hire someone on a full-time basis due to certain contingencies or factors that may affect the client contract or deal.
On the other hand, it needs to deliver on its contractual obligations.
Staffing through an agency will be a good option.
A company can bring the necessary resources to handle the additional workload until it determines that the new workload is more permanent and requires an additional direct headcount.
In that case, it can hire the same contract to hire employee who has been working on the same project and is already familiar with the business.
Contract to hire disadvantages
Even though contract for hire provides important benefits, there are some drawbacks as well.
Let’s look at the main ones you should know.
On the one hand, there are important time savings in dealing with a contract for hire staff.
Companies do not have to spend labour-intensive effort in directly hiring and recruiting a person to fill a position.
However, the mere nature of a contract to hire job is that it is short-term.
As a result, when the contract is over, the company may need to start all over again with another candidate.
In most cases, candidates hope to have a more stable or permanent job.
Working on short-term contracts from one company to the next may not be ideal for candidates.
As a result, they may find a permanent job and no longer renew their contract to hire job.
These factors may result in an organization having to start the same process over again with a new candidate.
Less job security
In general, candidates perceive a contract to hire position to offer less job security.
If they do not expect or hope that the company may hire them after the contract’s initial term, a candidate may opt for another job offering better security.
The job expectations must be clearly communicated to the candidates to ensure that both the candidate and company are aligned in their plans.
If the company has contingencies to hire the candidate following the term of the contract, it’s best practice to be clear about that upfront.
Limited number of candidates
Another disadvantage of the contract to hire setup is with regards to the limited number of candidates willing to work under this type of arrangement.
Generally, candidates look for better job security by finding a permanent job and are looking to get company benefits such as vacation, healthcare plans, retirement savings, pension and so on.
For this reason, contract to hire work tends to have an unfavourable reputation due to the lack of employment benefits and its short-term scope.
Working as a contract to hire will not provide candidates with these benefits available to direct employees.
As a result, there may be fewer people looking to work as a C2H.
Contract vs contract to hire
What is the difference between contract and contract to hire?
Contract work can be classified in two categories:
- Independent contractor contract (also known as Corp to Corp)
- Temporary employment contract
A Corp to Corp (C2C) is when a person is hired as an independent contractor.
In other words, the person is a freelancer who will handle a specific project, task or function for the company for a period determined under the Corp to Corp contract.
The contractor is not an employee of the company and is not legally subordinated to the employer.
As a result, there is no employer-employee relationship and the contract is purely commercial in nature.
The contractor can have as many clients as he or she wants.
A contract-to-hire arrangement is like a hybrid of the a temporary employment contract and an independent contractor.
In this arrangement, the “employee” is actually not the company’s employee but the staffing agency’s.
This means that the company filling a contract-to-hire position does not have an employer-employee relationship with the person.
That part is left to the staffing agency.
The staffing agency and company enter into a commercial agreement where the company agrees to borrow the staffing agency’s employee for a certain period of time.
As part of this agreement, the staffing agency provides body, staff or resources to fill the company’s open position.
The contract-to-hire employee works just like a typical employee working for the company.
He or she will work under the company’s supervision and governance and will be subordinated to the company.
The employer-employee relationship is formed between the staffing agency and the hired employee.
To mitigate risk, staffing agencies will generally require the company to provide them with contractual commitments that they will treat the contract-to-hire employee fairly and in accordance with employment laws.
As a result, even though a company does not have “direct” legal obligations towards the employee, it will effectively need to treat the contract-to-hire staff the same way as it treats the others.
Contract to hire vs direct hire
The main difference between a contract to hire vs full time or direct hire is with regards to payroll.
A contract hire is a person who will be paid by the recruitment agency whereas a direct hire goes directly on the company’s payroll.
With regards to the actual job, whether a person is hired under a contract or directly by an organization, the company must respect the same employment laws and practices.
The company’s legal obligations do not change even though the company is not paying the contract hire’s salary directly.
Contract to hire vs temporary work
A contract to hire is similar to a temporary worker but it’s not the same thing.
In the United States, temporary employment or temporary work is a type of position that is available for a period of one year or less.
Typically, the temporary work has a clear start and end date.
In some cases, we may refer to a temporary employment contract as a “contract”.
In this case, we really have an employment contract where a company hires a person just like an employee.
The only difference is that the employment contract has a term.
Typically, a temporary employment contract can go between six months up to a year.
Temporary workers are hired to accommodate seasonal work, handle fluctuations in a business workload due to specific projects or particular deals signed by the company.
A contract to hire is a type of position that will be filled by a staffing agency’s employee but there are some expectations that the position may remain open on a permanent basis.
In other words, if the company finds the right candidate through the staffing agency, there is a possibility for the company to hire the person on a full-time basis.
Contract to hire FAQ
Should I take a contract to hire job
Taking a contract to hire job requires some reflection on your part.
A contract to hire placement allows you to test the waters before working permanently for a company.
It allows you to do a company test drive if you will and even expand your personal network.
Here are some questions that you may want to ask yourself:
- Are you a good fit for the job?
- Are you interested in the industry?
- Why is the company going for a contract to hire arrangement?
- How will you be evaluated for a full-time and permanent job?
- Can you leave the contract to hire position if it does not work out?
- For how long will this arrangement last?
At the end of the day, if you believe that there’s a good opportunity for you to enter into a company, then you can give it a shot.
Is contract to hire worth it
A contract to hire employment may be worth it as you may potentially be placed in a company that you did not think about.
You may find a contract hire job worth it if:
- You are looking for a short-term position
- You are not sure about the company and want to work there before finalizing your decision
- You are not able to find a permanent job in the short-term