What's the purpose of "contract-to-hire" software jobs?

Question

I've received a recruiter email that states that they're interest in both "full-time or contract-to-hire". While the position doesn't interest me in this case, I'm wondering, on both sides, what the appeal of "contract-to-hire" is?

If I'm a contractor, I need to handle my own taxes, provide my own healthcare, and in general play the role of the "employer". That's fine for many people, and many people like doing that. To make up for that, contractors are typically paid a much higher hourly rate. Other people prefer being an employee and not having to think about any of that.

I'm wondering, then, why someone would want to become a contractor for three to six months, then become an employee? They'd have to set up all of their contractor-only stuff (possibly get an accountant, find health insurance...) all for it to become pointless six months later. If you're going to be a contractor, why not just continue being a contractor?

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From the employer's side, this question mentions that:

It gives the employer and yourself a trial period to see if they want to keep you, and if you want to stay. It tells you that there is a FTE position and it's yours to win. A regular contract position tells you that there is no FTE position at the end of the rainbow.

I don't follow this, though - almost all US employment in the tech industry is at-will, so anyone can be fired at any time, or quit at any time.

Answer 1

It would be extremely unusual for a candidate to really want to do the contract-to-hire route rather than joining as a full-time employee straight away. Normally, that sort of arrangement is done primarily to benefit the employer. Normally, the people that take those sorts of positions are looking for full time positions and accept something less than they want for much the same reason that people that can't find a full-time position often take a part-time position to get their foot in the door.

From the employer standpoint, while it's true that they can dismiss their at-will employees at any time if they're not working out, it is psychologically much less taxing on managers and other employees to not renew a contract than to dismiss a permanent employee. When a new employee hire isn't working out, managers are much more likely to ignore the situation hoping that performance will improve or to go to heroic lengths to try to fix the issue rather than having to call someone into a room and tell them that they're fired. On the other hand, if a manager has to make a decision at, say, 6 months whether to hire someone one or decline to renew their contract, it is much more likely that they would be willing to part ways with someone that wasn't measuring up.

Declining to renew a contract also has very different impacts on the morale of other employees. When a permanent employee is let go, there are often immediate questions of whether the company is laying off staff or running into financial issues. Contractors, on the other hand, can generally come and go without generating the same sense of worry because that's the nature of contractors.

Other factors like savings on unemployment insurance, not needing to pay for health insurance or make retirement contributions for a few month, etc. factor in as well. But these are generally secondary concerns

Answer 2

Just because it's possible to quit or be fired at any time doesn't mean it's profitable or a good idea to do so.

First off, being fired without cause opens the door to lawsuits. Even if the reason was X, if the person can make a case for Y, even a small one, it could cost the company a lot of money.

Second, the morale aspect of firing someone compared to letting go a contractor is night and day. All management has to say is "his contract wasn't renewed" and as far as everyone else knows, his contract just wasn't renewed. Could be him, could be management, both, could be a better contract came up, no one knows. If he's hired on then fired, it's going to cause quite a stir. Who's next? What did he do?

And lastly, it's just simpler to let someone go if they aren't hired on. No HR paperwork, no tax paperwork, no final check, no cashing out vacation days, no anything. It's much simpler.

Answer 3

For me, it was a foot in the door. I was coming off years of unemployment and underemployment due to a severe personal illness. (My doctors said I would never be able to work again.) An employer will take a chance on a contract to hire as opposed to just hiring someone outright who's qualifications or resume raise one or two red flags. Going in on "contract to hire" is essentially saying "I can do this job, just give me a chance."

Again, it's very useful for breaking into a company you want to get into, or restarting your career, or shifting the focus of your career. Say for example, the position requires C# and SQL, with the SQL being the main focus of the job. You're strong in C#, but weak in SQL. Being willing to go in contract to hire might be the difference of getting the job or not.

Answer 4

From a company's perspective, another reason they may offer a contract-to-hire position is budget. Typically employee salaries are paid from a different budget pool than contractors' salaries. For example, I have worked in various organizations where contractors were actually paid from the capital expenditure budget.

This means that when a business unit has no room left in their salary cap, they can still pay a contractor with the view to hiring them as a permanent employee when the new salary budget opens up; often the next financial year.

Answer 5

Contract-to-hire is like an engagement-for-marriage. The company gets to try before they buy, without the overhead of all the paperwork for payroll, taxes, workers comp insurance, health insurance, and so forth. But ALSO, the savvy worker gets to see if the company's the right fit, because his/her needs are important as well.

It is common for contract-to-hire engagements to roll over to full time employment within 60 or 90 days. Sometimes it will work out for both parties, and sometimes not!

Answer 6

To add to what people have already said about this, many companies have specific policies regarding contracted workers that on the one hand require them to only employ you for a specific length of time (for instance, I know that Intel has a limit of 18 months for contractors; Microsoft has similar limits) and on the other allow them to give you bonuses / pay you like a regular salaried employee whereas contractors are often paid by the hour and cannot enjoy the benefits that a regular FTE receives.

From the company's standpoint it's generally easier to end a contract with a contracting agency with a specific employee than it is to let an internal employee go. The latter can and does still happen, to be sure, but when the implied arrangement itself is temporary, there generally aren't any laws being broken by making it a bit more temporary than what was originally implied.

On the other other hand, it's my experience that if you as a contract-to-hire employee makes $X per hour, your contracting agency is making something like $X+10% per hour, and if there are a few contracting agencies negotiating in between you and the company, each one in between takes a cut. Many companies, once they've seen with their own eyes that a given contractor can actually cut the mustard, would prefer to do away with paying all that overhead. In most contract-to-hire situations they have to pay the contracting agency a finder's fee to hire the employee but at that this fee is generally a lot less than what they'd pay over the course of a few months.

This gets at the larger point, which is why so many companies who want software developers deal with contractors in the first place. I think the #1 reason isn't the temporary nature of some development gigs - many companies need a stable of developers that they can move around in jobs - it's the fact that it's really hard to suss out who can do the job and who can't in an interview situation. I've worked with companies who needed sometimes a month, sometimes six months to figure out if a particular employee was contributing effectually. You can fake your way through interviews, you can provide someone else's code samples (and even your own code samples don't always tell vital things about it, such as how long it took you to write it), and in many cases you're being hired into a position specifically because you're supposed to have knowledge that other people at the company lack, so how are they supposed to check that? One answer is to trust that a contracting company whose business it is to hire these experts gives you someone who knows what they are doing.

Answer 7

I asked a recruiter about this once and she said that they usually pay the recruiter less than they would for finding a full-time hire.