As your business continues to grow, you might find yourself in need of hiring technical professionals to help you achieve your goals. When welcoming new team members to your company, you have two main options: contract to hire and direct hire.
Both options have their perks and drawbacks, and which choice is better depends on your company’s unique situation. This article discusses the key similarities and differences between the two hiring approaches to help you make an informed decision.
Contract vs. Direct Hire
Direct hire and contract-to-hire are two of many ways you can bring talent into your company. The primary difference between the two types of employment contracts is their duration. Direct hire is a long-term, full-time contract, while a contract position is a temporary state of employment that could potentially lead to a full-time hire.
The other significant difference is that staffing companies usually fill contract positions and handle all the related paperwork, vetting, salary, hours, and contract-length negotiations. The hiring company manages direct hires.
As for similarities, they’re both official and contractually obligated ways to onboard new employees to your company through a traditional recruitment process.
The contract-to-hire approach to employment is often considered the best of both worlds for the employee and employer. A short-term contract is an opportunity for you to evaluate a candidate's performance to see whether they’re a good fit for a permanent position. This possibility can be established early in the negotiation stage by discussing whether the candidate may be interested in a long-term position after their initial contract expires.
What Is Direct Hire?
Direct hire refers to the process of hiring an employee without an intermediary or third party, usually for a full-time, long-term position. It’s considered the traditional hiring model, where the candidate must still meet specific requirements and qualifications to get the job.
Direct hire is a long-term commitment for both the employee and the employer. The contract usually lasts for a few years, with the ability to renew once the contract period is over. While some direct hires are part-time, the vast majority are full-time with benefits.
It’s a great option if you want someone to permanently join your team and grow their skillset alongside your business. Hiring individuals who fit the company culture ensures higher success rates in the long run.
Slower Hiring Process
The direct hire process is significantly slower than other employment methods. This is because it typically involves multiple rounds of interviews, assessments, and qualification and reference checks — not to mention the unpredictable amount of time between posting a job description and waiting for suitable candidates to apply.
These steps are essential and could save you time, effort, and energy. Making sure you find the right fit reduces the chances of having to start the hiring process all over a few years down the line.
Higher Annual Salary
The annual salary for a direct-hire employee is usually higher than for contract-to-hire positions. The added cost also includes the many benefits your company offers with full-time employment, such as health insurance, retirement plans, paid time off, and sick leave.
This is seen as a long-term investment in your employee, as they will likely stick around for years, if not decades, with your company. Also, direct hires are more likely to receive profit-sharing and bonuses after several years of excellent performance at the company.
What Is a Contract to Hire?
Contract to hire refers to the process of hiring a short-term contract employee, with the possibility of leading to a permanent, full-time contract. This newer hiring approach caters to the fluctuating needs of growing companies, particularly startups and companies in seasonal industries.
The contract-to-hire model is usually used for short-term positions, lasting between three and six months. This is a perfect alternative to a trial period, allowing you to determine whether an employee is a good fit while working on a one-time project.
The number of hours varies per contract, but they can be anything from part-time to full-time to project-based. They’re more flexible and faster to hire than their traditional counterpart, making them ideal for emergency hires and quick turnaround projects.
No Company Benefits
Contracted employees aren’t entitled to company benefits such as health insurance, retirement plans, paid time off, and sick leave. This makes them a more affordable option for companies that need to fill positions but are on a strict budget.
Contractors also aren’t entitled to holiday or performance bonuses, and their contracts can be terminated easily once a project is completed or if they’re not meeting set expectations.
Paid Through Staffing Agency
One key difference between contract-to-hire and direct-hire candidates is how they come to work for you. Contract hires are typically managed by a staffing firm responsible for the employee’s salary, taxes, and benefits. In return, you pay a fee for the firm's services.
This approach is beneficial to both parties. Employees have constant access to jobs in their realm of expertise without worrying about job hunting or their contracts not being renewed. Similarly, as an employer, you get access to a talent pool without going through the complications of a traditional hiring process.
If you’re seeking more than one employee, negotiations with a staffing agency can also be completed once for several employees, rather than having to set salary expectations one employee at a time.
Lower Base Salary
Generally, the contract-to-hire salary tends to be lower than for a direct-hire position. This is because the contractor isn’t receiving the same benefits as a full-time employee, but also because you’ll be able to negotiate their salary with the staffing agency rather than directly with them.
However, due to the short duration of the contracts, it can be hard to establish a salary set in stone. Employees can re-negotiate their wages every time their short-term contract expires, depending on their newly acquired skills, experience, and the market rate for their positions.
Hire Software Developers for Your Team
When hiring software developers for your team, weighing your options is important. While both direct hire and contract to hire have benefits to offer, you’re responsible for managing all parts of a hiring process if you’re approaching it directly. That’s not the case if you work with a recruiting agency — or, better yet, a remote staffing solution.
At Revelo, we’re a talent marketplace connecting US-based companies with pre-vetted, English-speaking software developers and technical professionals in Latin America. We’ve partnered with hundreds of companies, helping them scale their technical teams quickly and cost-effectively by matching them with candidates who became full-time hires and integral parts of the team.