The appeal — and the trap

Temp-to-perm (also called contract-to-hire) is one of the most sensible ways to hire: you bring someone in through a staffing agency on a temporary or contract basis, work alongside them for a few months, and if it's a fit, convert them to a permanent employee. You get a long, real-world "audition" that no interview can match, and the worker gets to evaluate you too. Done well, it's a lower-risk path to a great hire than a cold offer.

The trap is that the arrangement has moving parts most managers don't see until they're mid-conversion: a contractual conversion fee owed to the agency, a co-employment relationship that carries real legal weight while the temp is on assignment, and a classification question that has to be answered correctly at every stage. This is a practical recruiting-operations guide; the specifics of any conversion are governed by your contract with the staffing firm and by employment law in your state — treat the numbers and rules below as the shape of the problem, not legal advice.

The conversion fee is in the contract you already signed

When you engage a staffing agency, the master service agreement almost always includes a conversion clause (sometimes called a temp-to-hire, buyout, or placement fee). It says that if you hire the agency's worker directly, you owe the agency a fee — because you're effectively taking a placement they sourced. Two structures are common:

  • A flat or percentage placement fee, often a percentage of the worker's first-year salary, mirroring what a direct-hire recruiting fee would have cost.
  • A declining fee that phases out over time — the longer the worker stays on assignment through the agency (say, past a threshold of hours or months), the smaller the buyout, often reaching zero after a defined period. This is the agency's way of getting paid for the placement while giving you a legitimate path to convert for free if you keep the assignment running long enough.

The single most expensive mistake here is converting someone without reading the clause and getting an invoice you didn't budget for. Before you extend a permanent offer to any agency worker, pull the MSA, find the conversion terms, and calculate the actual cost of converting now versus after the fee steps down. Sometimes waiting six weeks saves five figures. Fold that number into your cost-per-hire and recruiting budget — a conversion fee is a real cost of that hire even though it never looks like a recruiting expense on the surface.

Co-employment: who's the employer while they're a temp?

While the worker is on assignment through the agency, you're usually in a co-employment relationship: the agency is the "employer of record" (it runs payroll, withholds taxes, provides its benefits, handles workers' comp), while you direct the day-to-day work. Both parties have obligations, and the line between them matters:

  • The agency typically owns the formal employment mechanics — wages, tax withholding, unemployment, and often the workers'-compensation coverage for on-assignment injuries.
  • You control the work, the workplace, and the conditions — which means you can still create liability under anti-discrimination, harassment, and safety law even though the temp isn't "your" employee on paper.

Practically: treat agency temps with the same anti-harassment, safety, and fair-treatment standards you apply to employees, because the law frequently will too. And be clear on who carries workers' comp for an on-assignment injury before anyone gets hurt — that's a contract term, not an assumption. (If your own workers'-comp posture for direct new hires is fuzzy, workers' compensation for the small employer covers the fundamentals.)

Classification doesn't disappear — it just changes hands

A common misconception is that "the agency handles classification, so I don't have to worry about it." While the worker is a genuine W-2 employee of the agency, that's largely true. But two things demand your attention:

  • If you engage the worker as a 1099 contractor directly (not through an agency that's paying them as a W-2), you own the classification question entirely, and the same misclassification risk applies as any other contractor engagement — the tests are in worker classification: 1099 vs W-2.
  • At conversion, the classification resets to you. The moment they become your permanent employee, you own the I-9, the W-4, payroll, benefits eligibility, and — easy to forget — state new-hire reporting. A conversion is a real hire with a real onboarding, not a paperwork formality.

Run the conversion like the hire it is

When you decide to convert, it's tempting to treat it as a light-touch status change because the person is already at their desk. Resist that. A clean conversion has three parts:

  1. Settle the agency side. Confirm the fee (or confirm it's phased to zero), get written release of the worker from the agency, and document the effective date so there's no gap or overlap in who's employing them.
  2. Onboard them as a new employee. New I-9, W-4, benefits enrollment, policy acknowledgments, and new-hire reporting — the full new-hire paperwork checklist. Their tenure for your benefits and PTO typically starts now, which is worth communicating clearly so there's no expectation mismatch.
  3. Make the offer real. Even for someone who's been sitting with your team for four months, put the terms in writing — title, pay, start date as a permanent employee — using the same rigor as any offer letter. "We all know you're staying" is not an offer; a signed letter is.

The evaluation was the point — use it

The whole reason to go temp-to-perm is the months of real performance data you now have. Don't waste it by converting on gut feel. You've watched this person do the actual job, so your conversion decision should read like a well-documented quality-of-hire judgment: did they hit the outcomes the role exists to produce? That's a far stronger signal than any interview loop, and it's the compensating upside for the conversion fee and the co-employment overhead.

Where the product fits

Hosting HR lets you carry a contract-to-hire worker through the same pipeline and evaluation record as any candidate, so the performance you observed on assignment is captured evidence rather than hallway impressions — and when you convert, the onboarding checklist fires with every step a real hire requires, from I-9 to new-hire reporting, so nothing gets skipped just because the person was already in the building. The audition is the advantage of temp-to-perm; the tooling's job is to make sure the conversion that follows is as disciplined as the trial that earned it.