Contract to Hire: Pros, Cons, & When It's Worthwhile

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Bruna Vasconcelos
Bruna Vasconcelos
Head of People

Table of Contents

What is a contract to hire, and when should you choose this type of employment? Learn more about the pros and cons of contract-to-hire positions for employers and employees.
Published on
August 24, 2023
Updated on
April 11, 2024

Hiring managers are constantly faced with the dilemma of when and how to hire new personnel due to the dynamic nature of today's workplace and the ever-changing needs of organizations. Luckily, the hiring industry continues to evolve and offers numerous options for finding new employees depending on your needs, budget, and timeline.

One increasingly popular option is contract to hire — also known as “temp to hire.” While this hiring arrangement may benefit some organizations in specific scenarios, it’s also important to understand potential drawbacks. Therefore, it’s essential to determine when and why such an arrangement is worthwhile for your organization.

This article covers the contract-to-hire arrangement, discusses its pros and cons, and explains when it's most suitable for an employer and employee.

What Is Contract to Hire?

Contract to hire means that instead of hiring an employee directly, a company brings in a contract employee to work temporarily for an extended period with the understanding that they may become a permanent employee if they meet specific criteria. In other words, a contract-to-hire job allows the employer to evaluate a potential employee before making a long-term commitment.

In this arrangement, the employer sets a period of time — usually between three and six months — for the contract employee to prove their value. During this contract period, the contract worker works as a regular employee of the company, but the contract is only guaranteed to remain valid for the established period. The employer can extend or terminate the contract at the end of this period.

While contract-to-hire jobs may seem similar to other temporary arrangements, such as independent contracting or consulting, they are distinct in several ways. For example, with a contract-to-hire arrangement, you are looking for someone who can eventually become a long-term employee. In contrast, independent contracting or consulting is typically only for short-term roles or projects.

To make the most of this arrangement, you may need to partner with a staffing agency or recruiting firm specializing in contract-to-hire services. This will ensure you can find the right candidate for your organization and properly handle the hiring process. Moreover, recruiting agencies can help you with the legal aspects and provide vital advice regarding onboarding and managing a contract-to-hire employee.

Contract to Hire vs. Direct Hire

The main difference between contract-to-hire and direct hire is that as an employer of the former, you can “try out” a potential employee before making a long-term commitment. This arrangement gives you more flexibility when evaluating potential employees and helps you make informed decisions.

Alternatively, a direct hire occurs when you hire employees without any trial period before standard employment. Thus, with this arrangement, you have to commit to an employee without evaluating their performance.

Other differences between the two can affect:

  • Time frame: A contract to hire is typically a short-term arrangement, while a direct hire is a long-term commitment.
  • Hiring process: The hiring process for a contract-to-hire position is generally quicker than direct hiring, mainly because the evaluation period is shorter. A direct hire requires a lengthy evaluation process, given the long-term commitment.
  • Cost: Contract-to-hire positions have a lower cost per hire than direct hires, as the employer only pays for the specified period and does not need to commit to a long-term salary and benefits package. Moreover, the employer can end the arrangement without further obligation if the employee is unsuccessful.

Pros of Contract to Hire

To help you determine if a contract-to-hire arrangement is right for your organization, here are some benefits this type of hiring arrangement can offer.

Trial Period

There's nothing worse than going through the lengthy and costly hiring process only to find out the employee isn't a good fit. With a contract-to-hire arrangement, you can evaluate contract workers before making an official offer. This trial period will give you insight into the employee's work style and performance before committing to a long-term relationship.

Additionally, you can use the trial period to determine if the employee is a good fit for your company culture while allowing you to adjust the responsibilities and duties associated with the position if needed.

Swift Onboarding Process

Once you’ve decided to extend the contract of a potential employee, you can quickly onboard them and start taking advantage of the skills they bring. Moreover, since the employee is already familiar with your company culture and how it works, they can hit the ground running. This makes it easier for the employee to quickly become a productive member of your team and start contributing. Since the hiring process is shorter, you can save time and money and reduce additional paperwork.

Flexibility for Employers & Employees

With a contract-to-hire arrangement, employers can take advantage of the skills and expertise they need without committing to a long-term relationship. Moreover, the employer can easily adjust the employee’s responsibilities and duties if needed. 

Similarly, employees hired on a contract-to-hire basis can gain valuable experience and acquire new skills without the pressure of a full-time commitment. These opportunities give employees the flexibility and freedom to explore different opportunities and employers while keeping the security of a job in the short term.

