Can a Back-Office Help with a Conversion Fee Agreement?

Absolutely. That was our one-word answer in February 2010 to a question recruiters asked us often: if a back-office partner employs my contractor, can it still help with my conversion fee when the client hires that person directly? Today that partner is usually called an Employer of Record (EOR), and the answer is still yes, as long as the agreement is set up the right way.

How it worked in 2010

If a recruiter used a provider to employ their contract placements, that provider could add the recruiter's conversion fee language, or Conversion Fee Agreement, into its own Client Services Agreement. The provider was not under any obligation to invoice for the conversion fee or enforce its payment.

When the client wanted to convert the contractor to a full-time employee, the recruiter would contact the provider and submit the conversion date the recruiter and client had agreed on. Once the conversion occurred, the provider handled the transfer of the worker from its own employment to the client's.

Most importantly for the recruiter, the provider should not take any portion of the temp-to-direct conversion fee the recruiter negotiated with the client company.

Why the conversion language matters

Any client can decide to hire your contractor, sometimes months into an assignment and sometimes with very little notice. If your agreement doesn't spell out a fee for that moment, you may walk away with nothing for the candidate you found. The conversion fee is what pays you for the placement once the hourly margin stops.

It's also good news when it happens. A client who wants to hire your contractor is telling you the placement worked, and that's often the start of the next order. Clear conversion terms let you enjoy that moment instead of negotiating a fee after the fact, when you have the least leverage.

Most conversion fee language covers a few basics:

• The fee amount or formula. Some recruiters use a flat fee, and others use a scale that shrinks as the contractor works more hours.
• How long the fee applies, including for a period after the assignment ends.
• What counts as a hire, such as the client hiring the contractor directly or through another firm.
• Payment terms and who invoices the client.

For help setting the number itself, see how to calculate a temp-to-perm conversion fee. Because these terms are contract language you may need to enforce, it's also worth having employment counsel review your template.

Questions to ask your EOR before the assignment starts

Because the EOR is the legal employer during the assignment, it sits in the middle of every conversion. Its agreement with your client, its payroll, and its offboarding process all touch the handoff. So it pays to know how your EOR handles conversions before you need one:

• Will your conversion fee language be included in, or referenced by, the EOR's agreement with your client?
• Who invoices and collects the conversion fee: you or the EOR?
• Does the EOR take any share of the conversion fee?
• How much notice does the EOR need before a conversion date?
• How are final pay and the handoff to the client's payroll handled?

Get those answers in writing before your contractor's first day. It's far easier than sorting them out after your client has already made an offer. Also ask how the worker's benefits coverage ends at conversion so your contractor isn't surprised by a gap while the client's benefits enrollment gets started.

When a conversion goes smoothly, your client gets a proven employee, your contractor gets a permanent role, and you get paid twice for one placement. Our guide to contractor-to-direct-hire conversion walks through your responsibilities when that day comes.