What is a Contract Employment?
Contract employment is good for a few reasons; one, the company knows that the employment will only be for a limited time, two, the employee knows that the job will end at some point, and three, there are no "benefits" from serving as a contract employee. But just as there are pluses to this type of employment, there are minuses as well.
Contract employment is typically used for project-based work and work that is only temporary in nature. For example, if an IT Department has just converted the company’s email system to a new service, using contract employees for a transition period is beneficial to both the company and the employee. The company benefits by being able to hire people with experience doing this particular job . The contract employee benefits because they get to do this job for a period of time while probably being paid a pretty good wage.
These contract positions usually have a defined length that ranges from six months to several years, depending on the job. The employment ends on the date it was supposed to end. In the above example, the contract employee knows that, after his contract term ends, he is going back to job searching. While the contract employee is getting a good wage, she is not getting paid for being off during holiday breaks or for any time off. There is no severance, there are no benefits, and there are no protections when the length of employment is over.
Example of Contract to Hire
Contract to hire is a specific approach with an employment process. It’s an opportunity for job candidates to show their value and talent to an organization, while also giving employers a chance to assess the assets of a new employee before making a long-term decision. Contract to hire is offered by virtually every staffing company, maintaining popularity in the recruitment world. While it can be a risky proposition if the process is not managed, when approached thoughtfully, contract to hire is an effective solution for employers and employees alike. It is a way for both parties to determine if a permanent position is warranted. If an employee fails to work out, there is still the flexibility to search for a different candidate. If a job candidate doesn’t measure up to expectations, a tried-and-true flexible arrangement exists to find a better candidate.
Advantages of Contract Employment
From an employer perspective, the benefits of contract employment are that it can help to ensure that greater performance levels are achieved. Additional performances consultants can be brought in on a temporary basis to provide specialist skills and mentor current employees, helping them to develop and learn new skills as well as improving overall morale. In addition, should a business have a project that needs completing quickly, a contract employee can come in to do just that, allowing for faster completion than what was possible in-house. A temp employee also allows for greater flexibility, and can allow a business to increase or decrease employee numbers when necessary, saving on overheads and expenses. A cost-effective solution for businesses, hiring a contractor eliminates the need to offer long-term salaries, health benefits, social security, pensions, and holiday pay which may not be required for such a short period of employment. In addition to this, the recruitment costs of contractor employment are also lower than if a permanent position had to be filled, as the contractor will already be registered with a recruiter and the employer would not have had to pay for advertisements or for the interview process. From an employee perspective, the benefits of contract employment include the fact that they can be flexible with their working lives, choosing when and where they want to work, rather than committing to a full-time position that may last for years. This means that they are able to keep their options open and can move from contract to contract without worrying about being tied to one position for too long. In addition, many contractors will be paid more for their services than if they were a full-time employee, and when contracted out through an employment agency, benefits such as sick pay, vacation pay, and maternity pay can often be included.
Pros of Contract to Hire Arrangements
The advantages of contract to hire are many. Employers like the flexibility of hiring on a trial basis, and the ability to evaluate a candidate’s fit in real time with actual work. They do not have to make an immediate commitment, and if it does not work out, the person goes back to their agency or is released. Agencies love transferring to permanent status because they get to collect a fee and the employer is happy with the person they placed. Candidates may get to try out a new job without the pressure of making a long-term commitment if they are not sure the position is a good fit.
Searching for a direct hire versus a temp-to-perm or contract to hire position offers better protection. Sure, you may have to look longer to find the right opportunity but remember, being an employee can have its advantages – first, you’ll get unemployment insurance if your position ends and second, you’ll likely be eligible for a retirement plan, medical insurance, vacation time, holidays, sick time and a whole roster of other benefits that independent contractors are not entitled to. Then finally, you’ll have the security of knowing the employer made a permanent commitment to you because they liked what they saw.
It is a win-win when a contractor turns into a permanent employee. Just make sure that you develop a strategy that deals with the potential pitfalls that come along with moving to direct hire status so that everyone comes out a winner in the end.
Contract Vs Contract To Hire: Which Is Riskier?