Mitigates Hiring Risks

Hiring mistakes, even if unintentional or minor, can impact your organization’s bottom line due to the costs associated with recruiting, onboarding, and training. Moreover, retaining the wrong employee can lead to low morale, decreased productivity, and a negative reputation.

With a contract-to-hire arrangement, employers can assess potential employees by seeing them in action and evaluating their performance before deciding to bring them on full-time. This helps mitigate the compounded costs of recruiting and hiring the wrong employee.

Cons of Contract to Hire

While contract-to-hire is an attractive option for many employers, weighing the pros and cons before deciding is important. Here are some of the potential drawbacks associated with this type of arrangement.

Job Security Concerns

A contract-to-hire position offers less job security than direct-hire arrangements. Employees may feel uncertain about their future with your organization, leading to decreased engagement and motivation. Additionally, employees may be hesitant to invest in learning new skills or developing relationships with colleagues if they’re not sure they will stay with the organization for a long period of time. This may negatively impact the employee’s work performance and overall satisfaction with their job.

Furthermore, employees may be less loyal, leading to a higher turnover rate, which could hurt your organization’s bottom line. Ultimately, the uncertainty of contract-to-hire jobs can make employees feel apprehensive and may compromise their commitment.

No Benefits Package

Another potential downside of contract-to-hire is employees may not receive the same benefits as they would in a direct-hire position. This can include access to health insurance, retirement savings plans, and other benefits like tuition reimbursement or paid time off. Employees who don’t receive these benefits may be less likely to stay with your organization and may even become resentful. Without the security of a benefits package, employees may be more likely to leave their job in search of better compensation elsewhere. This could result in the loss of valuable talent and knowledge.

When Contract to Hire Makes Sense

Contract to hire is an attractive option for many employers, but it’s important to understand when and why such an arrangement makes sense. Here are some of the scenarios when a contract-to-hire arrangement may make sense.

You Only Need Short-term Employment 

If you have a short-term or seasonal need for additional staff, contract to hire can be a great option. It allows you to bring on additional staff for a specific period without committing to a long-term relationship. This can be especially beneficial for your organization if you have unpredictable workloads, such as during peak seasons or when launching a new product. In these situations, you can hire the staff you need for the duration of your project without worrying about long-term employment.

Your Business Needs Fluctuate

Contract to hire is also a great option if your organizational needs tend to fluctuate. You can bring on additional staff for a specific time and then let them go when the need no longer exists. This allows you to remain agile and flexible, which can help you to save money in the long run.

For instance, if you experience an influx of orders during the holidays but then slow down during the off-season, a contract-to-hire arrangement can be advantageous.

You Want to Review Performance Before Committing

Committing to long-term employment with an employee can be risky, especially if you don’t know how they perform. Contract to hire allows you to bring on the employee for a short time and then decide whether or not to offer them a full-time role after evaluating their performance.

For example, if you want to hire a software developer for a long-term project but are wary of committing until you’ve seen their work, you can bring them on for a contract-to-hire position. That way, you can evaluate their performance and decide to convert them to a full-time role if satisfied with their work.

You Don't Have the Budget for a Full-time Position

Small businesses, startups, and organizations with limited budgets often struggle to find the resources to hire full-time employees. This is because full-time positions typically require additional costs associated with benefits packages, training, and other overhead expenses.

With contract to hire, you can bring on the staff you need for a short time and then decide whether to offer them full-time roles; you can hire the team you need without incurring additional costs associated with full-time employment.

Should You Use Contract to Hire for Your Next New Hire?

There isn't a simple yes-or-no answer here because it depends on your circumstances and goals. While this type of employment arrangement may have worked for other organizations, there may be better solutions for yours. Therefore, it’s essential to carefully weigh the pros and cons before deciding.

Consider your budget, needs, and expectations to determine if contract to hire is the right option for you. Also, assess any potential risks associated with this arrangement before committing to it. By thoroughly evaluating these factors, you can make an informed decision that is right for your organization.

Revelo’s Contract to Hire Solution

Do you need to hire software developers quickly and efficiently? If so, Revelo can help you leverage the benefits of contract-to-hire. We provide access to a global pool of pre-vetted software engineers in Latin America who can commit to a contractual period. After this point, you can decide to offer them full-time employment. We make the contracting process simple and efficient, allowing you to focus on finding the right talent while minimizing the stress of many administrative tasks.

Contact us today to learn how we can help you scale your engineering team quickly and effectively.

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