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Thinking about hiring a contractor?

Definitions:

Hourly Worker = Contractor = Temp = Consultant, I will refer to them as hourly workers for this article.

EOP = Employer of Record

W2 costs = ~15-25% cost added to candidates pay rate depending on the city and worker classification. This is to cover FICA, FUTA, Medicare, Workers Comp & other insurances.

Conversion scale = Lump sum paid to an agency when converting a contractor to full time

SOW = Statement of Work

 



THINKING ABOUT HIRING A CONTRACTOR?


So you and the team are considering hiring a contractor for your pharma/biotech company and you’re thinking about using a recruitment agency to find them? Let’s discuss some of the pros and cons of hourly worker recruitment to make sure you pick an optimal partnership that is fruitful for both you and the agency.


I hope this information can help you make the best decision for your business, the worker, and the agency you choose.

 

PROS

No lump sum payment

Unlike retained or contingent searches, paying workers on an hourly basis through an agency is much like renting. You only pay for the hours worked, instead of a large payment to an agency for someone who might not work out.

No onboarding, pay-roll, insuring or hassle

Agencies will handle the onboarding and paying of a candidate while all that is required of the hiring manager is a sign off of the timesheets for compensation. The agency will pay the worker before the payment is received from you, the client, so you don’t have to have to worry about paying workers either. Just be sure to pay your invoices to your agencies or they are left with the bill! :)

Quick to on-board and begin working

Because the agency is normally the employer of record and often has workers already on payroll, your company can simply draft an SOW for a specific worker and the agency will coordinate with the worker to get them started working.

Contract recruiters are 'faster'

Amongst recruitment agencies there’s a long standing culture that contract recruiters are considered faster workers than perm recruiters. That means they will be more likely to have a CV on in your inbox by the end of the day. The average turn around from initial conversation to offer is ~2.5 weeks for contract hiring and over 6 weeks for full time.

Specialists

Contractors and consultants tend to be niche and really good at delivering on a task. As such, this type of hiring is perfect for when you have a project or something that your company can’t do in-house.

"Try before you buy" AKA Contract to Hire

If you want to quickly get someone started for a full time opening and see if they would be a good culture fit without 5 interview processes over 6 weeks, contract to hire is a great solution for that.

Try to stick to a sliding conversion scale so that when you want to hire someone full time there isn’t an unreasonable conversion fee.

Hint: Conversions should match whatever your permanent recruitment fees are (20-30% normally) and be reduced over the length of time the contractor is working.

Flexible workforce

Hourly workers are only paid when they are actually working. So in times like COVID-19 when hours may be reduced, your company can remain flexible without having to make pay cuts.

Sometimes contractors budgets fall into a different budget than full time

This allows for some companies to still get the help they need when their headcount budget is limited but they are short of hands to complete a task.

 

CONS

Overtime can get expensive

In the US overtime rates are 1.5X the candidates pay rate. No matter what, the agency has to pay the candidate 1.5X their pay rate. W2 costs increase accordingly. Be careful because you should only increase your bill rate to the agency by the respective increase in pay rate. See below for an example

  • Candidate Pay Rate: $100.hr, W/ 20% W2 costs: $120.hr, total Bill rate $150.hr

  • Overtime Pay Rate: $150.hr, W/ 20% W2 costs: $180.hr, Total Bill rate: $225.hr

See how the agencies fee increases from $30/hr to $45/hr with the bill rate? Make sure that you’re paying the same margin or try to negotiate for less.

  • Requiring manager approval for any hours over 40/week are a good way to regulate this.

Harder to sell

Flat out, contract opportunities are going to eliminate a pool of candidates who refuse to go on a contact. A good recruiter can tap into that pool, but only so much. Not only that, other opportunities presented to a candidate might be more enticing to certain candidates.

  • If you’re worried about not getting good talent because of this, help your agencies sell it! Are there long term down opportunities down the road? Good chance to meet the best in your industry? Unique experience they can put on their CV? Something exciting that’s not happening anywhere else? References from the top experts in the industry? Etc.

Stigmas around being a contractor

This one is tricky, because it falls into worker classifications. It’s important to be careful with what types of perks you can offer your contractors. I won’t go into detail here so I recommended doing some research on your own on worker classifications.

Terms of Business require more diligence

It’s not as easy as “pay XX% of salary for this candidate” like a permanent recruitment contract might call for. As I mentioned earlier, agencies are the EOR and therefore bear the responsibility of their workers. Hold harmless and unlimited liability clauses in a contract are hard to agree to as an agency because they expose the whole business to risk. I always recommend capping that liability at $1M.

 

I hope this helps shine light on some of the questions you may have regarding using an agency to hire a contractor.


Of course, if you have further questions - feel free to contact me directly for a further consultation.


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