When comparing contract and contract to hire in the hiring process, one of the first considerations for an employer is often the level of risk involved in each scenario. Contract employees give employers the opportunity to find skilled talent quickly, but it comes at the risk of job security. These skilled workers know that these jobs are temporary, so the motivation to go above and beyond may not be there unless they’ve been given compelling reasons to care about their position, the company, or the work itself. Plus, if they don’t feel valued, they may jump ship for the next contract position they’re offered.
Consider also that if a temporary contract worker doesn’t meet your expectations, then you’ll have to find a replacement quickly, which can cost time and money. In fact, temporary workers are often held to a high standard for this specific reason. Any missteps in the hiring process can cost you.
Contract to hire, on the other hand, gives employers the opportunity to get to know a potential employee before making a commitment to hire them full-time. This trial period gives employers the chance to see if a candidate is the right fit for the position and the company culture. However, both candidates and employers need to keep in mind that this step is still just a trial run, and there are no guarantees for either party. Despite the employer’s best intentions, they may decide to end the contract before, or even after, converting the temporary worker to full-time. The same goes for the employee: they can end the contract at any point, too, taking a toll on the company’s bottom line. There’s also the added risk of accidentally being considered an employee due to a misclassification. This can lead to tax liabilities and benefit claims down the road, as well as legal ramifications.
With both contract and contract to hire employment comes an element of risk that can’t be avoided. This is especially true for those companies who do choose to go with the contract to hire model, because the stakes for both the candidate and the employer are higher than they would be in a straight contract situation. Both types of employment models have a place in the hiring process, but it’s important for both recruiters and candidates to understand the risks involved before they begin.
Job Sectors Where One Option Fits Better
Contract and contract to hire positions are typically seen in tech, accounting, finance, education, engineering, healthcare, manufacturing, consumer goods, marketing, and human resources. IT contractors are especially common with the accelerated pace of technical change and the need for specific programming experience and expertise. Big data analytics has also created a need for complex analytics modeling and machine learning experience.
Contracting in accounting and finance, especially when working with investment banking firms is especially common, since they experience such a high rate of change to the financial regulations they use. It’s also very common to have accountants contract though the tax season and during periods of transition, as tax regulations change, and the accounting industry experiences disruptions.
Educational institutions also use contracts to fill emergency vacancies among teachers and administrators, and schools under limited budgets can’t afford to make long-term commitments to their faculty. Employees in this industry also tend to move between contract and permanent status frequently, as their skills allow them to pursue opportunities in different schools and districts , and contract to hire arrangements are often attractive to laypeople for their chance at full-time employment.
Many engineers also contract when they have specialized skills in a technology that isn’t in high demand, so a long-term contract may be difficult to justify. Manufacturing businesses also hire many summer interns and co-op students on a contract to hire basis, though this arrangement is less common among the engineering and STEM fields.
In the consumer goods industry, contractors are used both among content and creative teams to support product launches, since they most often need to make short-term commitments. Marketing consultants and contractors are also common in this industry, since many have specific areas of expertise that allow them to work with diverse products and brands.
Healthcare contractors, from nurses to psychiatric and family care providers, are uncommon as a permanent position due to the ever-changing needs of the industry, which is seeing a projected deficit of 1 million practitioners by 2024, according to Medical Schools.
Contract to hire arrangements are less common in human resources, but many employers will use them through service agencies because they enable the company to retain control over its hiring efforts while the contractor utilizes the employers’ tools and resources and becomes more familiar with its processes.
Making the Call – Which One Should You Choose?
