Permanent or contract? When hiring for a position, which is better? Some companies will only hire permanent, while others prefer a hybrid approach. Which makes the most sense for your company depends on many factors.
First, let’s define both.
A contractor typically works for a company for a specific time frame, project or key initiative. Their tenure may be tied to a date on the calendar, upon completion of a project or they can work on an as-needed basis. They typically come ready to work on day one, bringing their education, skills and even hardware and software with them to jump in feet first.
A contractor must adhere to your contract, however, they are autonomous and in many cases, can decide when, where and how they work. The hiring company has little oversight, relatively speaking. Contractors can either be self-employed and file a 1099 or they can be a contract employee who is sent via a third party, such as a staffing company. They, too, file a 1099 and both do not count against internal headcount spend, rather the Outside Service Spend (OSS) budget.
There is quite a big difference between contractors and permanent employees when it comes to pay and benefits. A hiring company is responsible for paying a contractor the negotiated rate or a lump sum. That’s it – no benefits, paid days off or any other frills. Contractors typically use this rationale to charge more per hour than if you broke down the per-hour rate for a permanent employee. This pay differential will come into play when you are determining how long you will need a position filled.
Don’t get too stuck on the word “permanent” when considering a hire. While the permanent hire is looking to stay at your company longer than a contractor might, they may not be there more than about 4.2 years, according to the Bureau of Labor Statistics. During this timeframe, the permanent hire will need to be onboarded and trained, supplied with all of the required technologies and tools to do their job, and most likely will require ongoing training as their role develops. They are considered more of an investment than a stop gap.
A hiring company has much more oversight when it comes to a permanent employee. As part of your internal culture, they must follow the standards and guidelines of the business, including showing up when and where they are expected, attending mandatory meetings and events, and generally being part of the team. As your full-time employee, you will count them as internal headcount and the W2 will be in play.
While you may pay more per hour for a contract employee, you aren’t saving much money on a permanent employee when you consider the benefits, workers’ comp, payroll taxes, paid days off and FMLA benefits you’re obligated to cover. Your company may also offer a 401(k) matching program for permanent employees. The longer the employee is there and the better their work output, the more likely their salary will increase over the years.
Pros & Cons
There are advantages and disadvantages to both contract employees and permanent hires and they may alternate depending on the company and needs. If you’re debating, it’s worth evaluating the drivers specific to your business. We’ll give you a few that we know are typical motivators in either direction.
Long-term vs. Short-term
Are you looking for a specific skill set to fill a short-term need, such as with a project that has a definite beginning and end point? For these positions, hiring a contractor ensures you are only paying for that talent to complete that particular job. Once the project is over, they’re off the payroll and you don’t have to figure out another position to place that worker.
If you’re looking for a long-term solution, however, a permanent hire can often save costs and time. If you’re cycling through contractors, you’re having to spend time and money to fine each one. If you can find skilled talent to fill one position but do the work you may have had to hire several contractors to do, you will save those expenditures. The best way to save the on these costs is to hire a reputable staffing company to do the hiring for you. They can find you a skilled contractor or permanent employee in less time than you could find one on your own – and that person will likely be a better fit.
Changing Skill Requirements
Resource capacity can be a huge project management roadblock. One of the primary reasons a company looks to hire is because they realize they don’t have the internal skill sets needed to effectively execute one or more stages of a project. This could be attributed to resources being over-allocated and spread too thin, or it could be that the skill set doesn’t exist within the company. In either situation, companies have to determine whether it makes sense to hire a contract employee or permanent hire.
The contract employee may be able to start sooner and get to work faster than a permanent hire that requires a lengthier hiring, onboarding and training process. If you have lots of one-off projects where specific skills won’t be required after the project ends, a contractor is your best bet. Alternatively, if it is a skill set that is repeatedly sought after, hiring a permanent employee who can fill that void on an ongoing basis will save you time in the long run and likely establish best practices with all of their experience.
If you need to hire a resource yesterday or only during peak times, a contractor is the way to go. Because they come with the necessary skills and experience, they require little hand holding or onboarding. They can start bringing value on day one. A good staffing company can vet them before they send them your way to ensure the right person is placed in the role. If, for instance, your IT project needs someone who is adept in a certain technology, the staffing company will be able to go beyond a historical resume and determine whether or not that contractor has current experience using that technology in a similar project setting as yours. This can save you huge amounts of time.
On the other hand, if you are implementing a larger initiative, enhancing your IT department, or recognize a skill gap in your resource pool, a permanent hire is a better investment. While they may take longer to bring up to speed, once they get going, they typically become experts and can adapt to evolving needs and project scopes. With more skin in the game, they are also more likely to go above and beyond what a contractor is willing to do, such as offering insight and value into other areas of the business. With a long-term vision in mind, permanent hires want to invest their time and energy into the success of the company, not just a single project.
Contract employees generally cost less than permanent employees. The added ongoing costs of a permanent employee overshadow the higher per-hour cost of a contractor. With a contractor, you are only paying for the time you need them. If you hire someone to do your lawn, you hire them only during the summer months when needed. You don’t pay for them year round. You are also less invested in the contract employee and can change them out quickly if needed. On the flip side, they are less invested in your company and may have other clients, walk away for a better opportunity, or be generally less interested in the overall company success.
As stated before, permanent employees are an investment. They are also an asset. While they cost more to maintain, they can also bring more long-term value. If you have the budget allocated for additional headcount, it’s recommended to hire a professional staffing company to find just the right person to add to your team. You want someone who will fit the culture as well as the outlined role. Even though you are allocating budget to a staffing company to find the talent, you will save money in the long run by ensuring you are hiring the right person, without having to spend all of your time vetting candidates.
An Alternative to Both
Not to complicate your decision making, but it’s worth it to consider a hybrid approach to hiring. Many contractors are interested in being hired after their contract agreement is up. With a contract-to-hire option, both you and the contract employee have had the opportunity to feel things out over six or more months. You know from experience how they fit into the company culture, what skills they bring to the table and whether they can continue to bring value to the business.
The contract employee has likely bonded with team members, established a better understanding of the business and its core functions, and recognizes the opportunities the company can offer them for their continued professional growth. In essence, you have both been able to “try before you buy.” You both know what you’re getting and the risk is somewhat removed.
This approach can also save training costs. One thing to keep in mind is how to structure their salary. Contract employees are used to getting paid by the hour and that rate will likely need to be adjusted for the benefits they will receive as a permanent employee. At least with a contract-to-hire, you know exactly what they are currently being paid and can offer a fair compensation plan that fits into your budget.
By understanding the difference between contract and direct hire, you can make smarter decisions to maximize your returns on labor costs. In a nutshell, contract employees are cost effective for high-skill projects and workload peaks. Direct hires typically make more sense for long-term and core tasks. Contract-to-hire gives you the flexibility to hire stellar contractors into a permanent position.