Direct-Hire vs. Temp-to-Hire: Which Saves More Money in 2025?
- laurafilip
- 6 days ago
- 5 min read
Hiring is expensive. Not just in terms of salary, but recruitment costs, onboarding expenses, training investments, and potential turnover costs if the candidate doesn't work out.
Companies need to get this right, especially when budgets are tight or when every dollar spent needs clear justification.
One of the biggest dilemmas hiring managers face today is deciding between a direct-hire candidate and a temp-to-hire employee. Both approaches have merits, and each has costs associated. But over a full year, which option is actually more cost-effective?
In this guide, we'll clearly break down both options, providing actionable insights so you can confidently make the right choice for your organization.
First, Let’s Clearly Define Both Approaches:
Direct-Hire
Direct-hire means you immediately hire a candidate onto your payroll as a full-time employee, right from the start. You handle all responsibilities directly, including salary negotiations, benefits administration, payroll taxes, and compliance. It's a long-term commitment, reflecting confidence in the candidate’s fit and potential.
Temp-to-Hire
Temp-to-hire, also known as contract-to-hire, means you initially bring in a candidate through a staffing agency on a temporary basis. After a set trial period (often around 90 days), you decide if you want to bring the employee on board permanently. This option allows employers to "try before they buy."
Understanding the True Costs of Hiring:
Hiring costs go far beyond the paycheck. Here’s what to consider:
Recruitment and advertising fees
Staffing agency markups (temp-to-hire scenario)
Administrative costs and onboarding
Training and lost productivity
Turnover and rehiring costs
Benefit packages and payroll taxes
Let’s clearly evaluate each of these categories in detail, comparing direct-hire vs. temp-to-hire.
Recruitment Costs: Direct vs. Temp-to-Hire
Direct-Hire:
When you recruit directly, costs include advertising the role, recruiter or job board fees, internal HR time, and software used in the recruiting process. These expenses can quickly add up, especially if a role remains vacant for extended periods.
Average recruitment cost for a mid-level direct-hire is typically between 15%-25% of their annual salary.
Temp-to-Hire:
With temp-to-hire, upfront recruitment costs are often significantly reduced. The staffing agency takes on the responsibility of sourcing candidates, conducting initial screenings, and handling preliminary assessments.
However, temp agencies generally charge a markup, often 25%-50% above the employee's hourly pay rate. While initial recruitment costs are lower, these markups over several months can add up substantially.
Administrative Costs and Onboarding
Direct-Hire:
Onboarding involves training materials, background checks, payroll setup, benefit enrollments, and new-hire orientations. On average, onboarding a direct-hire employee can cost around $3,000–$5,000 for mid-level roles.
Temp-to-Hire:
Most administrative tasks (payroll, initial onboarding paperwork, tax withholding) are handled by the staffing agency initially. However, once you transition the temp-to-hire employee to your payroll after the trial period, you'll incur similar onboarding costs as direct hires, effectively doubling some administrative efforts.
Training and Productivity Costs
Regardless of hiring method, training new employees comes at a productivity cost; existing employees invest their own time in training, potentially decreasing their own output temporarily.
Direct-Hire:
Direct hires usually receive intensive training upfront, aiming for rapid integration. Because of the long-term mindset, training often is deeper and more structured from the start.
Temp-to-Hire:
With temp-to-hire, some companies offer abbreviated training initially, deferring more detailed training until the employee is hired permanently.
This approach can reduce initial investment but can prolong productivity ramp-up, indirectly increasing costs through lost productivity over the long term.
Turnover Risks and Rehiring Costs
Direct-Hire:
If a direct-hire doesn’t work out, you face considerable costs to terminate and restart the entire hiring process. Turnover can cost companies 33%–50% of an employee's annual salary, factoring in lost productivity, rehiring, and training.
Temp-to-Hire:
The primary advantage of temp-to-hire is significantly reducing the risk of turnover. If a temp employee doesn't work out, you simply request a replacement from the staffing agency, avoiding many termination hassles. This flexibility is one of the key reasons companies opt for this route, as it effectively mitigates turnover risk in the initial months.
Benefit Packages and Payroll Taxes
Direct-Hire:
Full-time direct-hire employees usually receive comprehensive benefit packages including healthcare, retirement matching, PTO, sick leave, and bonuses. Employers pay approximately 20%–30% of the employee’s annual salary in benefits and payroll taxes.
Temp-to-Hire:
Initially, temporary employees typically receive limited or no benefits from the company, as they are agency employees. The staffing agency covers payroll taxes and any minimal required benefits. However, once transitioned to direct-hire status, you assume all benefits responsibilities, matching direct-hire costs long-term.
Direct Financial Comparison Over 12 Months:
Let’s consider a hypothetical mid-level employee earning $60,000 per year:
Direct-Hire:
Salary: $60,000
Recruitment Cost (20% average): $12,000
Onboarding: $3,500
Training/Productivity Loss: $5,000
Benefits & Taxes (25% of salary): $15,000
Total Year-One Cost: ~$95,500
If turnover occurs mid-year, this figure can quickly balloon by another $15,000–$30,000.
Temp-to-Hire:
Initial Temp Period (90 days at agency markup of ~30%):
Hourly Rate equivalent ($60k/year = ~$28/hr): 480 hrs at $36/hr (markup included) = $17,280
Conversion Fee (staffing agency's direct-hire fee typically reduced, ~10%): $6,000
Salary for remaining 9 months: $45,000
Onboarding at conversion: $3,500
Training/Productivity Loss (initial reduced productivity): $7,000
Benefits & Taxes (25% annualized over remaining 9 months): ~$11,250
Total Year-One Cost: ~$90,030
In scenarios without turnover, temp-to-hire can offer moderate savings in year one.
Non-Financial Considerations:
Cost isn't everything. Here's what else matters clearly:
Cultural Fit: Direct hires often feel immediate loyalty and commitment, leading to stronger initial cultural integration.
Candidate Attraction: High-quality candidates may prefer direct-hire roles due to perceived stability.
Flexibility: Temp-to-hire offers greater flexibility to quickly scale teams or pivot organizational direction.
Morale and Team Dynamics: Direct hires can immediately feel part of the team, whereas temps may experience uncertainty or lower engagement initially.
Making the Best Choice for Your Company:
When to Choose Direct-Hire:
Long-term roles requiring highly specialized skills
Stable, predictable workloads
Strong talent market competition (to attract the best candidates quickly)
Desire to quickly integrate the employee into company culture
When to Choose Temp-to-Hire:
Uncertainty around the role’s necessity long-term
Rapid growth or changing organizational needs
Mitigating the risk of hiring mistakes or turnover
Limited resources for recruitment or onboarding
The Bottom Line: Which Really Saves More?
Over a 12-month period, temp-to-hire generally shows modest financial savings primarily by mitigating early-stage turnover risk. However, direct-hire investments often pay long-term dividends through stronger cultural alignment, better retention, and higher employee satisfaction.
In essence, temp-to-hire typically saves costs in the short term, particularly in volatile or uncertain situations. Direct-hire, meanwhile, delivers the greatest value when long-term stability, high-quality talent
attraction, and cultural fit are prioritized.
Ultimately, the best choice depends on your unique organizational circumstances, growth strategy, and cultural priorities. Understanding these financial and non-financial factors will ensure your hiring strategy aligns clearly with your company's long-term goals.
Ready to Make Smarter Hiring Decisions?
Choosing between direct-hire vs. temp-to-hire isn't easy—but you don't have to navigate it alone. At HC-Resource, we help companies like yours build efficient hiring strategies that maximize your investment and reduce turnover risks.
