Contract-to-hire conversion checklist: moving a contractor onto your payroll
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This is not legal advice. The Form I-9, benefits and classification points below were checked against USCIS, Department of Labor and IRS pages as of September 2026. Confirm your situation with counsel, and check your staffing agreement and benefit plan documents, which control the details.
A contract-to-hire conversion moves a worker from a contractor arrangement, usually as an employee of a staffing agency, onto the client's own payroll. The work may not change at all, but the employer does, and that restarts most of the employment paperwork: a new Form I-9, a new Form W-4, a new-hire report, a new offer letter and new benefit eligibility. It also triggers the agency agreement's conversion terms. This checklist covers both sides, client and agency, in the order the steps happen.
The checklist at a glance
| Stage | Task | Owner |
|---|---|---|
| Before any conversation | Read the conversion clause: fee, how it is calculated, notice required | Client (hiring manager and procurement) |
| Before any conversation | Confirm budget and an approved requisition for the permanent role | Hiring manager |
| Decision | Review the contractor's work against the role's scorecard | Hiring manager |
| Decision | Tell the agency you intend to convert, per the agreement | Client |
| Offer | Set salary, exempt status, title, benefits start and time-off accrual | Client HR |
| Offer | Written offer letter with a start date that follows the agency end date | Client HR |
| Transition | Agency ends the assignment and runs final pay | Agency |
| Transition | Form I-9, Form W-4, state forms, new-hire report | Client HR |
| Transition | Accounts, badge and equipment moved from contractor to employee status | Client IT |
| After | Pay the conversion fee on the agreed terms | Client finance |
| After | 90-day review as an employee | Hiring manager |
Step 1: the agreement before the conversation
Most staffing agreements say what happens if the client hires a placed worker directly. Common forms are a fee that decreases with hours worked, a flat fee, or no fee after a minimum period on assignment. Many also require notice to the agency before an offer is discussed. Read the clause first; a hiring manager who mentions a permanent offer before checking it can commit the company to a fee nobody budgeted. The placement fee agreement template shows how agencies usually write these terms.
Write down, before deciding:
- The fee if you convert this month, and next month if it steps down.
- Any notice period or process the agreement requires.
- Any restriction on hiring the worker directly within a period after the assignment ends.
Step 2: the decision, on evidence
The advantage of contract-to-hire is months of real work to judge. Use it. Write the permanent role's scorecard, which may be broader than the contract's scope, and review the contractor against it with examples: projects delivered, quality, how they handled problems, how colleagues describe working with them. Where the permanent role adds responsibilities the contract did not cover (managing people, owning a budget, customer-facing work), a single focused conversation about those areas fills the gap without restarting a full interview loop.
Keep the decision consistent with how you would treat other candidates. If the permanent role is posted internally or externally under your policies, the contractor should go through the same steps, and any pay transparency rules for the posting still apply.
Step 3: the offer
| Item | What to decide | Why it matters |
|---|---|---|
| Pay | Salary or hourly rate as an employee | The contractor's hourly pay rate is not comparable to a salary; the agency's bill rate is higher still. Compare total compensation, including benefits. |
| Exempt or non-exempt | Whether the role meets the FLSA salary and duties tests | Changes overtime eligibility; see DOL Fact Sheet #17A |
| Benefits start | The date coverage actually begins | Plans may not credit agency time; a group health plan waiting period cannot exceed 90 days once the employee is otherwise eligible (DOL, 90-day waiting period) |
| Time off | Accrual start, and whether any service is credited | Converted workers often expect credit for months already worked |
| Title and level | Where they sit in your structure | Sets future pay reviews and promotion path |
| Equity or bonus | Eligibility and start date | Often tied to the employee start date, not the contract start |
Put all of it in a written offer; the offer letter template works as is. Tell the worker plainly what changes: who pays them, when the first paycheck comes, and whether there is any gap in health coverage between the agency's plan and yours.
Step 4: the transition paperwork
Form I-9
While the worker was on assignment, the client did not complete a Form I-9 for them; the USCIS handbook lists people "employed by a contractor providing contract services (such as employee leasing or temporary agencies)" among those an employer does not complete the form for (USCIS M-274, section 2.0). On conversion, the client becomes the employer, and USCIS requires an I-9 for each person an employer hires: the employee completes Section 1 by the first day of employment and the employer completes Section 2 within three business days (USCIS, Form I-9). Do not treat the agency's I-9 as yours. If you use E-Verify, create a case on the same timeline. See I-9 timing in hiring for counting the days.
