Direct-Hire vs. Contract-To-Hire

by Peg Bogema

If you think about it, in any state that has passed at-will and right to work laws, a company can fire an employee at any time for any reason. So why the profusion of contract-to-hire job offerings lately? Why not just hire people and fire them later if they don't work out?

In a typical contract-to-hire arrangement, a company will contract workers from a staffing firm. The workers are employees of the staffing firm, and are covered by worker's compensation and often also receive other benefits.

Let's drill down into this a bit. From the employer's perspective, is the contract-to-hire option a good idea? And from the candidate's perspective, should you embrace the contract-to-hire opportunities that are out there or shy away from them?

Side Bar

Right to Work legislation allows a person to work at any place of employment without having to join a union as a condition of employment. Workers in unionized businesses benefit from the terms of a union contract without paying any dues. On the flip side, unless you have an employment contract that defines how you can be fired, in a right to work state you can be fired for any reason other than your race, age, gender or religion.

At Will
means that employees without a written contract can be fired for almost any reason—that is, fired for cause or fired for no cause at all. Both the employer and employee are free to terminate the employment at any time.

The Employer's Perspective

A large portion of our business—and what we are most well-known for—is custom software development. But we also have a large business providing computer professional staffing and recruiting services. When clients ask us to provide personnel, a surprising number of them embrace the contract-to-hire model with great enthusiasm. While we are happy to work with our staffing clients on this basis, I ask them why?

I always want to understand a client's motives and motivations better. Do they REALLY need to operate in that model? If they do, they stand to lose out on candidates who refuse to go from direct-hire (perceived as stable) to contract-to-hire.

Here are the top five reasons why companies opt for the contract-to-hire model:

  1. They find it difficult to fire someone once he or she is hired.
  2. To avoid employment overhead costs until they are certain they want to hire someone (note those costs are the responsibility of the contracting firm during the contracting period).
  3. The hiring process is substantially more involved for a direct-hire role than for a contract-to-hire role, requiring more interviews with more people who all must agree on the hire.
  4. The company doesn't have a direct-hire slot open, but does have a contracting slot open. There are direct-hire slots anticipated or planned for the near future. Or there is the hope that everyone will love the contractor and will clamor to convert him or her to direct-hire.
  5. For vague, non-specific reasons, the company is more comfortable with the try-before-you-buy model.

The inability or unwillingness to fire is a company culture issue. Some companies are so close-knit that firing anyone for any reason—even firing someone who is caught red-handed stealing from the petty cash drawer—destabilizes the entire staff.

Complex hiring processes often slow things down so much that good candidates are lost to other job offers. One company we've heard about has an initial interview of 1-2 hours duration followed by a ½ day interview with the technical lead followed by a full-day interview with the full team, which includes pair programming. Getting these interviews scheduled can span several weeks. Worse in the summer when vacations are a major issue. For a contract-to-hire role, only the ½ day interview is required. To convert to direct-hire-employment, the candidate must still go through the rest of the interviews, but these are rarely done with the competition and pressure of other offers pending.

Using contract-to-hire to generate a direct-hire slot is a tried and true technique in many companies. When another resource joins the team and demonstrably increases the team's throughput, it becomes significantly easier to lobby for the direct-hire slot. The argument is much easier to make with concrete metrics than with hypothetical or hoped-for gains.

No matter the rationale for using the contract-to-hire model, a company must recognize that it is excluding a portion of the job-seeker pool by going this route. Someone with direct-hire employment that is perceived to be stable—no financial difficulties, restructuring or other earth-shaking events underway—is less likely to even consider or pursue contract-to-hire. This is a cold, hard fact. So if a company offering a contract-to-hire role is failing to attract desirable candidates, they should take a close look at whether or not they absolutely cannot offer direct-hire employment. If they can, then re-offering the slot as direct-hire will often turn that around.

In addition, companies should be forthright about why they are offering the role as contract-to-hire. When interviewing candidates, they should explain the reason or rationale behind contract-to-hire, putting as positive a spin on it as possible. Often times that calms whatever nervousness the candidates has, making him or her far more accepting of the model.

The Candidate's Perspective

As a prospective employee, the $64,000 question is whether or not contract-to-hire is, indeed, less stable than direct-hire employment offers.

If you have been unemployed long term, then any job—no matter the employment model—looks very attractive. But if you've only been unemployed briefly, or if you are currently employed but trying to make a move for career reasons, should you rule contract-to-hire in or out?

The three bits of advice I give candidates:

First, remember that employment in Michigan (and most states) is at-will. While some companies are very nervous about firing their employees, many more are not. You can be hired on Monday and fired on Friday. So the stability of a direct-hire job offer is factually not there.

Second, remember that if you interview for a contract-to-hire role, you have the right to ask the company why the role is being offered in this model. The information you get may provide insight into the company.

For example, if a company tells you that they are loathe to fire people once they are hired, that says that once you make it through the probationary period, job security is favorable.
Conversely, if a company tells you that they are trying to generate a direct-hire slot by bringing someone in on a temporary basis, that might not give you a good feeling. Will there be slots next year? Or is the manager operating on a wing and a prayer?

Third, observe the interviewing process in a detached fashion to measure just how thorough it is. Is the interviewing process adequate for the hiring manager (or even yourself) to determine that you are a good fit for the role? The number one place where contract-to-hire falls apart is when the interviewing process is so abbreviated that nobody would be able to determine if the match is a good one. That kind of abbreviated interviewing comes from a hiring manager who really (really really really) is looking at you like a part in a machine. If you happen not to fit right, it's easy to throw you on the scrap heap and get another part. My advice: run for the hills.


Contract-to-hire is often appropriate for both companies and candidates. It shouldn't be overused or used inappropriately by the company. The candidate should interview with a very critical eye. Many, many of our candidates are in direct-hire roles that started as contract-to-hire. So we—and they—know that it works!

Stout Systems is the software consulting and staffing company Fueled by the Most Powerful Technology Available: Human Intelligence®. Stout was founded in 1993 and is based in Ann Arbor, Michigan. Stout has clients across the U.S. in domains including engineering, scientific, manufacturing, education, marketing, entertainment, small business and, yes, robotics. Stout provides expert level software, Web and embedded systems development consulting and staffing services along with direct-hire technical recruiting and placements. If you're looking for a job in the tech industry, visit our job board to see if you qualify for some of our positions. Best of luck to you! If you're looking to hire technical talent for your company, please contact us. This is a career advice article catered to developers, technical project managers, and other technical staff looking to improve their skills. Sign up to receive our career and technical articles in your email inbox.
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