When weighing the decision of whether to opt for a contract or contract to hire, a number of factors should be considered. Although the financial situations and hiring practices of companies differ, it is important for companies to establish criteria before determining which employment type is best for their needs. Budget constraints are often a major factor in determining which type of employment to choose. If your organization has limited funds, opting for a contract-to-hire employee can help your company save valuable money. A traditional contractor may not be able to make a budget-friendly candidate, as many skilled professionals offer remuneration requirements that can be relatively high. A outsourced employee is also not likely to result in a long-term employee, unless they are transitioned into a permanent contract. Contract-to-hire employees have proven themselves to be reliable and will be able to take on the mantle of a full-time employee without additional training costs. Additionally, company size and stage of development also impacts how often contract-to-hire employment is utilized. If your business is just getting off the ground, it is likely that a contract-to-hire scenario will be extremely practical, as it will allow the company to qualify their hires prior to bringing them on for the long term. For larger or longer-established companies, opting for contract-to-hires will only serve to benefit the company by allowing them to better assess their current and future needs. Working in this manner also allows for lower risk, as the commitment is lower and can be ended if need be. The potential for long-term employment also weighs into the decision-making process. If your business is one that experiences consistent turnover, it is likely that opting for contract-to-hire employees will serve your company very well. This option will allow you to fill your ranks and seamlessly accommodate for the changing economic landscape. In the event that your business does not experience much turnover, traditional hiring practices may be the best option. If you have not had a problem with turnover in the past, there is no reason to suspect that it will be a problem in the future. In this case, it would be more profitable to consider hiring on a traditional basis, as there would be little chance of needing to let someone go.
Legal Considerations
The primary legal implication of contract positions is that they do not fall under a wide range of employment laws and IRS guidelines requiring businesses to classify workers as employees and not independent contractors. Most federal employment laws dictate the relationship between the employee and the employer, such as the Equal Pay Act or the Age Discrimination Act. Employers can be liable for violating these laws and will often find that contract workers are applicable employees and enjoy protection under all applicable laws. For example, if a company hires a third-party to provide the services of an accountant, under the IRS guidelines the accountant likely to be considered an employee. The importance of these guidelines is critical and often misunderstood, and it is important to always get a contract or contract-to-hire worker’s status correct. Misclassification as an independent contractor can result in both civil and criminal liability.
Contract-to-hire employees are subject to employment law, just like regular employees, whereas contract positions are not. The employee would receive the same workplace protection and benefits as any other employee. For example, if a contract-to-hire worker worked for the same company for over six months, the employer would be subject to harassment law just as if they had hired the painter full-time. When a contract-to-hire worker decides to leave the position, the employer must follow the same procedures as any other employee.
Effective Tips
For Employees
When it comes to contract employment, understanding where you fit and whether the opportunity is right for you can make all the difference.
If you are seeking to simply add experience to an empty résumé during a period of unemployment, you may find a contract job to be beneficial. If you are seeking to transition from one career to another, or add another specialty to your already established skill set, a contract position may be within your reach.
If you are looking for a permanent position, you should be selective with contract work, so that you use it as a means to an end (e.g., being placed in a permanent role with a company) and not a stopgap. You should seriously consider the potential for a permanent position when renegotiating your contract for an extension or renewal. Make sure to state your desire for a permanent position with the client. And above all, find out if any of your co-workers have gone permanent or if they are "lifers" at the company.
Remember that you still have to negotiate a contract for the next assignment, whether it is a few months or a few years down the road. It will likely be easier to renegotiate terms if your reviews and performance are strong, so you have a successful contract under your belt.
All that said, the most difficult portion of a contract position is navigating it without the benefits and protection that a permanent position promises—that said , here are a few suggestions that may make your contract experience more enjoyable:
• Set your goals: Be clear about what you are hoping to achieve by taking a contract position, whether it is a specific personal or professional goal.
• Take time to assess and understand the contract with your recruiter.
• Don’t be afraid to ask for changes to a contract before signing, and speak up if something doesn’t seem right.
• Manage your finances carefully because contract work rarely offers the level of salary or benefits of permanent work.
For Employers
Since contract employees have less of a stake in a company, be sure to clarify any tasks you would like them to achieve beyond the basic job requirements. You are dealing with an independent worker, not someone who is set up to succeed in your corporate structure.
The best way to manage contract workers is through frequent feedback, both positive and constructive. Be sure to communicate with your contractors upfront as to the type of feedback they can expect, so they can make a plan to make changes if necessary.
It is also important for you to be clear about the terms of a contract extension or renewal. Allow your contract employee to renegotiate the terms of their contract based on a productive experience. Many contractors are anxious to be considered for a permanent position within your company, but if that is not an option, be honest about the situation.