Tax and state forms
- A new Form W-4, since you are a new employer for withholding purposes, and any state withholding form.
- A new-hire report to the state within 20 days, or sooner if the state requires (Office of Child Support Services).
- Any state wage notice required at hire.
Dates
Agree one clean handover: the agency assignment ends on one day and employment with the client starts the next working day. Overlapping dates create double pay and confusing records; a gap can interrupt pay and coverage. The agency runs final pay for its last period on its state's schedule.
If the worker was a 1099 contractor
Converting an independent contractor you paid directly is different. There was no I-9 and no W-4, so both are collected for the first time. The harder question is the earlier period: the IRS decides status from behavioral control, financial control and the relationship of the parties, not from the contract's label (IRS Topic no. 762). If the person's work and your control over it did not change at conversion, that suggests the contractor period may have been employment. Get advice before the offer; worker misclassification explains the tests. Also issue a Form 1099-NEC for the contractor payments if they reached the year's threshold ($2,000 for payments made in 2026, per the IRS instructions).
Copy-ready conversion worksheet
CONTRACT-TO-HIRE CONVERSION — [worker], [role]
Agency: [ ] Assignment start: [ ] Hours worked to date: [ ]
Hiring manager: [ ] HR: [ ] Requisition ID: [ ]
AGREEMENT
Conversion fee now: [$ ] If we wait to [date]: [$ ]
Notice to agency required: [yes/no, how] Sent: [date]
DECISION
Scorecard reviewed with examples: [date]
Gaps covered by conversation on: [topics, date]
Decision: [convert / not now / no] Approved by: [ ]
OFFER
Title / level: [ ] Pay: [ ] Exempt: [yes/no]
Benefits coverage starts: [date] PTO accrual starts: [date]
Service credit for contract time: [none / for X]
Offer sent: [ ] Accepted: [ ]
TRANSITION
Agency last day: [ ] Employee first day: [ ]
Form I-9 Section 1: [date] Section 2 (within 3 business days): [date]
E-Verify case: [date / n.a.] W-4 and state forms: [date]
New-hire report filed: [date]
Accounts moved to employee status: [date] Equipment: [kept / swapped]
AFTER
Conversion fee invoiced / paid: [ ]
90-day review scheduled: [date]Common mistakes
| Mistake | What it causes | Fix |
|---|---|---|
| Talking offer before reading the agreement | An unbudgeted fee, or a dispute with the agency | Procurement reads the clause first |
| Relying on the agency's Form I-9 | No valid I-9 for your own employee | Complete a new one on conversion |
| Comparing salary with the contract hourly rate | Offers that feel like a pay cut, or overpay | Compare total compensation, benefits included |
| Promising benefits "from day one" without checking the plan | A broken promise in week one | Confirm the start date in the plan document |
| Overlapping assignment and employment dates | Double pay and messy records | One clean handover date |
| No review after conversion | Scope growth nobody measured | A 90-day review against the permanent role |
Questions people ask
Does the client need a new Form I-9 when it converts an agency contractor?
Yes, in the ordinary case. While the worker was employed by the staffing agency, the client did not complete an I-9; the USCIS handbook excludes people employed by a contractor such as a temporary agency. When the client hires the worker directly, it is hiring a new employee, and USCIS requires a Form I-9 for each person an employer hires.
Is there a fee to convert a contractor from a staffing agency?
Usually, if the agency agreement says so. Many agreements set a conversion fee that falls as the contractor works more hours, or waive it after a set period. Read the clause before discussing an offer with the worker, because hiring the worker directly without following it is a common source of disputes.
Can a converted employee skip the benefits waiting period?
It depends on your plan's terms, which may or may not credit time worked through an agency. Under the Affordable Care Act, a group health plan cannot impose a waiting period of more than 90 days once an employee is otherwise eligible. Check the plan document and tell the worker their actual coverage start date before they accept.
Should a contract-to-hire worker interview again before conversion?
Not a full loop. You already have months of evidence about their work. A structured review of that work against the role's scorecard, plus one conversation about the permanent role's scope, gives a better decision than repeating interviews designed for strangers.
What changes if the worker was a 1099 contractor rather than an agency employee?
You complete Form I-9 and Form W-4 for the first time, and you should look at whether the earlier contractor period was classified correctly. If the work and control did not change at conversion, ask counsel whether the prior period creates exposure before you finalize the offer.