What Is Contract to Hire?

Contract to hire is a flexible employment arrangement where you bring on a professional as a contractor for a specific period (usually three to six months), with the option to convert them to a permanent employee later.

Also referred to as “temp to hire,” the contract to hire approach lets you evaluate someone’s skills, work style, and cultural fit on the job before making a long-term commitment. Think of it like a test drive for talent.

Calculating future workforce needs can be tough; you don’t want to under hire and you sure as hell don’t want to over hire. Sometimes all you know is what you need right now… but you still want to keep your options open in the future.

Contract to hire vs. other employment arrangements

Unlike traditional full-time hiring, contract to hire doesn’t lock you into a long-term commitment to an employee. And unlike temporary hiring, contract to hire offers a clear pathway to full-time employment if both sides want it.

In short, full-time hiring is a commitment from day one, temporary work ends when the contract ends, and contract to hire sits in the middle.

Independent contractors

A contract to hire pro is not the same as an independent contractor. Independent contractors are self-employed, are responsible for paying their own taxes, and typically have multiple clients at one time.

On the other hand, contract to hire workers are employees. Whichever company hires them is responsible for payroll taxes and submitting income and social security taxes on their behalf.

For more information, check out this article: Hire a Contractor vs. an Employee: Which Is Best For Your Business?

Contract to hire: Is it right for you?

Before deciding if contract to hire is the right approach, weigh the pros and cons for your business.

Pros

• Check fit before committing. During the contract period, you can evaluate how the talent performs, collaborates with your full-time staff, and meshes with your company culture. This real-world trial reduces the risk of a fit mismatch and helps you make more confident hiring decisions.
• Reduce turnover. Eighty percent of employee turnover results from bad hiring decisions, per Harvard Business Review. With contract to hire, you only extend full-time offers to talent who have proven themselves.
• Hire faster. Contract to hire speeds up your ability to fill critical roles and keep business moving. You can skip the oftentimes lengthy process that often comes with full-time hires.
• Lower labor costs. Contract to hire gives you more control over your budget by reducing upfront salary and benefits commitments. Full compensation packages only come into play if the role is made permanent. With this approach, you can keep labor costs down while still accessing the talent you need.
• Quickly ramp up or down. Bring in talent to handle peak workloads without locking into long-term commitments to them. If demand downshifts, adjust your workforce smoothly (it’s easiest when an EOR handles this for you), while keeping the option open to retain top performers permanently.

Cons

• Miss out on talent. Candidates may think twice about accepting your contract to hire position if they are seeking permanent, stable employment and professional growth with a company over time. As a result, you could miss out on talent who aren’t comfortable with the temporary nature of the initial contract period and the lack of guarantee that the contract will turn into full-time employment.
• Lose top talent to competitors. A challenge with contract to hire is that top performers might be recruited elsewhere before you convert them to full-time. Since they know their position may not be permanent, they may stay open to offers with more stability.
• Deal with legal hassles. Contract to hire arrangements require that you perform due diligence so you don’t run afoul of worker misclassification laws, such as the Fair Labor Standards Act in the United States. Make sure the contract states that they are an employee (not an independent contractor), as this affects tax obligations, benefits, and legal responsibilities.

Three best practices

1. Be transparent with candidates about the possibility and conditions of a permanent role. Being upfront about the potential for but not the guarantee of full-time conversion helps set clear expectations from the start and builds trust with your contract worker. Share the specific criteria they need to meet, the timeline for evaluation, and what the permanent role would look like in terms of responsibilities and compensation.
2. Write a crystal-clear contract. Such a contract is essential when bringing on a contract to hire a professional because it creates a shared understanding from day one. Outlining performance expectations, responsibilities, and evaluation criteria ensures you both know exactly what success looks like. This contract supports objective decision-making regarding whether to hire your temp permanently.
3. Partner with an employer of record. Make things much simpler for yourself by using an employer of record to handle recruiting, compliance, payroll, and benefits during the contract phase.

Get hiring help with Pebl

The difference between contracted workers, contract to hire, and full employees can be difficult to parse—and often the law varies greatly from place to place. Misclassification can be costly.

So why not let Pebl take care of it all?

Our Employer of Record services make contracting to hire seamless in 185+ countries worldwide. We act as the legal employer for your contractors and guarantee compliance with local laws, from Bermuda to Brazil. We also handle payroll, benefits, and tax obligations during the contract term, so you can sit back, relax, and focus on finding the right fit.

Contact us to learn more.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

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