(Originally published 7/30/2009, updated 11/25/2014)
Q: What do I need to know about conversion fees?
A: As more companies are utilizing contractors as part of their long-term business strategies, the chances for contract-to-direct conversions increases. Many companies are 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.
That’s why it is always a good idea to have standard language in the contracts that will protect the recruiter’s conversion fee. If you are utilizing a contract staffing back-office, 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 conversion fee by not allowing the candidate to go to work as a direct hire employee without approval.
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:
1. Pro-rated Option: The conversion fee 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 Option: 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.
NOTE: Top Echelon Contracting does NOT take any part of the conversion fee that is owed to the recruiter.
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