Contract staffing is a hiring arrangement where individuals are hired only on terms specifically set out in a contract. It usually refers to a fixed-term or project-based, rather than permanent, hiring arrangement. In many cases, it is arranged by a third party staffing agency.
Here we explain what contract staffing is, and set out its advantages and disadvantages as an approach to Human Resources.
Key Takeaways
1. Contract staffing occurs when a third party agency provides non-permanent staff for a client company.
2. It is an alternative to other HR solutions such as direct employment, independent contractors and PEO.
3. Advantages of contract staffing include fast hiring, cost savings, hiring across multiple locations and mitigating compliance risks.
4. The disadvantage of contract staffing is that it is inappropriate in certain circumstances, such as where hiring executives or hiring on a permanent basis.
Businesses are increasingly using staffing agencies to supplement their own hiring — particularly when on the search for temporary staff. According to the US Bureau of Labor Statistics, the use of these agencies has increased steadily over the past decade, covering 3,000,000 workers in 2020.
Any business looking at engaging a contract staffing firm needs to carefully consider the advantages and disadvantages of doing so, compared to other forms of staff hiring.
What Is the Definition of Contract Staffing?
‘Contract staffing’ refers to an arrangement that has arisen organically in hiring practices in many countries, rather than a term defined by law or regulations. Therefore, it is difficult to define precisely. However, it usually involves three components:
- 1. A contract for services, not an employment contract. When a company uses contract staffing, they don’t usually hire those individuals as employees. Instead, the company enters into a B2B contract with a staffing agency which provides specific services.
- 2. Fixed-term, or project-based hires, not permanent. It applies to a relationship of a fixed time period, or relating to a specific project. When that period is over, the contract terminates. It does not usually refer to permanent staffing arrangements.
- 3. A third party agency. A staffing agency (sometimes also called a ‘labor hire company’, ‘employee leasing company‘ or ‘contract services company’) is usually engaged to lend or assign their staff to the client company. These staff may themselves be employees of the staff agency, or in some cases, contractors of the staffing agency.
While the definition above covers the most common way in which the term ‘contract staffing’ is used, it is worth acknowledging that it is also sometimes used to include other services, such as hiring independent contractors.
Where a company seeks to contract with an employee or contractor directly, as well as with the support of a third party agency, it may be possible to use a ‘tri-partite contract‘ for that purpose.
An organization that also hires permanent and ongoing employees, as well as contract staffing, is known as a ‘Professional Employer Organization‘ or ‘PEO’.
What Is Contractual Staffing?
Sometimes the term ‘contractual staffing’ is used rather than ‘contract staffing’, with the terms being interchangeable.
Sometimes, ‘contractual staffing’ means the more specific activity of hiring employees on fixed-term contracts, rather than permanently. When the term is used this way, contractual staffing need not involve a third party agency.
What Services Does a Contract Staffing Firm Provide?
A contract staffing firm usually provides the following services:
- recruitment, or choosing from among its existing staff, appropriate workers for a client company;
- contract provision. Compliant employment or service contracts are provided, aligned with the project or work requirements of the client company;
- payroll and benefits administration. The contract services company manages the payroll for staff, as well as benefits and social contributions;
- tax withholding and declarations. The contract staffing firm withholds income and payroll taxes in relation to employees;
- ongoing HR services. The staffing agency deals with any employment disputes, contract renewals or terminations.
What Are the Alternatives to Contract Staffing?
Human resources strategy means working out the right balance for staffing arrangements in the organization. Besides contract staffing, some other possibilities that businesses need to consider include:
- Permanent full-time employees
- Permanent full-time employees are at the heart of any company. Through permanent full-time employees, the company is guaranteed the full loyalty and talents of team members. Permanent employees can either be hired directly by a company, or indirectly through PEO services.
- It is recommended that employees be hired through a written employment contract, and in some countries this is a compulsory requirement.
- Permanent part-time employees
- Similar to permanent full-time employees, except hired on a part-time basis.
- Part-time employees are useful for businesses that operate outside 9-5 business hours, do not need a full-time resource and/or those who seek to accommodate staff who are unavailable to work full-time
- Fixed-term employees
- A fixed-term employee is only hired for a set period of time, such as via a 12-month contract.
- Where permitted, these contracts allow a company to fill a gap in staffing needs (such as where a permanent staff member is on maternity leave), or where the business is unsure it has an ongoing need for an employee.
- Note, in some countries there are heavy restrictions on the hiring of fixed-term employees.
