Today, companies are utilizing the contract or contract-to-hire model more frequently than before because of the uncertainty with the economy long-term. In this blog post, let us uncover what it means when working in a contract-to-hire position and outline essential considerations when evaluating an offer.
What is the biggest concern you get when people when you first present someone with a contract-to-hire position for the first time?
They do not think they’ll receive benefits. This is one of the biggest misconceptions that people have when considering a contract or contract-to-hire position: they do not realize that their staffing company – OpenArc, in this case – can provide them benefits.
They think they will be taking on a job opportunity and not getting benefits associated with it. In contrast, the reality of the situation is – in particular with OpenArc is that you’re working with a firm that can provide you with medical, dental, vision, and the ability to participate in a 401K, along with paid time off in the framework of paid holidays.
Here is OpenArc, after a certain period, we offer additional paid vacation days as well. After learning about the benefit offerings, it then alleviates the worry about having to figure out how to cope with not having benefits for the contract duration in a contract-to-hire role.
What is a common misconception between contract-to-hire and direct hire roles?
A common misconception between contract-to-hire versus direct-hire is the perceived stability associated with a direct-hire position is thought to be significant, and in reality, it’s not. With Pennsylvania being an at-will state, employers in Pennsylvania can end employment at any time. This means, whether you are in a direct-hire position or a six-month contract-to-hire position, the difference between stability in the two scenarios is minimal at best if it exists at all. What you want to look into when you are looking at a contract-to-hire position, and ideally, your staffing firm can give you a sense of this – is track record—the company’s track record of converting contract-to-hire roles to full-time employees.
The team we have in place works very closely with our clients. Given the sheer number of contract-to-hire opportunities we have, we can effectively determine how often the contract-to-hire position ultimately converts within each company.
We can offer insight on contracts of any term length, whether it be after the three-to-six-month period or whenever it is, and we’re able to tell you with certainty that with XYZ company, “100% of the time, 90% of the time, they convert their contract to hires to full-time employees. The caveat to all of that is just if you were direct-hire and you threw coffee on your boss at some point during the contract duration, you’re going to lose your job, and of course, you would’ve lost your job if you were a direct-hire anyway for this type of behavior. The stability factor on contract-to-hire versus direct-hire is nominal to the point of almost nonexistent in most cases.
How is a contract-to-hire employee different from an independent contractor?
Independent contractors are individuals with their own company in some capacity, and most of the time, it will be their LLC where they’re operating as a company. Then they are an employee of that company working as a consultant. In this scenario, they act as 1099 contractors, so basically, OpenArc is paying their company for the services that they are providing on the client site. Even in these circumstances, if it is a contract-to-hire, that person can still be hired permanently within that organization. The difference is because they own their own company, they’re going to have additional responsibilities compared to a traditional W-2 contractor, meaning they’re going to be responsible for their company taxes, their company insurances, and things of that nature.
Behind the scenes, why do employers use contract-to-hire roles?
One of the primary reasons companies use a contract-to-hire model is bureaucratic red tape. It is often a lot more difficult from a budgeting perspective to go through the lengthy process to get a direct-hire position approved. HR departments and hiring managers have a role to fill. To get somebody in there working on a specific project, they will utilize alternative forms of budgeting, which involves separate funding for contracting services that they can readily access, and that’s already been approved.
When you take a contract-to-hire role, what can you expect in terms of a wage premium? What are those perks?
Generally speaking, you can expect a contract to be more lucrative than a direct-hire position. One example is when you convert, it is usually a similar compensation structure, yet you have the added value from a total compensation perspective. Now you have a premium benefit offering based on what the client offers, as have opposed to what staffing firms provide.
For instance, we offer a relatively standard benefits package for W2 employees. We have clients out there who have really attractive benefits packages that go into total compensation at times of conversion. You may find after you convert, you’re now being offered four weeks of vacation, 100% paid-for healthcare, things like that, that adds to the value that you see, and usually, the compensation reflects that.
If we do the math, and we are paying you $50 an hour on a contract, that works out to roughly $104k, depending on hours worked throughout the contract duration. In contrast, a direct-hire offer might be high-90s or like 100k, but that is usually made up of the benefits you get.
