Direct Hire vs. Contract Staffing: Which is More Profitable for Staffing Agencies?

US staffing agencies can model their operations in one of two ways: direct hire and contract staffing. Both strategies have advantages, and like with many things, the right choice often depends on the goal of your staffing agency.

However, if you’re looking to grow and expand your agency and maybe even build towards a potential exit, it’s natural for your goal to maximize profitability at any cost. In that case, you must understand how each model works and how you optimize your operations to achieve your goal.

While both strategies provide a great opportunity to take advantage of the massive US staffing market worth nearly $220 million, some key differences change how profitable each strategy is.

What’s The Difference Between Direct Hire and Contract Staffing

At its most basic level, the biggest difference between direct hire and contract staffing is the fees a staffing agency can charge.

Direct Hire

When placing through a direct hire model, a staffing agency charges a one-time placement fee, calculated based on the candidate’s first-year salary. This is a popular option as it increases stability for both the client and the staffing agency.

The agency places the talent, and the client can ensure the agency is compensated via a simple one-off transaction.

Due to its one-off nature, direct hire is a popular model when placing permanent employees who can expect to stay at a company for several years and be compensated with a salary.

However, once a staffing agency makes a placement, it receives no recurring revenue. This can make it hard to build a retained income as you constantly rely on getting new business. Consequently, making a bad placement can be highly damaging as you constantly rely on client satisfaction and referrals.

Contract Staffing

Contract Staffing differs from the Direct Hire model in that staffing agencies charge a fee based on the candidate's hourly rate for the entirety of the contract. However, staffing agencies will have to fund the payroll and manage all compliance issues for their talent.

The obvious benefit is that your staffing agency will receive continuous income throughout the contracts’ duration, so you won’t have to find new placements to keep money coming in constantly.

Businesses use contract staffing to find temporary placements, as it allows for greater flexibility for your candidates and clients. Your clients don’t have to commit to hiring talent for at least one year to make the placement worthwhile, and the contract can vary to the exact length a client needs.

Comparing Total Income Between Direct Hire and Contract Staffing

Due to its one-time nature, the direct hire model offers staffing agencies a higher initial upfront income. However, this doesn’t necessarily mean that the total income you’ll receive is higher than if you opt for a contract staffing model.

The average hourly markup for contract staffing can be anywhere from 20%-75%, so while you won’t receive a large amount initially, your total income can quickly add up, especially if you’re placing for longer contracts.

However, not just the total income per placement makes contract staffing more profitable. Because it shifts your staffing operations, contract staffing provides plenty of opportunities to boost your staffing agency's profitability.

What Makes Contract Staffing More Profitable

Contract staffing is often more profitable because it gives your staffing agency a stable base to build. As a business, when you have a consistent and reliable income, you can make strategic decisions to grow and expand instead of trying to find new businesses simply to stay afloat.

Due to its inherent flexibility, contract staffing leads to more profitable outcomes, enabling you to scale quickly and build your agency. With Direct Hire, you can only make a placement once, and companies tend to keep their hires for a long time, making scaling quickly a lot more difficult.

Compare this to contract staffing, where staffing agencies can adjust their recruitment efforts based on market demand without placing talent in long-term commitments. This can allow staffing agencies to scale quickly to meet potential demand and reallocate talent without worrying about long-term commitments.

A contract staffing model can help your staffing agency build more robust client relationships. Most companies will only have one or two vacancies at a time, and once they fill them, they normally stay filled for a long period. However, with contract staffing, you are placing talent temporarily to meet demand. Consequently, you’ll be able to get repeat business for multiple different roles.

For example, your client may require a software developer to help get a website project over the line but also require seasonal warehouse workers. A contract staffing model will mean you can fill these positions and boost your client relationships by working together multiple times.

Given that contract staffing is inherently temporary, it’s also often much quicker than the direct hire process. Direct-hire staffing takes longer as there’s inherently more commitment when taking on an employee permanently.

Typically, there’s a longer interview and screening process as companies try to find the right fit. This means staffing agencies can make more placements quickly and ultimately boost the amount of revenue they have coming in.

Contract Staffing Fee Structure

So, what does the average contract staffing fee structure look like?

Here’s an example of the difference in profits between a permanent and contract hire.

How the Employer of Record Can Simplify Contract Staffing

Executing a contract staffing model requires handling payroll, compliance, and other back-office complexities. An Employer of Record (EOR) like Ascen can simplify these operations, allowing staffing agencies to focus on scaling their business and maintaining client relationships. Here’s how:

Streamlined Onboarding and Background Checks

An EOR integrates onboarding and background checks into a single, streamlined process, ensuring candidates meet compliance requirements efficiently.

Simplified Payroll and Benefits Administration

The EOR manages payroll and benefits administration, including tax filings and payments, minimizing errors, and ensuring compliance with local labor laws.

Compliance Management

With expertise in federal, state, and local employment laws, the EOR ensures agencies meet all legal obligations while reducing the risk of fines or legal action.

Operational Scalability

EOR platforms are designed to handle high volumes of placements, enabling staffing agencies to scale operations without increasing back-office overhead.