Posted on April 23, 2014

Contract to Hire: Why and How Your Organization Can Use It

The perfect talent can be hard to find, especially in a pinch. Many companies have turned to hiring independent contractors on a contract-to-hire basis to fill mission-critical positions quicker and at a lower risk. Could contract to hire be a good fit for your organization?

Why should we contract to hire?

Some of the pros of using the contract-to-hire option include the following:

Quicker to fill the position

The hiring process can typically move faster when hiring a contractor instead of a more “permanent” employee. This is because hiring a contractor is considered less long-term, and therefore less risky, than hiring a full-time employee.

Opportunity to find a good fit

Using independent contractors allows employers to “try before they buy.” They can see if the contractor performs her work well and if she would be a good culture fit at the organization. In turn, the contractor can determine if she wants to become a long-term employee. It’s a mutually beneficial arrangement.

Cost-effective for employers

When using an independent contractor, the employer is not burdened with withholding payroll taxes, making matching payroll tax contributions or covering the cost of the employee’s benefits. However, companies have gotten into trouble in the past for abusing the independent contractor status to get out of paying taxes and benefits (more on this issue below).

Easier transition into full-time employment—or not

An independent contractor who performs well and fits in with the culture has an advantage if she is hired, as her learning curve is substantially shorter. She has already had an opportunity to become acquainted with the industry, the culture and the team dynamic. Additionally, if it’s not working out, opting to allow her contract to expire is a simpler task than terminating a regular employee.

How do we do contract to hire?

Engage contractors as if they were employees

Even though the contractor is essentially “auditioning” to become a regular employee, she should not feel as if you’re watching her every move, lest the stress affect her productivity. Try your best to make her feel like a part of the team. After all, if you’re serious about the opportunity for her to become a full-time hire, you want her to be engaged from the start.

Beware of misclassifying employees as contractors

As previously mentioned, it can be tempting for employers to designate employees as contractors to avoid paying taxes and benefit costs. But over the past few years, the IRS and other government agencies have been stepping up their enforcement efforts on misclassifications. Companies who abuse the contractor classification could face substantial back taxes, IRS penalties, liability for workplace injuries, retroactive benefits, attorney’s fees and other monetary damages.

The IRS has strict guidance regarding the classification of W-2 employees verses 1099 independent contractors. The basic premise behind the determination is the amount of control that the company has over the worker and how the work is performed. Another large contributing factor is how important to the work is to the company’s core business. Resources like Paycor’s HR Support Center can provide checklists to help you ensure the correct classification is made.

Sources: Anchorpoint Technology Resources, HR Support Center, ESP Staffing

This content is intended for informational purposes only and should not be considered legal advice.