Contract-to-Hire Offer: What to Check Before You Convert

Who actually employs you during a contract-to-hire period?

During the contract period you may be an independent contractor paid directly by the client, or a W-2 employee of a staffing agency placed with the client. That difference affects your taxes, your benefits, and your legal protections. If you are paid on a 1099 but work fixed hours, under close supervision, with the client’s equipment, you may be misclassified; our guide to 1099 versus W-2 classification explains the tests.

Which legal tests decide if you are a contractor or an employee?

There is no single test. For federal minimum wage and overtime, the Fair Labor Standards Act asks whether you are economically dependent on the business or genuinely in business for yourself. The Department of Labor adopted a six-factor rule in 2024, but on May 1, 2025 it told investigators to stop applying that rule in enforcement and return to its older guidance in Fact Sheet #13 while it reconsiders. The 2024 rule can still be cited in private lawsuits, so as of 2026 the federal picture is unsettled.

For federal taxes, the IRS applies common-law rules that look at behavioral control, financial control and the relationship of the parties. If you are misclassified, the self-employment tax you paid under 26 U.S.C. § 1401 may have covered both halves of Social Security and Medicare when an employer should have paid half. Either side can ask the IRS for a formal determination by filing Form SS-8.

California applies the stricter ABC test, codified at Labor Code § 2775 after the Dynamex decision. You are presumed to be an employee unless the hiring business proves all three of the following: you are free from its control and direction in doing the work, the work is outside the usual course of its business, and you are customarily engaged in an independently established trade or business. A contractor doing the same work as the client's own employees, as contract-to-hire roles often involve, will usually struggle to meet the second requirement. Other states use their own tests for wage and unemployment purposes, so check the rule where you work. Labor Code §§ 2776 to 2784 list exceptions for certain occupations and business-to-business arrangements, which use the older Borello test instead.

Comparing the numbers properly

Contract rates look higher than salaries because they have to cover things an employer otherwise pays. When comparing, account for:

• Self-employment tax: as a 1099 contractor you pay both halves of Social Security and Medicare, 15.3% on most earnings, against 7.65% as an employee.
• Health insurance, retirement matching and paid time off, which a conversion may add.
• Unpaid gaps between contracts, which a permanent role removes.
• Equity, bonus eligibility and other benefits available only to employees.

Staffing agency restrictions

If an agency placed you, check its agreement carefully. Agencies often charge the client a conversion fee to hire you directly, and some include clauses restricting you from working directly for the client for a period after the assignment without the agency’s consent. These usually bind the client more than you, but some are written to bind the worker too, and they can delay or complicate a conversion. Ask the agency directly how conversion works before you accept the assignment.

What the conversion offer should cover

• Salary, bonus and equity as an employee.
• Whether your contract period counts toward tenure, vesting and benefits eligibility.
• Start date for health insurance and any waiting period.
• Paid time off accrual.
• Any new non-compete, confidentiality or IP assignment terms.

Intellectual property from the contract period

Work you created as a contractor may be governed by the contractor agreement, not the later employment agreement. Check whether the contractor agreement assigned your work to the client, and whether the employment agreement tries to reach back to cover pre-employment work or projects of your own.

A worked example

Luis works as a 1099 contractor at $75 an hour for six months, then receives a conversion offer of $135,000 a year with benefits. At roughly 2,000 hours, $75 an hour is $150,000, which looks better. But after self-employment tax, health insurance of around $7,000 a year, and no paid leave or retirement match, the salaried offer is roughly comparable or better, with more stability. The offer also includes a new non-compete, which is the term Luis should read most carefully.

Sample wording you can send

“Thank you for the conversion offer. Could you confirm whether my six months as a contractor will count toward vesting and benefits eligibility, and when health coverage will begin? I’d also like to discuss the non-compete in section X before signing.”

Common mistakes

• Comparing an hourly rate to a salary without adjusting for taxes and benefits.
• Not reading the staffing agency’s agreement before accepting the placement.
• Signing a conversion offer with a new non-compete without negotiating it.
• Assuming contract time counts toward vesting.

What happens if you are not converted?

Contract-to-hire does not guarantee a permanent role. Check how the contract ends: the notice period, whether you are paid for notice, and any restrictions that continue after the assignment. If the client decides not to convert you, you want to leave free to take the next role, with no non-compete or no-hire restriction from the contract period following you.

Setting expectations for the trial period

Ask at the start how the conversion decision will be made, by whom, and roughly when. A clear understanding, ideally in writing, of the criteria and timeline reduces the risk of an open-ended contract that never converts, and gives you a basis for asking the question if the date passes.

Restrictions that change at conversion

Contractor agreements and employment agreements often carry different restrictive covenants. The conversion paperwork may add a non-compete, broaden confidentiality, or extend IP assignment. Because the conversion offer is new consideration, restrictions introduced at that point are generally easier to enforce, which makes it the moment to negotiate them.

Benefits eligibility and waiting periods

Employers often apply waiting periods before benefits start, such as the first of the month after thirty or sixty days, and some retirement plans have service requirements before matching begins. Ask whether your contract time counts toward those periods. If it does not, the first months after conversion may leave you without health coverage you were counting on, which is worth planning for, or negotiating around.

Can you negotiate your conversion salary?

Treat conversion as a new offer, not a formality. You now have months of demonstrated performance and the employer knows exactly what it is getting, which is real leverage. Research the market rate for the role, factor in the benefits you will gain and the costs you will lose, and negotiate the salary and title as you would for any external offer. Employers sometimes open with a figure that simply converts your hourly rate, which may understate the value of a permanent hire.

Background checks and new paperwork

Conversion often triggers the employer’s full hiring process: a background check, new tax forms, an employee handbook acknowledgement and an employment agreement. Read the employment agreement as carefully as you would any new job’s paperwork, because it will usually replace the contract terms you worked under and may introduce restrictions that did not exist before.

Quick checklist

• Confirm who employs you during the contract period.
• Check for classification red flags if you are paid on a 1099.
• Compare total compensation, including taxes and benefits.
• Read the staffing agency agreement for conversion terms.
• Ask how and when the conversion decision will be made.
• Confirm whether contract time counts toward vesting and benefits.
• Negotiate the conversion salary and any new restrictive covenants.

Key terms explained

These are the terms you are most likely to meet in the clause itself and in any correspondence about it, explained in plain English so you can read your own contract with confidence.

• Contract-to-hire: a role that starts as a contract with the possibility of converting to permanent employment.
• 1099 contractor: a self-employed worker paid without tax withholding.
• W-2 employee: an employee whose employer withholds tax and pays its share of payroll taxes.
• Self-employment tax: the combined Social Security and Medicare tax paid by self-employed workers.
• Conversion fee: a fee a staffing agency charges the client for hiring you directly.
• Misclassification: treating a worker as a contractor when the law treats them as an employee.

If you are asked to convert through a new entity

Occasionally a client asks a contractor to become an employee of an affiliate, a professional employer organization or another staffing arrangement rather than of the client itself. That can affect benefits, which company’s policies apply, and who you would have a claim against. Ask exactly which entity will employ you, and read that entity’s agreement rather than assuming it mirrors the client’s own terms.

Review both agreements together

ClauseAudit reads contractor and employment agreements, flags restrictive terms that appear at conversion, and checks classification red flags during the contract period.