Direct Hire vs Contract to Hire - Advantages and Disadvantages

Updated On : July 2021

These are challenging times for organizations who are trying to hire the required resources. Hiring new employees is a time-consuming process and can be burdensome, depending on the professional needs and the level of experience that is required in a potential candidate. Whether looking to hire, it’s crucial to understand the differences between contract-to-hire and direct hire. Both these methods are designed to suit varying needs.

Contract-to-hire

Contract-to-hire means the employee is placed in a short-term position for a set period of time, with the possibility of being hired full-time when the contract ends. The short contractual roles allow both employer and employee the opportunity of a trial period before committing to full-time employment. A contract-to-hire employee is technically employed by the staffing agency but is under contract to work for the client company.

How contract-to-hire works

In contract to hire, a staffing agency fills in the positions and handles most of the front-end recruiting tasks like sourcing candidates, reviewing resumes and shortlisting candidates. Then the shortlisted candidates are passed along to the client for any final interviews. The end-user company makes the final decision, with insights and guidance from the staffing agency if needed. A selected candidate begins the employment contract on the staffing agency’s payroll and not the company’s. The contract duration can vary from one month to being indefinite, and in almost all situations, the client has the option of hiring the employee full time or terminate the contract employment.

Direct hire

Direct hire means a direct job offer to a candidate from the intending client company, usually for permanent roles in the company. The employee that joins the organization through direct hiring is given all company benefits and remuneration. In direct hire, which is also known as direct placement, the staffing agency finds, qualifies and hires permanent staff members on behalf of their client. These are usually full-time positions with benefits, though sometimes they are used to fill part-time positions as well.

How direct hire works

The staffing agency handles the recruiting tasks, but the selected candidate is on the client’s payroll and becomes an employee of that company. Typically, a direct-hire search means the company maintains and is committed to a long-term relationship with their staffing partner who does a thorough job of shortlisting the best candidates for the role. 

Contract-to-hire vs Direct hiring

There are various advantages and disadvantages to both Contract-to-hire and Direct hiring and they may alternate depending on the requirements of the specific business.

• Long-term vs. Short-termIf there is a need for a specific skill set to fill a short-term need, like a project with a definite beginning and end point, then a contract-to-hire ensures paying only for that talent to complete that particular job and scaling down as soon as the project is over. However, for a long-term solution, a direct hire can save costs and time.
• Changing Skill Requirements Sometimes companies do not have the internal skillsets required to effectively execute one or more stages of a project or the skill set doesn’t exist within the company. This is when the company has to decide to hire a contract employee or permanent hire.
  Considering a permanent hire requires a lengthier hiring, onboarding and training process, a contract employee may be able to start sooner and get to work faster. If there are lots of one-off projects without specific skills requirement after the project ends, a contract to hire will work better. But if the skill set is repeatedly needed, hiring a permanent employee is more profitable.
• TimelineA contract hire comes with the needed skills and experience and requires little hand holding or onboarding. So, they can add value from the first day and will be the right candidate for a time strapped project.
  However, to implement a larger initiative, enhance the IT department, or fill in a skill gap in the resource pool, a permanent hire is a better investment. Once they get going they become experts and can adapt to evolving needs and project scopes and are willing to go above and beyond what a contractor is willing to do. They work towards the company’s vision and invest their time and energy for the company’s success and not just a single project.
• Cost Effectiveness Contract employees usually cost less than permanent employees as they are only paid for the time they are required. But contract employees are also less invested in the company’s success and may have other clients or move away for a better opportunity.
  Permanent employees are an asset and while they cost more to maintain, they also bring more long-term value. So, if the budget permits, hiring a professional staffing company to find the right person to add to the team is a great investment.

Having discussed what method of hiring could work for companies, according to the requirements, there are certain broad advantages that both contract-to-hire and direct hire bring to the table.

Contract to hire

• Faster Interview Process The hiring process becomes much easier and smoother as the staffing agency handles all the time-consuming and tedious legwork of finding the right candidates. This the right option for businesses to add talented skills to fill an immediate need or capacity gap, as candidates can start working and producing value for the company sooner. 
• Opportunity to Assess the Candidate This is a major benefit as it gives the employer a chance and additional time to assess a candidate in action without committing to taking them on full time. The candidate also gets a chance to assess the company and avoid ending up in a wrong position where they are not happy or productive.
• Budget Flexibility Contract-to-hire minimises expenses when working with a restrained budget as it allows the company to include a full-time employee into the budget and still get the work done. Contract to hire employees typically are not eligible for any benefits, like healthcare plan or retirement benefits from the company, and get paid by the staffing agency, including benefits too, sometimes.
• Staffing Flexibility Contract-to-hire allows businesses to avoid overstaffing or understaffing by meeting the exact capacity especially when the need for resources fluctuates due to seasonal or project-based needs. Also, it can meet the need for specialized skills too and strict timelines. With access to additional brainpower and hands for the duration of a project, companies can scale back once the job has been completed.
• Accommodates Growth Contract to hire helps to stay productive during unexpected growth, or when extending a project, or catering to a new client by scaling up on short notice. It makes it possible to quickly hire the help required.

Direct hire

• More focussed team players Direct hire employees are likely to be more stable, more engaged, committed and loyal to the company. They will be more invested in the company and will be focussed more on the company goal and vision. Direct hire employees are more likely to be better team players.
• Management has more control  With Direct hire, the company can impose more control over how, when and where an employee works. Companies are able to avoid employee-contractor classification compliance issues.
• Large pool of candidates  Direct hiring attracts a huge number of highly-qualified candidates. They are more comfortable with the benefits like sick leaves, vacations, health benefits, etc. and the sense of job security that direct hire brings.