Temporary to Hire: What is It Worth?

[I originally wrote this in 1998 for the Web magazine Disgruntled, which is now defunct. Having retained the copyright, I now post this on my Web site with some updates noted — as this is — indented in brackets.]

Temporary employment has been discussed quite thoroughly in Disgruntled and elsewhere. I currently work with a contract employee (a term often used for temporary professionals) who prefers the added cash income over fringe benefits. Other temps dislike their status. However, they all know that temporary employment is their permanent situation until they change their career direction.

[My former office-mate got married. With new obligations and responsibilities, he decided that regular (non-temp, non-contract) employment is necessary.]

Temporary-to-hire is quite a different situation. This involves an employee whose immediate goal is regular employment (permanent no longer being a realistic term) but who has to accept temporary employment in order to reach that goal. These workers likely have a reasonable appraisal of their worth as regular employees, but they have a problem evaluating an hourly rate offered in conjunction with a temporary-to-hire position. I know this happened to me when I was unemployed in 1997 and received several approaches from employers and agencies for temporary-to-hire positions.

I took a long look at the differences between a truly temporary position and my goal of regular employment. I had already learned twice in two years that regular employment could end with a layoff; it can be as temporary as an explicitly temporary position. However, I also learned that regular employment includes certain benefits (not just the customary fringe benefits) that are unavailable to temps. In exchange, temps often receive a higher cash wage than regular employees. The question I had to resolve was: How much higher should I be paid during the temp portion of a temporary-to-hire situation?

I finally developed the following analysis, from which I determined the hourly rate that I should receive as a temp while trying to become a regular employee. Note that the percentages below represent my own evaluations of what these factors are worth to me; other individuals might develop different valuations. But the concept should be valid for all.

In any employment situation, I always consider total compensation (which includes benefits) and not merely salary. An employer's total compensation costs for a person in my profession can easily be 130% of salary costs because of the effects of benefits, which becomes 120% if paid leaves for holidays, vacation, and sick days are excluded. (A separate adjustment is taken for those leaves below, where I determine the number of hours used in computing an hourly rate.) While working towards a regular position, I should be compensated at the same rate as if I were receiving regular benefits. Otherwise, the employer has too great an incentive to keep me in the anomalous situation of permanently temporary or (worse) terminate me at the end of the temporary period as part of a sequence of temporary-to-hire employees who never seem to get hired.

[The fact that Microsoft has had to pay significant damages to "permanently temporary" employees has not ended that abuse. At Microsoft, they changed their policy. Now, temporary employees are automatically terminated after a year. These, however, are not temporary-to-hire employees but employees obtained through temp services. Anyone offered a temporary-to-hire position should nevertheless be cautious; some employers might try to avoid Microsoft's problem while still having "permanently temporary" employees by declaring them to be temporary-to-hire employees.]

Given eight holidays (a very minimal number), 10 vacation days, and 10 sick days per year — none of which are paid during temporary or contract work — compensation is earned for 232 days or 1856 hours, not 260 days (52 weeks times 5 days). Converting total compensation to an hourly rate must use 1856 hours. This is especially important for temporary-to-hire situations leading to salaried positions, where compensation is expressed in weekly, monthly, or annual terms without regard for the fact that you do not work every single workday.

[Beware of the employer who indicates a standard work-week greater than 40 hours for salaried employees. A salaried employee — not paid by the hour — should indeed expect to work more than 40 hours in a week on occasions when deadlines or contractual requirements loom. However, a salaried employee who is expected to work (for example) 45 hours per week every week (12.5% more than the 40 hours per week that I am expected to work) should expect 12.5% more salary. This longer workweek needs to be considered, not by increasing the 1856 hours that are divided into annual salary to obtain an hourly rate but by obtaining the employer's formal commitment that all hours actually worked while in temporary status will be paid.

By the way, on a job interview, I was convinced that I would be offered a position. Therefore, I gave a reasonable figure when asked for my desired salary. A few minutes later, I was told that the standard work-week would be 44 hours. I told the manager who would be hiring me that she expected me to do 10% more work than I did at my current position (which had a standard work-week of 40 hours) and that my desired salary would thus be 10% greater than the amount I just gave her. She abruptly terminated the interview.

I am always suspicious of employers who cite a standard number of hours in the work-week for salaried employees who are not paid by the hour. Yes, in my job, I not only have a standard number of hours but I must also report my hours. My employer bills my time to our customer and has a contract to provide the customer with some number of man-hours of effort. When the interviewing manager cited a 44-hour work-week, however, the position was providing software services internally to the company and not to any outside customer.]

