Direct hire vs contract-to-hire vs temp: who employs, who pays, and when each fits
On this page
- What is the difference between direct hire, contract-to-hire and temp?
- Who is the employer during a temp or contract-to-hire assignment?
- How does the money work in each model?
- When does each model fit?
- What should candidates ask before accepting each?
- What goes wrong most often?
- Questions people ask
In a direct hire, a staffing agency finds the candidate and the client employs them from the first day, usually for a one-time placement fee. In a temporary assignment, the agency employs and pays the worker and bills the client an hourly rate that includes its markup, for as long as the work lasts. Contract-to-hire starts as a temporary assignment with an intended trial period and ends with the client hiring the worker onto its own payroll, often paying a conversion fee. The American Staffing Association describes temp-to-hire as a staffing firm employee working for a client "for a trial period during which both the employee and the client consider establishing a permanent employment relationship" (as of October 2026).
This page compares the three models for clients and candidates: who employs and pays, how the agency earns, conversion terms, benefits, speed and risk, and when each fits. The paperwork at conversion is in the contract-to-hire conversion checklist, fee structures and state caps are in temp-to-perm conversion fees, and the fields to agree for each model are in the job order form template.
What is the difference between direct hire, contract-to-hire and temp?
| Direct hire | Contract-to-hire | Temp (or contract) | |
|---|---|---|---|
| Who employs the worker | The client, from day one | The agency during the contract; the client after conversion | The agency, throughout |
| Who runs payroll and withholding | Client | Agency, then client | Agency |
| How the agency is paid | One-time placement fee, usually a share of first-year salary, due when the hire starts | Markup on every hour billed, then a conversion fee if the client hires, per the agreement | Markup on every hour billed |
| Benefits | Client's plans, under their eligibility rules | Agency's plans during the contract; client's after conversion | Agency's plans, if eligible |
| Trial before commitment | None beyond the interview process and any guarantee period | Yes, for both sides | Not intended to convert, though some do |
| Ending it | An employment decision by the client | Client ends the assignment through the agency, or converts | Assignment ends through the agency |
| If it goes wrong | Replacement or refund under the fee agreement's guarantee | Assignment ends; no conversion fee | Agency replaces the worker |
| Candidate's view | Permanent job, client's benefits | A paid audition with uncertain outcome | Flexible or short-term work |
| Typical uses | Permanent roles the client is sure it needs | Permanent roles where fit or budget is uncertain | Peaks, projects, leave cover, seasonal work |
The American Staffing Association's staffing definitions use "search and placement" for direct hire, a firm finding candidates "for the purpose of establishing a permanent employment relationship," and "temporary help" for assignments where the firm "hires its own employees and assigns them" to a client. Longer assignments, often called contract or staff augmentation, work the same way as temp for employment purposes; see what is staff augmentation.
Who is the employer during a temp or contract-to-hire assignment?
On paper, the agency: it hires the worker, runs payroll and usually carries workers' compensation. In practice, federal agencies often see two employers, and that is the "co-employment" risk clients worry about.
- Safety. OSHA's temporary workers page says the staffing agency and its client, the host employer, "are joint employers of temporary workers" and both are responsible for a safe workplace, and it recommends setting out each side's safety duties in the contract. See OSHA rules for temporary workers.
- Family and medical leave. The FMLA regulations say joint employment "will ordinarily be found to exist when a temporary placement agency supplies employees to a second employer." The agency is most commonly the primary employer, responsible for notices, leave and keeping health benefits; the client must count jointly employed workers toward coverage and must take a returning worker back in place of a replacement in the circumstances the rule describes (29 CFR 825.106).
- Labor law. The National Labor Relations Board applies its 2020 rule: a business is a joint employer only if it possesses and exercises "substantial direct and immediate control" over essential terms of employment (29 CFR 103.40). The Board formally withdrew its broader 2023 standard, which a court had vacated in March 2024, on February 27, 2026 (91 FR 9707).
- Wages and overtime. The Department of Labor proposed a new joint employer rule under the FLSA, FMLA and MSPA on April 23, 2026 (91 FR 21878); no final rule had been published as of October 27, 2026.
The practical point for clients is that the label in the contract does not decide joint employment; what your managers do day to day does. Joint employer liability for staffing agencies covers the factors and contract clauses. This is not legal advice.
How does the money work in each model?
