There are many different kinds of hires and it is important to understand each one. In this article we will explain what a contract to hire is and their pros and cons.

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What Is a Contract to Hire?

A contract to hire is an employee hired for a certain period of time. Typically the length of employment will be specified prior to the employee starting in a contract. Often, contract hires are used as a trial period for an employer and employee to decide if it is the right fit for both parties. This is often referred to as “temp to hire” as well.

Should Companies Have Contract to Hire Positions?

Whether or not a company should have contract to hire positions depends on the nature of the business and what kind of job it is. Contract to hire positions make the most sense at staffing or temp agencies. Ultimately, it is something that each business decides.

Pros of Contract to Hire

Every type of hire has pros and cons. Contract to hire is no different. What works for each business is going to be unique, so it’s important to be aware of the pros of contract-to-hire positions.

  • Easy hiring process. When you hire an employee as a contract to hire, there is typically little to no onboarding needed as the employee might be with the employer only a few months. This usually means little training is needed, which saves the employer time and money.
  • Trial period. One of the biggest benefits of contract-to-hire positions is that they allow both parties a chance to see if employment will be a good fit long term. You are not locking yourself into anything and it’s the expectation that the employee might only be short-term.
  • Flexibility. Contract to hire positions allow more flexibility for both parties. Often it is easier to reach workable terms for the employer and employee that can be outlined in the contract. You don’t need the same guidelines or expectations you might have with exempt or non-exempt employees.

Cons of Contract to Hire

Just like other hires, there are also cons of a contract to hire. It is important to weigh the cons with the pros to see if this employment model will be beneficial for your business.

  • Lack of commitment. Due to contract-to-hire positions being temporary, it can lead to a lack of commitment among employees. Temporary employees might be short-sighted on the company’s direction as opposed to looking towards the future.
  • Culture. Contracted employees might not feel as much a part of the team as other employees. This can affect the culture of the team and company. Extra effort should be made to ensure that contracted employees feel connected and integrated as much as other employees.
  • Potential for a breach in the contract. One possibility to consider when hiring a contract employee is the potential legal ramifications if either party breaks the contract. This can include terminating early, doing more or less work than what was agreed upon, misclassification of employees as independent contractors, etc. Every state has legal requirements when it comes to contract for hires. If an employer is found guilty of misclassifying an employee, that employer will be responsible for all past payroll taxes, unemployment taxes, plus interest and penalties. This can end up being quite costly for the employer, and it needs to be considered mindfully when deciding to hire someone for contract.

Parts of a Contract to Hire Agreement

Just like any other contract, a contract to hire agreement is a legal, binding agreement and should be evaluated by a legal team. Some companies, such as staffing agencies, have generic contracts they use for all their contract to hires. If you are going to use a unique contract for each contract hire, be sure to consult a lawyer.

Compensation

In a hire agreement, be clear on how much the employee will be paid for the entirety of a contract. That should be broken down by how often they will be paid. In addition, it should be clear if the contracted hire will be reimbursed or paid more for any business expenses that occur while doing the job.

Length of Contract

It is important to specify in the contract how long the contract is for. Some contracts might allow for some flexibility depending how long they think the job will take, but there should be a clear timeline for how long the employee will be contracted.

Severability — Getting Out of the Agreement

The agreement should specify what will happen if either party ends the agreement early. Depending on the kind of work being done and how the employee is being paid, some work-for-hire agreements will be more complex than others. Therefore it is important to be clear about what happens if either party terminates the agreement early.

Job Expectations and Guidelines

The contract should clearly state the type of work that will be done, the expectations of the job and any other relevant information to give the employee a clear idea of their expectations for the duration of the work.

Confidentiality or Arbitration

Each agreement will be different, so neither confidentiality or arbitration may be needed, but it is important to consider if the work to be done needs to be kept confidential. If either confidentiality or arbitration may be necessary for a contracted hire agreement, consult a legal team.

Reasons Companies Use Contract to Hire

Some of the main reasons companies consider a contract to hire is they can be cheaper, they give employers a trial run with the employee, and the hiring process can be quicker.

Contract to Hire Can Be Cheaper

Contract to hire employees can be cheaper as you don’t have to pay for taxes, unemployment insurance or worker’s comp for them. All these expenses are either taken care of by the staffing agency or the employee if they are classified as a 1099 employee. Contract to hires are also cheaper because little to no money and time are spent on the training or onboarding of these employees.

It Gives the Employee a Trial Run

Contract to hire allows a company to do a trial run with an employee to see if the employee and company are a good fit for each other. Hiring can be expensive and take a lot of time, so doing this can save time and money for both parties before they fully commit to something.

The Hiring Process Is Quicker

When a company decides to hire someone for contract work, they usually use a staffing agency, a recruiting agency, or someone they already know and want to hire for a job. All of these options make for pretty quick hires. By using a staffing or recruiting agency, there is typically a database of employees for different lines of work. This allows a company to find someone quickly for contract work.

Questions You’ve Asked Us About Contract to Hire

A contract hire is a temporary position and the employee is not considered an employee of the company. They might be a 1099 employee or assigned to the company by a staffing agency. A direct hire is hired directly by the employer on a permanent basis.
Yes, they can. However, they will want to be aware of the ramifications of terminating a contract early, which are typically outlined in the contract.
Tanner Pierce, PHR

Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.

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