Temp-to-perm conversion fee: how it works, state caps, and clause wording

A temp-to-perm conversion fee is what a client pays a staffing agency when it hires, as its own employee, a temporary worker the agency placed with it. The fee compensates the agency for finding the worker and for the markup it stops earning once the worker leaves its payroll. A well-drafted conversion clause reduces the fee the longer the worker has been on assignment, and in some states the fee is capped by law for certain kinds of temporary work.

This page covers the common structures, the Illinois and New Jersey caps, worked examples, and a clause to adapt.

Where the fee comes from

The American Staffing Association defines temporary to hire as a staffing firm employee working for a client for a trial period while both consider a permanent relationship. The agency earns in two stages: a markup on every hour worked during the trial, then a fee if the client converts. The two are linked. The longer the worker bills, the more of the recruiting cost the agency has already recovered through markup, which is the logic behind a fee that declines over time.

Three ways to structure the fee

All three work if the clause is precise about the starting point, the unit of reduction and when the fee reaches zero. Whatever structure you use, check it against any state cap before you send it.

State limits: Illinois, New Jersey and Arizona

Some states protect temporary laborers' right to take permanent work with the client and limit what the agency can charge for it.

• Illinois. Under the Day and Temporary Labor Services Act, 820 ILCS 175/40, an agency may not restrict a day or temporary laborer from accepting a permanent position with the client, or restrict the client from offering one. It may charge the client a placement fee of no more than the total daily commission rate it would have received over 60 days, reduced by the daily commission rate for each day the laborer worked for the agency in the preceding 12 months. The cap does not apply to "skilled labor", which the section limits to placements where the agency runs an advanced application process, a screening process and a job interview. The Act covers day and temporary labor and does not include professional or clerical work.
• New Jersey. The Temporary Workers' Bill of Rights, at N.J.S.A. 34:8D-7, uses the same 60-day formula for temporary laborers in its designated classification placements, which include production, transportation and material moving, building and grounds cleaning and maintenance, food preparation and serving, and several construction and repair occupations (NJ Department of Labor). If the result is zero or negative, no fee may be charged. See the New Jersey staffing agency guide for the firm's other duties.
• Arizona. A.R.S. 23-553 bars a day labor service agency from restricting a day laborer's right to accept a permanent position with the client, or the client's right to offer one. The section does not set a fee cap.

Other states may have their own rules for day labor or temporary help firms, so check each state you place in. For professional, clerical and skilled placements outside these statutes, the conversion fee is a matter of contract.

Worked examples

Invented numbers, to show the arithmetic.

The last example shows why the "fee minus markup" clause must say whether it uses gross spread or margin after employer costs. How to calculate staffing markup explains the difference.

The conversion clause

CONVERSION OF TEMPORARY WORKERS

1. "Conversion" means the Client, or any company it controls or is
   under common control with, employing or engaging a Worker supplied
   by the Agency, directly or through any third party, during an
   assignment or within [180] days after the Worker's last day on
   assignment with the Client.

2. On Conversion the Client will pay the Agency a conversion fee of
   [__]% of the Worker's first-year annual base salary [or the
   annualized hourly rate x 2,080], reduced by [__] percentage
   points for each full [month] [week] the Worker has worked on
   assignment with the Client. No fee is due after [__] [months]
   [hours] of assignment.
   [Alternative: a fee of $[____], reduced by $[__] for each hour
   billed, with no fee due after [___] hours.]

3. Where applicable law limits the fee the Agency may charge, the fee
   is the lower of the amount in clause 2 and the legal maximum.

4. The Client will tell the Agency in writing before making an offer
   of employment to a Worker, and within [5] business days of any
   Conversion, with the start date and salary.

5. The fee is invoiced on the Worker's start date as the Client's
   employee and is payable within [__] days.

6. Nothing in this agreement restricts a Worker's right to accept
   employment with the Client or anyone else, or the Client's right to
   offer it; the Client's obligation is only to pay the fee under this
   clause.

Clause notes

• Clause 1, the tail period. Without it, a client can end the assignment on Friday and hire the worker on Monday. A tail after the last day closes that gap.
• Clause 1, "through any third party". Covers the client moving the worker to another agency's payroll or a payrolling provider.
• Clause 3, the legal cap. Keeps the clause valid where a statute limits the fee, without a separate version for every state. You still need to know what the cap is when you invoice.
• Clause 6, no restriction on the worker. Required in spirit in Illinois, New Jersey and Arizona for covered workers, and good practice everywhere: your claim is against the client, not the worker.

Telling the worker and the client

Put the conversion terms in the assignment paperwork too, so nobody is surprised. The temp assignment confirmation email is a good place to state that the role is temp-to-hire and the expected review point. With clients, raise conversion at the order stage: ask whether they intend to convert and when, and price the markup and the fee together. A client who plans to convert after 13 weeks may prefer a lower conversion fee and a slightly higher markup, or the reverse.

Checklist before you send the clause

• Structure chosen, with the starting fee, reduction unit and zero point stated.
• Tail period after the last assignment day.
• Covers related companies and hiring through third parties.
• State caps checked for each placement state and job type.
• Clear statement that the worker is free to accept the job.
• Client must notify you before an offer and after a conversion.