An invented example, not a benchmark: a role that would pay $30 an hour, or $62,400 a year at 2,080 hours.
| Example | Direct hire | Contract-to-hire, 13 weeks then convert | Temp, 13 weeks |
|---|---|---|---|
| Agency charge | Fee of 20% of first-year salary: $12,480 | Bill rate at a 50% markup: $45 an hour × 520 hours = $23,400, plus a conversion fee if the agreement has one | $45 an hour × 520 hours = $23,400 |
| What the agency pays from it | Its own recruiting costs | Worker's wages, employer payroll taxes, workers' compensation and other costs during the contract | Same as contract-to-hire |
| Client's own payroll costs | From day one | Only after conversion | None |
The bill rate is not comparable to a salary: it includes the worker's pay and the agency's employer costs and margin. How to calculate staffing markup shows the arithmetic. Conversion fees are commonly reduced the longer the worker has billed, and some states cap them for certain temporary labor; the Illinois and New Jersey rules are covered in temp-to-perm conversion fees. Direct hire fee terms, including guarantees, are in the placement fee agreement template.
When does each model fit?
| Situation | Usually fits | Why |
|---|---|---|
| Permanent role, clear requirements, approved headcount | Direct hire | No reason to pay hourly markup for a trial you do not need |
| Permanent role but uncertain fit, skills hard to assess in interviews | Contract-to-hire | Real work shows what interviews cannot |
| Budget approved for a contractor now, headcount later | Contract-to-hire | Starts the work while the permanent role is approved |
| Seasonal peak, project or leave cover | Temp | The need ends; no permanent commitment |
| Candidates who are currently employed and will not leave for a trial | Direct hire | Strong employed candidates often decline contract-to-hire |
| High-volume entry roles with high early turnover | Temp or contract-to-hire | The agency replaces workers who leave; conversion goes to those who stay |
Interview just as carefully for contract-to-hire as for direct hire. A trial period does not make a weak screen cheaper, because the hours are billed whether the person works out or not; the interview guide for contract roles covers what to test.
What should candidates ask before accepting each?
- Direct hire: who is the employer, what are the salary, benefits and start date, and is the offer from the client in writing.
- Contract-to-hire: how long the contract is expected to run, what the conversion decision depends on and who makes it, the expected permanent salary and benefits, and what happens if the client wants to hire you before the end.
- Temp: pay rate, expected hours and length, overtime, who to call about problems on site, and when benefits from the agency start. Several states set extra rights for temporary workers; see temporary worker bill of rights laws.
In every model, the client or agency pays the agency's fee, not the candidate. The Federal Trade Commission says honest placement firms do not typically charge job candidates and tells job seekers to walk away from one that asks for a fee in advance.
What goes wrong most often?
- No conversion terms in writing. A temp the client later hires directly, with no agreed fee or schedule, is the classic dispute; settle it on the job order.
- Calling it contract-to-hire with no permanent role behind it. Candidates leave when the conversion never comes, and the client keeps paying markup.
- Treating the contractor as the client's employee day to day. Direct discipline, scheduling and pay decisions by client managers are what push toward joint employment findings.
- Skipping onboarding at conversion. The employer changes, so a new Form I-9, W-4 and offer letter are needed; the conversion checklist has the list.
- Comparing a bill rate to a salary. It makes temp look expensive and direct hire look free; compare total cost over the period you actually expect.
Questions people ask
What is the difference between direct hire and contract-to-hire?
In a direct hire, the staffing agency finds the candidate and the client employs them from day one, paying the agency a one-time placement fee. In contract-to-hire, the agency employs and pays the worker during a trial period while the client pays the agency an hourly bill rate; if both sides want to continue, the client converts the worker onto its own payroll, often paying a conversion fee set in the staffing agreement.
Who is the employer of a temp or contract-to-hire worker?
The staffing agency usually runs payroll, withholds taxes and is the employer of record, but federal agencies often treat the agency and the client as joint employers. OSHA says the staffing agency and the host employer are joint employers of temporary workers for safety purposes, and FMLA regulations say joint employment will ordinarily be found when a temporary placement agency supplies employees to another employer.
Is contract-to-hire cheaper than direct hire?
It depends on how long the contract runs and on the agreement's terms. During the contract the client pays a bill rate that includes the agency's markup on every hour, and conversion may add a fee; a direct hire is usually one placement fee plus the client's own payroll costs from day one. Compare the total for your expected contract length using your actual rates, not someone else's percentages.
Should a candidate accept a contract-to-hire role?
It can be a good way into a company, but ask what the conversion depends on, when the decision is made, what the permanent salary and benefits would be, and whether there is any fee or restriction if you are hired directly. Treat the contract pay and benefits as what you are certain to get, and the conversion as a possibility.