Contract Conversion: How to Calculate the Temp-to-Perm Conversion Fee

Everybody loves trends. That’s because everybody likes to know what’s happening. (Or they like to think that they know, at the very least.) Recruiters are no exception. And there is one trend of which they should absolutely be aware:

More companies are making the hiring of contractors part of their permanent workforce strategy.

Part of that trend includes a smaller, albeit related trend: more companies are hiring candidates on a temp-to-perm basis. That means the company first hires the candidate on a temp basis and then converts them to a direct hire. This type of contract conversion is becoming more commonplace, and recruiters are benefiting financially from it.

They’re benefitting from it because they’re positioning themselves to make a contract conversion fee. That’s right. Not only do they earn income for every hour that their contractor works, but they also earn a temp-to-perm conversion fee if that contractor is hired on a direct basis.

That’s like getting paid twice for the same placement!

If there’s one thing that recruiters love more than trends, it’s getting paid twice for the same placement. And they can with contract-to-hire fees! But how do they work? And what should recruiters do to make sure that they benefit from this trend?

Why does contract conversion happen?

As more companies are utilizing contractors as part of their long-term business strategies, the chances for contract-to-direct conversions increases. Many companies see contract staffing as a “working interview” of sorts where they initially bring the worker in as a contractor with the intention of eventually converting them to a direct hire (contract-to-direct).

But ANY contract placement has the possibility of converting to a direct hire position, even if it was not originally considered to be a contract-to-direct arrangement. Sometimes, companies like their contractors so much that they decide to make them direct hire employees.

Make sure your temp-to-perm agreement is in writing

That’s why it is always a good idea to have standard language in the contracts that will protect the recruiter’s temp-to-perm fees. If you are utilizing a recruitment back office solution, make sure every contract placement they generate has an conversion free clause in the Client Services Agreement.

There should also be a “Non-Competition/Non-Solicitation” clause in the Employment Agreement. Both of these clauses protect the recruiter and the recruiter’s temp-to-hire conversion fee by not allowing the candidate to go to work as a direct hire employee without approval.

Two Options for Contract Conversion Fees

If a recruiter knowingly places a candidate with the intent of doing a contract-to-direct hire (temp-to-perm) placement, it is highly recommended that specific terms be included in the Client Services Agreement. Two common scenarios exist for a contract conversion schedule:

#1 — Prorated temp-to-perm agreement

The temp-to-perm conversion fee schedule is based on a prorated percentage of the standard placement fee. The proration can be done in 6th’s or 12th’s. For example, after one month of work on the contract, the client owes the recruiter 11/12ths of the 25% fee; after two months of work on the contract, the client owes the recruiter 10/12th’s of the 25% conversion fee, and so on.

#2 — Credit amount direct hire placement fee

The recruiter credits the client with a percentage or flat dollar amount based on how many hours the contractor has worked during the life of the contract. For example, the client owes the recruiter a fee of 25% of the contractor’s first-year compensation, less a credit of $5.00 per hour worked under the contract.

A Separate Letter Agreement is recommended in situations where the client company’s agreement is being utilized and it does not allow for conversion fee language. The separate letter agreement is initiated by the recruiter and spells out the details of the conversion fee and identifies the relationship of all parties.

When a contract placement converts from a traditional contract placement to a direct hire, it’s a good thing because the recruiter earns more than they would in either scenario! The recruiter earns money during the life of the contract, plus they earn a conversion fee. In all of the examples above, the conversion fee is paid directly to the recruiter. Consequently, it’s recommended that some sort of conversion fee language is included in the negotiation process to ensure the maximum recruiter fee.

Contract staffing: the best of both worlds

If you’re a direct hire recruiter and you don’t make contract placements, then NOW is the time to add contract staffing services to your business model. There are two major reasons why this is the case.

Reason #1 — The possibility of a recession

History shows that a recession strikes in this country every seven to 10 years. The problem is that it’s been nine years since the Great Recession. So it’s possible that a recession is right around the corner. Specifically, it might happen this year or next year.

During a recession, companies stop hiring on a direct basis. However, they do hire on a contract basis. So if you’re already making contract placements, then you’ll be able to switch gears relatively easily. You’ll still be able to make placements and generate revenue.

Reason #2 — A better plan for retirement

If you retire with only a direct hire business, you won’t be able to sell it for very much, if anything at all. We know, because direct hire recruiters lament to us all the time about this reality. When you run a direct hire firm, the most valuable part of the business is YOU. Once you’re gone, the value is gone.

On the other hand, when you have contractors, they become the value when you sell your firm. So the more contractors you have working, the more valuable your firm becomes and the more money you’ll be able to get for it. If you want to sell your firm, people will pay more for a contracting business than they will for a client list.

So adding contract staffing solutions to your business model gives you the best of both worlds. You can make both direct hire and contract placements, you can meet all of your clients’ hiring needs, and you can make more money both in the short term and for the long haul.

Contract-to-perm conversion fees are part of the equation. Once again, who doesn’t like being paid twice for the same placement? Now THAT is definitely the best of both worlds.

(NOTE: FoxHire does not take any part of the conversion fee that is owed to the recruiter.)