The Difference Between Direct Hires and Contractors Part 1

The following blog is a transcription of a webinar we hosted with The Judson Group. For the full webinar, click here.

I have been in the industry for just over 18 years, focusing mostly on IT placement. I would say 70% of that would be from a contract standpoint and 30% from a direct hire standpoint, depending on how the economy was flowing. Our goal today is to go over the types of placement within the industry, as well as an overview of the contract industry - why hire contractors, the benefits of hiring contractors, contractor expectations, and, briefly, co-employment. 

Let’s start talking about the types of placement. You’re probably more familiar with permanent/direct hire placements where someone becomes an employee of your company. This is the most common scenario and what you’ll see posted most frequently on your job boards, company websites, etc. Next is contract, and we’ll go more in depth on these in a little bit here on the contract side. This is when the candidate is employed by the contract staffing organization and reports to work at the client company. The third scenario is contract-to-hire, which is where the candidate is employed by the contract staffing organization and reports to work at the client company. This is more of a temporary arrangement until they become a direct hire of that company. 

So let’s talk a little bit about the contract industry. The contract industry itself, as of August 2014, was a $100 billion industry. The penetration rate reached a high of 2.08% in August 2014, which has doubled since 1990. What the penetration rate means is any non-farm employee that is on contract. Again, this doesn’t include farm employees, but 2.08% of US employees are now contract. 

Right after the 1991 recession, contract staffing grew 4%. After the 2001 recession, it grew about 1%. After this last recession in 2009, it jumped to about 9%. We see that as more evidence as a shift toward acceptance and adoption of contract staffing. There was a white paper put out by IBM right after the recession that states 20% of your staff should be contract staff. I think some clients are moving into that because when we went through the last recession, we got hit so hard that companies had to let employees go; they had to dump 401k, or whatever the case may be. If you have 20% of your staff as contract, they’re actually an employee of the contract staffing company, so you can end that contract at any time. It doesn’t affect your headcount or anything of that nature and it actually keeps your employees happy as well.

Let’s talk a little bit about contract by industry. In 2012, $99 billion was spent in temporary help contract staffing. It is projected for 2022 that we will spend almost $156 billion in contract staffing. It is broken down into two areas: commercial and professional/speciality. The commercial is your industrial; potentially shop floor workers, manufacturing setup, or office clerical work that you have at your desk. The professional/speciality is more your IT, healthcare, finance and accounting.   

Why hire contractors? What would be the reason? A lot of small to mid-size companies will bring in a front desk person to come in a few hours a day or bring in someone to help file paperwork, but what are the reasons to hire contractors? 

First of all, contractors are great for filling in for another employee on temporary leave. Whether it is medical leave, maternity leave, or someone who goes on an extended vacation, it just helps to backfill for that person. Also, it could be help with a specific project where their skillset is needed. It could be within IT if you’re updating a network system or something of that nature, you’ll want to bring in someone with that speciality who can hit the ground running. Another example on the finance and accounting side happens come tax time. You see a lot of tax companies hiring temporary staff from November to April. Another reason to hire contractors would be to augment existing staff during a busy time or as a support roll. Retail is big on this from September to January. 

So why contract-to-hire? It’s a “try before you buy” or really “try before you hire”. If the client is not sure about someone, or even the person is not sure of the company, you can try it for three months and see if it works out. If not, you simply part ways and the contract is done so the client just pays for that time during the contract. If it does work out, great. You hire them on and they’re already familiar with the organization a bit. They can really hit the ground running from that standpoint. Another reason for contract-to-hire is that it is a creative way of paying for search fees. Most staffing companies will be creative with you and say “if you hire someone in 0-2 months there is this fee, or if you hire someone from 2-4 months there is this fee.” Then after so long there is no fee, so after 6 months or 12 months you’re able to hire that person and it helps with the search fee because the initial fee could be $20,000-$25,000 upfront so that divided into a number of months really helps. This can also help fill gaps during a hiring freeze. For example, if you’re on a hiring freeze, you can bring someone in for 3 months and see if it makes sense to hire them after that time. 

What are the benefits of hiring contract staff? Contractors typically work in a variety of environments for shorter periods; therefore, they bring expertise specific to your need which can reduce training costs and bring fresh eyes to your project or process. As I mentioned before, maybe you need your software updated or it is tax time so you’re bringing in CPA’s to help get you through a heavy load of work. One of the things you’ll see on the contract side is that you bring somebody in and the contractor has had a lot of experience in regard to an implementation, or whatever the case may be. Your employees may not have that, so again, it is just bringing in a pair of fresh eyes. Another benefit is that augmenting your staff with contractors gives you flexibility to add skills where needed on a shorter term basis rather than trying to find someone who can fill several needs over a longer period of time. This especially will save you time and money with the training and onboarding process. Another thing is you will see a lot of contractors end up getting ‘rehired’ by the same company because they understand their system and it is an inexpensive way to do things, rather than hiring someone on and trying to get them up to speed.

Come back on Wednesday for part 2.