Contract Work vs. Direct Hire-What’s Best for You?

What’s the Right Work Fit for You?

It’s not uncommon for large companies to employ a mix of contingent workers who blend in alongside a labor force of direct employees. You might be wondering what precisely a contingent workforce is. It’s a worthy topic to unpack because the contingent workforce includes employment through several work arrangements. The classification is “the devil in the details.”

People use the word contractor for either an independent contractor or someone working on an assignment through an agency or firm. They aren’t quite the same thing. Let’s look at the differences compared to an employer’s internal employees.

Independent Contractors

Independent contractors are self-employed—think freelancers and consultants. They receive a 1099 form at the end of the year and are responsible for paying self-employment and income taxes. They may work either full-time or part-time, on-site or offsite. The IRS considers them non-employees. Companies must abide by state, local, and federal laws to avoid the risk of “co-employment” or having a contractor slide into the category of a direct employee. Independent contractors may or may not be set up as a business. Examples of independent contractors run the gamut and can include Uber Eats drivers, freelance marketing consultants, facilitators and trainers, hairstylists, and skilled trades like plumbers, painters, and carpenters.

Contractors Hired by Third Parties

Another type of contractor includes people assigned temporarily to projects or departments within a company but managed and paid by another entity, typically a staffing agency, consulting firm, or a third party responsible for recruiting talent. In this scenario, the worker is an employee of the third party but may work onsite, in the field, or remotely as part of a team or project for another employer.

Direct Hire

Direct Hires are traditional long-term roles where the employer, not an agency, hires the employee.  An agency may handle recruitment (direct placement), but the employee joins the employer’s payroll and is covered under their benefits. You may know this as a permanent full-time employee, but those descriptors are waning in favor of the terms direct hire, direct employee, and direct placement.

“The term permanent employee is fading because nothing is technically a lifetime guarantee of employment,” explained Josh Schiff, Director of Professional Staffing at Equiliem, “A direct-hire relationship generally provides a more secure employment relationship than temporary work, but we’re seeing plenty of long-term, open-ended, full-time employment arrangements for contracted staffing employees.”

Pros and Cons

Differences between work arrangements have become less tethered to whether you work independently, as a direct employee, or through an agency or third party. Let’s dive into some of the nuances.

Benefits

Schiff agrees that employers use benefits to lure talent when recruiting, which may be a plus for direct-hire work. Most people list their top advantages: paid holidays and time off, health benefits, flexible spending accounts, 401Ks, commuter benefits, stock options, and an employer managing taxes and deductions.  While attractive, Schiff points out that employer benefits aren’t always a clear-cut driver in a job seeker’s decision. Some staffing companies offer health insurance, life insurance, 401K, commuter benefits, employee assistance programs (EAPs), and paid days off. Some staffing companies even accrue PTO for their contract workers based on hours worked or paid time off for specific opportunities. Also, in some cities and localities, sick time is mandated.

Schiff added, “Generally speaking, workers on temporary assignments don’t receive PTO. However, we often see higher hourly rates indirectly compensating contractors for the unpaid time that direct hires are paid for.”

Meanwhile, independent contractors don’t typically have the option of company-sponsored or offered benefits.

Flexibility

The kind of job flexibility someone is seeking is an important variable. However, being flexible doesn’t mean the same thing to everyone. For some, it’s about control over their workday, while for others, it’s the freedom to break away and try new things or take on a side hustle.

Post-pandemic, temporary workers are finding some work-from-home or hybrid arrangements like their direct hire counterparts. Schiff said it’s essential to remember that contract workers hired by an agency must still meet the employer’s requirements. Typically that means attendance, reliability, responsiveness, and performance. He doesn’t suggest that there is great latitude to call off for a day without going through an employer’s normal processes for requesting time off.

“The flexibility that contract work delivers is the break between gigs if desired,” Schiff explained. “At Equiliem, we work to place someone when we know a contract is ending. However, some folks prefer to have a break between assignments.”

Schiff also said that some people choose temporary work that fits around an existing job, perhaps a second shift or part-time hours that increase or supplement their earnings. He noted, “For someone who is retired, being a contractor is a great way to stay active and make extra money.”

Independent contractors retain the most flexibility over their work. The general rule is that the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. While that’s a plus for self-directed people, independent contractors often trade off the reliability of a weekly or regular paycheck in exchange for that autonomy.

Personal Growth and Development

Schiff says that most people will find the best opportunities for career advancement by working as direct employees. “For someone looking to climb the corporate ladder and build relationships within a company, settling in with the organization can be satisfying,” said Schiff. He adds that there can be opportunities that spring from contract work.

“Contract work is that foot-in-the-door that can help someone get into their dream job or company. We love it when an employer wants to hire our contractors full time and give them greater responsibilities and exposure to a company’s internal workings,” Schiff said. “We have people seeking opportunities to explore certain work or be part of specific firms. A temporary assignment is an excellent way to test the waters, make connections and show your value.”

Contract work is also a way for people to navigate a career change. “Sometimes people seek to develop skills they aren’t using in their current role, or they want to transfer skills to a new industry. Or maybe, they want a change of pace,” Schiff suggested. “Contract work is a way to explore without the stigma of job-hopping or having resume gaps.”

Pay and Pay Stability

Income for contract work is a set rate with a pre-determined payment schedule. Contract workers can easily predict earnings, the only risk being early termination. Sometimes a project can be suddenly canceled, or an individual’s performance does not meet expectations. An employer can more easily end a relationship with a contract worker than with a direct hire.  A short-term or near-the-end contract can be a reason that lenders may prefer direct-hire arrangements. Staffing companies can and often do provide proof of employment for their contracted staffing employees when requested by a lender. If you’re seeking a loan or mortgage, you’ll want to consider how your work arrangement may impact the lending process.

Contract work can be more lucrative than salary positions and can be attractive to those who are money motivated. Schiff said that rates reflect fluctuating demand in the market. People with in-demand skills can take advantage of market timing by taking contract assignments. A recent example is travel nurses who received “crisis pay” during the pandemic. Technical roles, particularly time-sensitive projects, are another example of attractive contract earnings. Sometimes bonuses can even be attached to fulfilling goals on a contract role. Schiff said, “When we work with a client on a mass hiring event, we collaborate on incentives. That can include attendance bonuses, or performance bonuses, like meeting deadlines.”

Weighing In on Your Options

Only you can determine what advantages are most important to you and what suits your lifestyle and career goals. Recruiters who have built relationships with employers and are transparent about the employer’s needs can help.