Adding contract and temp-to-perm work to a perm agency

What changes when you place contractors

A permanent placement is a one-off sale. You find the candidate, the client hires them, you invoice a fee, and the work is done once the guarantee period ends. A contract placement is a running service: the worker stays on your books or a partner's, you bill the client for every week they work, and your income comes from the gap between what you charge and what you pay.

That difference touches almost every part of the business. Cash arrives later, payroll becomes your job or a partner's, the client contract needs new clauses, and a recruiter's day shifts from closing deals to looking after people already on assignment. None of this is a reason to stay perm-only. It is a reason to set things up before the first contractor starts, not after.

Many clients who use you for permanent hires also need short-term cover for a project, a leave or a peak. If you cannot supply it, they find another agency, and that agency is then in the room for the next permanent role too.

Permanent, contract and temp-to-perm side by side

The table below compares the three ways of placing a candidate on the points that matter most to an agency owner. The exact terms in each row depend on your market and on the contract you sign with each client.

Cash flow and payroll come first

The hardest change for a perm agency is the timing of money. A staffing finance provider, Now Corp, notes that clients may take 30 to 60 days to pay an invoice, while contract workers expect to be paid every week. Each new contractor widens that gap, so a good month of new contract wins can leave you shorter of cash than a quiet one.

Agencies usually close the gap in one of three ways: their own reserves, a bank line of credit, or invoice finance. With invoice finance, a funder advances part of each approved invoice and pays the rest, minus a fee, when the client settles. Now Corp states that traditional factoring commonly advances 80% to 90% of an invoice's value, and that structures and fees vary by provider, so compare written quotes rather than headline rates.

Payroll is the second decision. You can employ contractors yourself and run payroll, tax and insurance in house, or work with a back-office or payroll partner that does this for a share of the margin. A small agency testing contract work often starts with a partner and brings payroll in house only once the volume justifies the extra staff and systems.

Before you take the first contract order, work out how many contractors you could carry for two months if every client paid on its latest allowed day. That number, not the size of the opportunity, tells you how fast you can grow this side of the business.

What to set up before the first contractor starts

A perm agency already has candidates, clients and a recruiting process. To place contractors as well, it needs a few things it may not have yet:

1. Client terms for supply: a separate agreement or schedule covering bill rates, timesheet approval, payment days, notice to end an assignment and the conversion clause.
2. A way to pay workers: your own payroll or a partner, with the tax, insurance and worker checks your country requires, reviewed by an accountant or adviser.
3. Funding for the gap: reserves, a credit line or an invoice finance facility agreed before you need it.
4. Timesheet and billing routine: one weekly cut-off, one approval step by the client and one invoice run, so pay and bills never drift apart.
5. A person who owns live assignments: someone who answers pay questions, handles extensions and spots a contractor who is about to leave.
6. Legal review: worker status, equal treatment rules and fee clauses differ by country, so send your draft terms to employment counsel before you sign the first client.

Agency worker rules can also change your pricing over time. In the UK, for example, the government's guidance says that agency workers qualify for equal treatment with direct employees, including the same pay, after 12 weeks in the same job. A bill rate that works in week one may not cover your costs after that point, so check with counsel and build the change into your quote.

How temp-to-perm conversion terms are usually set

Temp-to-perm lets a client try a worker on assignment and then hire them directly. The agency earns a margin during the assignment and either a conversion fee or nothing extra at the end, depending on the terms. The conversion clause is where most disputes start, so write it before the first temp starts, not when the client asks.

The recruiting firm RediRecruit puts typical conversion fees at 10% to 25% of the worker's first-year salary, occasionally up to 30%. It describes a sliding scale on which the fee falls as the worker builds up hours, often reaching zero somewhere between 520 and more than 1,000 hours, or about 13 to 25 weeks of full-time work. The same page stresses that these numbers are illustrative and that the agreement sets the real ones.

Agencies tend to choose between a few common structures:

• Prorated fee: the full permanent fee shrinks by a fixed share for each month on assignment. FoxHire, which runs contractor payroll for recruiters, gives the example of a 25% fee reduced by one twelfth for every month the contractor has worked.
• Hourly credit: the client gets a credit against the permanent fee for each hour already billed, so long assignments cost less to convert.
• Flat buyout: one fixed amount for converting at any point, which suits clients who want a predictable cost.
• Fee-free after a set period: no conversion fee once the worker has been on assignment for an agreed time, with your margin over that time as the reward.

Some countries limit these clauses by law. In the UK, the government's page on transfer fees says an employment business can charge a temp-to-perm fee only if the contract also offers the hirer an extended hire period instead, and only if the hire happens within 8 weeks of the end of the assignment, or 14 weeks from its start if that ends later. A gap of more than 42 days resets that count. Other countries have their own rules, so ask counsel what applies in each market where you supply workers.

Start with one client and one role type

The safest way to begin is with a client who already trusts you on permanent hires and has asked for short-term help. Pick a role type you already recruit well, agree supply terms and a conversion clause in writing, and run a few assignments through payroll and billing before you sell contract work more widely.

Track three numbers each month: margin per contractor per week, days between invoice and payment, and how many assignments convert to permanent hires. If margins hold and clients pay on time, add the next client. If cash gets tight, slow down new contract wins until the funding catches up, even when the demand is there.