Vacation leave has a value beyond providing pay for days not worked and beyond continuing all other benefits during those days. In California where I live, accrued vacation is something an employer must pay me when my employment ends. The practice of "use it or lose it" is illegal for vacation leave in this state. Whether I retire, quit to accept a better position, am laid off as part of a broader reduction in the workforce, or am even terminated for cause, this accrued vacation represents a form of severance pay that does not accrue while in a temporary position. Further, it must be paid whether or not I have worked in a position long enough to actually take vacation time from work. That is, where an employer gives regular employees two weeks of vacation each year but not until after a full year of employment, I would still be entitled to one week's vacation pay if I were terminated after only six months. Given the uncertainty whether I will be retained at the end of the contract period, such use of vacation leave as severance pay is worth 4% of my total compensation.

A significant portion of an employee's benefits is not taxable. Receiving added pay in lieu of benefits results in added taxable income and thus less after-tax total compensation. This is a loss of 28% of the 30% (for benefits) added to salary to obtain total compensation. To compensate, I should receive an additional 28%×30%=8.4%. (I have ignored state income taxes here because they are so variable across the United States.) In this case, paid leaves are included in the taxed benefits since they are not taxed to regular employees until actual vacations or holidays are taken but the adjusted wages are taxed to temporary employees immediately when they are paid.

During the temporary period, I would be making a commitment to an employer to perform assigned tasks in a professionally competent manner. This commitment effectively prevents me from seeking regular employment elsewhere. In return, the employer has made no firm commitment to hire me as a regular employee. My commitment without reciprocity from the employer and my inability to seek regular employment elsewhere should be worth at least 5% of my rate of total compensation. Actually, I feel this one-way commitment plus my inability to seek regular employment are the two worst aspects of temporary-to-hire situations. I limit my demand for additional compensation to 5% only because the employer is at least offering me a paycheck.

During the temporary period, I earn no longevity towards increased or vested benefits. For example, if vacations increase by two days per year after five years, I would receive no credit towards those five years during the temporary period. For another example, if participation in a 401(k) plan is delayed until I have been a regular employee for one year, I would receive no credit towards that year during this period. In my profession (software engineering) longevity can also mean a lay-off benefit of one or two weeks pay for every year worked. I value this failure to earn longevity of service at increments of 0.5% for each month of the temporary status. That is correct: The longer I would remain a temporary employee, the more compensation per hour I would want for not accumulating any longevity.

These points are summarized below for someone who values his or her services as a regular employee at $40,000 per year and who might be hired after serving a six-month temporary position. Note that an annual salary of $40,000 paid over 52 weeks for 40 hours a week is $19.23 per hour.

Salary	$40,000	annual rate
Total compensation	$48,000	120% of salary, excludes paid leaves
	hourly rates
Base rate	$25.86	$48,000 / 1856 hours per year
Use of vacation for severance	$1.03	4% of base rate
Taxation of total compensation	$1.81	28% of added compensation*
One-way commitment	$1.29	5% of base rate
Lack of longevity	$0.78	0.5% per month for 6 months = 3% of base rate
Total hourly rate	$30.78
	* Added compensation is 30% of $40,000 / 1856 hours = $6.47

The recruiter at one agency gagged when I told her my hourly temporary rate would be close to 150% of my expected regular salary. I told her that the employer could save some money by merely hiring me, which was my goal.

[Today, it is not unusual for temporary workers in technical positions to receive 150% of what regular employees would earn. Why should an employer be allowed to pay someone at the rate of a regular employee but otherwise treat that person as a temporary employee? That would not only abuse the temporary-to-hire employee but would also undercut actual temporary employees (in pay) and regular employees (in job security).

Most states have "employment at will" laws, allowing an employee to be terminated (not laid off) at any time and without cause. A new employee can be eliminated even more easily than he or she was hired, especially if the employer decides that hiring the employee was a mistake. Thus, the only real reason for temporary-to-hire would indeed be abusive. Either the employer wants to underpay temporary employees, or else the employer wants some way to evade his own employment policies that confer benefits on employees after they achieve some duration of employment.]

No, I never received a firm offer for a temporary-to-hire position. While at least one agency was negotiating on my behalf for such a position, another employer offered me the regular position that I wanted. Perhaps, I asked too much for the temporary portion of temporary-to-hire. But I did not want to be a temporary employee. And the employer who offered me a regular position proved that I was not over-pricing myself; when I indicated how much salary I wanted, that employer offered me more. Of course, I accepted the offer; and I am still working there.

4 January 1998
Updated 13 August 2000

Temporary to Hire: What is It Worth?

Copyright © 1998, 2000 by David E. Ross