The other significant thing to consider is when you’re on a contract or contract-to-hire, you’re an hourly employee, which means you get paid for the hours that you work. It is not uncommon for salaried employees, in general, or technologists to work significantly more than 40 hours a week regularly. If you are a salaried employee, that does not affect the compensation that you get. If you are an hourly employee making $50 an hour, you get paid that $50 an hour for the entirety of that 50 hours per week.
Do you notice that any particular positions tend to have more contract-to-hire roles than others?
The contract-to-hire role is heavily prevalent in project-based tasks, and overall, within project management. Obviously, as a result, it is a commonplace for contract or contract-to-hire positions because the individuals are usually being brought on for that specific project and then demonstrate the value they can bring to the company. Then, if there are additional projects, etc., available, it may make sense to bring them on as a direct hire.
I would say that it also holds pretty accurate for business analysts because they operate in the same vein. And then, to a lesser extent but still significant, software engineering, if there is a particular product that needs to be released or in a consulting scenario where there is a project that needs to be completed.
What are some traps you need to look out for when considering a contract-to-hire role?
The key is the way it is represented to you. A contract-to-hire, ultimately it, is about intent. What you want to understand is if you are just being brought on for a three-month project, with no intention of ever converting or if there is an actual plan after those months to hire you full time. After a certain period, if they intend to convert you to a full-time employee, this is a genuine contract-to-hire opportunity.
Another trap to watch out for is an organization that, while you are on a contract, has some demand that you only record 40 hours per week even if you’re working beyond that. Again, as stated earlier, one of the advantages of contract or contract-to-hire is you are an hourly employee. You get paid for the hours you work, — if you’re working 50 hours, 50 hours need to be recorded. I would steer clear of any staffing firm or client organization that would have, as a requirement of a contract-to-hire, logging only 40 hours even if you work more than that
What are some of your predictions of contract-to-hire?
During times of economic uncertainty, it is more likely for clients to look at contract or contract-to-hire engagements to create shorter-term solutions and see what transpires. Also, as a nature of the unemployment associated with the current economic crisis and what we have seen previously, it’s altering how candidates and clients interact.
Up until I’d say February of this year, it was a candidate’s market where it was entirely likely for a candidate in technology that had quality skills to, if they were looking for a new opportunity, have anywhere from two to three other offers, organizations interested in them and a severely reduced candidate pool. Now that unemployment is so high due to the economic crisis, the situation is reversed.
Clients are often going to have two to three, if not more, quality candidates available for any role they might have. Whereas previously, candidates did have the ability to say, “I’m not going to consider anything that contract or contract-to-hire,” now that they might be unemployed or it looks like their company’s not doing great, it might have to do layoffs, clients’ companies are aware of the fact that they are going to be able to still attract quality talent in a contract or a contract-to-hire scenario.
What would be the one key advice you would give companies who are getting into the more contract-to-hire space who haven’t before, and then what advice would you want candidates to walk away with?
That’s a great question. In terms of companies, I would say being upfront is critical in terms of defining the difference between contract or contract-to-hire, that misrepresentations of things of that nature could affect your reputation as a company. If it’s a contract, say it. Just say it outright if it’s contract-to-hire. Mean it when you say it. Also, understand that the staffing firm is providing a lot of additional services that you might not take into consideration, such as what was discussed earlier in terms of the ability to participate in benefits, have to time off, all of that being provided by the staffing firm, and understand that there’s an expense associated with that when you’re evaluating the bill rates that they’re presenting you.
For candidates, I would say, to reinforce a lot of what I said earlier is make sure you are locking down – either the company or the recruiter – the difference between contract or contract-to-hire, and ideally, be able to present historical data that represents what they’re saying. And again, with a contract-to-hire position, you want your staffing firm or the company to say, “Look, we hired ten people on contract-to-hire in 2019. 9 of those 10 people converted to direct-hire, and the one person who didn’t convert either did not have the skills necessary for the organization or, in some circumstances, might’ve left on their own accord. It comes down to knowing the right questions to ask.
I have plan for a follow-up blog post on this subject, as there is quite a bit to cover. Feel free to email me with your questions on contract-to-hire positions at [email protected]