- Zero hours or casual employees
- In some countries these are also known as ‘as and when required’ employees. ‘Zero hours‘ employees are entitled to full employee benefits (e.g., minimum wage and annual leave entitlements apply), however they have no guaranteed hours per week.
- This is common in the hospitality and restaurant industries where individual rosters can vary radically between weeks.
- Independent contractors
- A contractor, by definition, is not an employee of the company. They operate via a contract for services and stand in a ‘B2B’ relationship with the company, rather than an employment relationship.
- A contractor is an independent contractor when they are hired directly by a company, rather than through the intermediary of a staffing agency.
- Independent contractors are also sometimes referred to as ‘freelancers’ or ‘consultants’.
- Read more about the difference between independent contractors and employees at What’s the Difference Between Employees and Independent Contractors?
What are the Advantages of Contract Staffing?
Given the range of options available for human resources, why would a firm add contract staffing to the mix? Some of the advantages include:
- Speed of hiring
- A contract staffing agency often has a full roster of workers ready and available to work. For any individual business hiring staff directly, recruitment, vetting, internal sign-off etc takes a considerable amount of time.
- With contract staffing, a staffing agency takes care of this, ensuring that a client company has staff in place as quickly as possible. This can be particularly useful for companies accelerating their growth, such as startups.
- Cost savings
- Often when looking for a non-permanent hiring, business look to engage independent contractors. However, hiring independent contractors directly means hiring without extensive knowledge of contractor market rates, as well as needing to have administrative procedures in place for managing invoices and compliance.
- A contract staffing agency can source staff in full knowledge of labor market prices, and will already have compliant invoicing and payment arrangements in place.
- Multiple location hiring
- An individual company may have an understanding of their local labor market, but be lost when it comes to hiring overseas.
- Most contract staffing firms operate over large areas (whether nationally or internationally), which means one agency can deal with all hiring for a large multi-location corporation.
- Reduce risk of employee misclassification
- Employee misclassification occurs when a business has classified a worker as a contractor, where they are a de facto employee. Where this has occurred, a business can be liable for unpaid taxes and social contributions, and penalties, both to the authorities and to staff themselves
- Using a contract staffing company ensures which employs workers directly ensures that relevant taxes and social contributions are withheld for employees.
What Are the Disadvantages of Contract Staffing?
A contract staffing agency is not the right HR solution for every situation. For example, it may not be the best HR solution in the following cases:
- Hiring directors and core management
- Under corporations law in many countries, those with significant responsibility and control in a company are the directors and officers. Directors have overall control and ‘govern’ the affairs of the business: Officers are appointed by directors and oversee day-to-day management within the business.
- While it is possible for directors or officers (e.g., a temporary Chief Financial Officer) to be engaged through contract staffing, best practice means officers (and working directors) are employed directly by the company.
- Direct employment by the company means that the employment contract makes explicit the obligations the officer has to company (e.g., to act in the best interests of the company and not to improperly use company property or information). This way, the contractual obligations of the director or officer line up with their obligations under statute.
- Where applying non-compete clauses
- A non-compete clause in a contract requires that a worker not work with other firms (usually competitors) for a certain period of time and/or within a certain geographical area.
- These are quite commonly included in employment contracts (though note, as of July 2021, President Joe Biden has committed to restricting the use of these clauses in the US). However, it is more difficult to include these clauses/enforce these clauses where the company does not directly employ the individual through a contract. To do so, runs the risk of employee misclassification.
- This means that, where a contract staffing arrangement provides contractors rather than employees, non-compete clauses are often inappropriate.
- Where permanent staffing resource is required
- Contract staffing is usually considered a non-permanent hiring solution. Engaging permanent and ongoing staff requires separate expertise. For example, dismissing permanent employees is usually much more difficult than dismissing temporary staff.
- Where a company still wishes to engage permanent staff through a third party solution, a PEO, rather than a contract staffing agency is the best solution.
Frequently asked questions
A contract staffing agency usually provides non-permanent staff to a company. By contrast, a Professional Employer Organization (PEO) can hire permanent and ongoing employees to work for a client business.
In some cases, such as a Europe PEO operating in Germany, temporary staffing solutions may be the only compliant option for a client company.
It depends. If the contract staffing agency hires professionals as employees, such as umbrella companies in the UK, then staff are entitled to the same benefits as any other employee.
Some can. An international contract staffing agency can hire staff in virtually any country or region throughout the world.
Contract staffing usually refers to an arrangement where a third party agency provides the workforce for a client firm. By contrast, in independent contracting an individual directly contracts with the client company to provide their services to that company.
