What is a Contract to Hire: Everything You Need to Know

When searching for a new position, it’s important to read job descriptions carefully to determine which positions would be a suitable fit for you. One phrase that you’ll likely hear again and again is “contract-to-hire.”

Recruiters will often times call you or DM you for positions that are “Contract to hire”. 

Therefore, you might be wondering: “What is a contract-to-hire job?” “What does that even mean? Is it beneficial or is it a warning? Should you apply for such positions or not?

To understand what is a contract-to-hire role, here is all the information you require regarding contract-to-hire positions and how to determine if one is ideal for you or not.

March 2, 2024 by Kazu Fujimoto

What is a Contract to Hire Position?

An employee hired under a contract to hire is hired for a specific amount of time. The duration of the employment will often be outlined in a contract before the individual begins work. Contract to hire is frequently utilized as a trial period for both the employer and the employee to determine if it is the best fit. Therefore, this is also known as “temp to hire”.

When a company uses a staffing agency to find a candidate for a position (which is the normal process), they also pay the candidate through the agency. The employer pays the agency, which in turn pays the employee under contract. The fact that agencies charge extra fees on top of the employee’s regular salary is significant since it enables them to recoup their recruiting expenses and turn a profit. You must determine whether this extra expense is justified by the money you would save by hiring someone much more quickly.

Looking for a job? Start your search with tools such as Indeed or LinkedIn.

Companies That Primarily Require Contract-to-Hire Positions

Contract-to-hire positions are typical in a wide range of industries, including:

• Software businesses 
• Sales activities
• Plans for manufacturing 
• Computer technology companies
• Marketing companies
• Graphic design companies 
• Businesses that manage projects
• Accounting companies 
• Seasonal shopping 

What Separates a Contract-to-Hire Employment from an Employment Contract

Independent contractors, a category of contingent workers, are not the same as contract-to-hire employees. The primary distinction is that individuals hired under a contract-to-hire arrangement are regarded as employees of the staffing firm that placed them. They are employed by the staffing company and occasionally (though not always) receive benefits. 

Independent contractors, however, are legally considered self-employed. They are employed by businesses on a project-by-project basis, they are not entitled to benefits and are in charge of handling their tax obligations. Additionally, none of the businesses that independent contractors work with expect them to land a full-time position.

DIRECT HIRE VS. CONTRACT-TO-HIRE VS. FREELANCE

There are many different ways to categorize a work, but ultimately it comes down to your employment conditions and the person who signs your check. Here is what those categories in job advertisements mean.

Contract or Temporary

1. Contract or temporary: As a contract worker, you perform a job for a certain amount of time, typically less than a year. Employers frequently hire temporary workers to satisfy urgent needs, such as covering an employee’s maternity leave or taking on extra work during a busy period. The position either terminates when the contract expires or is taken up by a regular employee.

Regarding your compensation, contract workers aren’t technically considered employees of the business where they work. You are employed by a staffing company, such as PEG, which handles things like tax withholding, pays your wages, offers benefits, and issues your paycheck.

Contract-to-hire

2. Contract-to-Hire: Contract-to-hire appears to be a lot like a contract at first glance. You fill a position for a set period while working for a staffing firm. But there is one significant difference. Contract-to-hire employment is used to fill positions that will remain open after the contract expires. 

If you enjoyed your work and the employer was pleased with your performance, you can continue in the same position as a regular employee when your contract expires. On the other hand, if you determine the position or the business is not a good fit, you can leave without any animosity or unpleasant talks. You’ll be able to enhance your résumé with a fantastic experience. 

In addition, you can simply respond that your contract expired if prospective employers question why you left the position.

Direct Hire

3. Direct hire: The employer directly hires a direct hire candidate to fill a permanent position. Although a staffing company may help with the recruitment of applicants, but it is the employer’s responsibility to make sure the employee is paid fairly and has benefits. If you were hired directly, you can anticipate staying with the same business until you leave, if you’re fired, or if the position is eliminated.

Freelance

4. Freelance: Freelancers, often known as contractors, are distinct from contract workers and contract-to-hire workers. Freelancers are sometimes referred to as gig workers or 1099s (since the IRS classifies them using this tax form). Freelancers are self-employed; they don’t work for an employer or a staffing firm. 

That implies that these individuals are in charge of their compensation, benefits, and taxes. Companies typically hire freelancers to work on a particular project rather than filling a post for an extended period. The freelancer moves on to the following project once that one is completed. 

Contract-to-Hire Method

The contract-to-hire procedure is straightforward.

You have three parties to this agreement: 

• A business with a temporary opening (the business is the employment agency’s client)
• A staffing agency serving as a liaison between a candidate for a contract position and the business.
• An employee of the employment firm (a potential employee or somebody temporarily borrowed by the business)

CONSIDERATIONS OF CONTRACT-TO-HIRE

Contract-to-hire makes a lot of sense for employers. Time and money are wasted on bad hires. Candidates should first be tested on a contract basis so that the hiring manager can assess their performance and fit the employee with the team.

Contract-to-hire has benefits and drawbacks for employees. Whether it works for you depends on your circumstances and personal priorities. Let’s see them.

The benefits of contract-to-hire

• Flexibility. With a contract-to-hire arrangement, you can explore a position or business without committing long-term which makes the role very flexible.

• Self-discovery. Working hard to get a job only to find that you don’t enjoy the employer or the position as much as you anticipated is a dreadful feeling. 
• Improve your abilities. Every job you hold offers you the chance to develop your talents. You may quickly develop your talents through contract-to-hire work, which will make you a more appealing candidate when you interview for a permanent position in the future.

• Update any gaps on your résumé. Contract-to-hire positions could be worth considering even if you’re seeking a long-term direct-hire job. 

Cons of Hire to Contract

The most well-known drawback of contract-to-hire is as follows:

• Lack of dedication. Contract-to-hire jobs can cause employees to be less dedicated because they are transitory. Employees temporarily might not be as long-sighted about the company’s future as permanent ones.
• Risk. There is always a risk that the contract to hire position won’t become a full time opportunity for you.

Agreement for a Contract to Hire

In a contract-to-hire structure, there are two tiers of contract-to-hire agreements:

1. Agreement on a contract to hire between the staffing company and the applicant
2. Agreement on a contract to hire between the staffing firm and the business 

Considerations for candidates 

Candidates should thoroughly examine the terms and conditions of their employment before signing a contract-to-hire agreement with a staffing agency.

A W-2 contract is one for a contract to hire work. This implies you won’t necessarily be eligible for the employment perks of a regular employee unless it’s clearly stated in your contract.

Candidates should thoroughly read their contract and comprehend its essential provisions, including:

• Position description 
• Beginning of the contract
• End of the agreement
• Options at the contract’s ending.
• Holiday Plans and Vacation pay
• Sick Leave 
• Retirement programs 

FINAL THOUGHTS: Do Businesses Need Contract-to-Hire Positions?

In conclusion, depending on the business and the type of employment, a corporation should decide whether or not to have contract-to-hire roles. However, each business must ultimately make this decision at the right time when in need of contract-hire employees. If it saves the business time, money, and resources, they should hire a contract-to-hire employee. But if they find no course to hire contract-to-hire personnel, then it’s best to stick to their full-time employee.

There is always a risk that the contract position does not turn into a full-time role, which could put you back into square one.

Proceed with caution.

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