Temp to Perm Agreements Explained
A temp to perm agreement is an agreement between the employer and a temporary staffing agency that the temporary staff the agency hires on their behalf can be converted to an employee of the company after certain pre-agreed conditions are satisfied. Typically, one of the purposes of this kind of agreement to help alleviate the costs associated with the employee transition from the temporary agency to becoming a regular employee of the company. There are a number of other advantages to signing a temp to perm agreement which will be discussed below. The temp to perm agreement will typically include the current wages for the employee while they are a temp as well as the wages they would be paid if they became permanent employees. The type of benefits provided to employees will also be listed. Often, the employer has to give the temp agency time to transition the employee to being a permanent employee of the employer or they pay for the employee to sign a permanent contract directly with the employer. There are a number of common scenarios where employers use temp to perm agreements. For example , some employers use them as a way of testing the skills and abilities of a prospective employee without having to make a long-term commitment. They may be used to fill a vacancy for a limited length of time in order to help with a project or during a busy period. Employers will also commonly use a temp to perm agreement to deal with unexpected staff absences such as illness or maternity leave. Temp to perm agreements provide a number of advantages to both employers and workers. In terms of doing temp work, you will have more time to determine if the work is a good fit for you and a lot of temp jobs lead to permanent positions. The arrangement is also attractive because you can work in a different environment and try out different positions without long-term commitments. For the employer, the arrangement is convenient because they do not have to deal with the hiring process and they can try an employee out and see if they are the right fit for the position. Before signing a temp to perm agreement, workers should thoroughly understand the agreement so that they understand what benefits and provisions they may be entitled to and they are not caught off guard if the employer does not meet all of their obligations. Temp to perm agreements are often signed by employers and agencies in order to save costs when converting an employee from a temporary position to a permanent one.
The Essential Components of a Temp to Perm Agreement
A carefully crafted temp to perm agreement forms the backdrop for setting clear expectations and objectives between the parties. Once an employer and a temp staffing agency agree on the terms of a temp to perm relationship, drafting a document becomes a necessity. However, a temp to perm relationship can easily turn sour if the document lacks key elements. These may include: Duration of the Conversion: One of the most important things negotiated in a temp to perm agreement is the duration of the temp period. In this regard, many employers expect the duration of the temp period to remain flexible. Conversely, the temp agency typically wants to keep the client on a committed/ fixed schedule in order to buffer their own employment risks. Where possible, it may be beneficial to include in the temp to perm agreement teacher hours and/or days of the weeks that the employer can request converting the temp to a permanent position. From a practical standpoint, keeping a firm schedule for conversion will help the employer avoid unseemly spikes in its payroll. Criteria for Transition: When converting a temp to a permanent employee, it is important for an employer to set forth in the temp to perm agreement the conditions under which a temp will be considered a permanent employee. This offers a roadmap for both the temp agency and the employer to train the temp regarding transition protocols, protocols that include orientation, employee handbook overview, lunch with supervisors, interaction with HR, security and I-9. Whatever the condition, the greater the detail, the more you will facilitate a smooth transition. Employment Terms: A temp to perm agreement should also enumerate the employment terms that the temp will be subject to once converted to an employee. This may include time off, review procedures as well as inquiry protocols (e.g. how the employee requests a review with HR for a raise or leave of absence). Notify Temp Agency of Potential Drop Outs: The relationship may seem ideal after the transition but somewhere down the road the temp’s due diligence may reveal that the company could be at risk of an economic downturn. In this instance, it is important for the temp agency and the employer to discuss whether any protocols are necessary to deal with potential drop outs who may wish to terminate their employment.
Top Considerations for Employers when Using Temp to Perm Agreements
The choice between temporary employment and direct hire often rests on a company’s operational and financial needs. For example, a company may need help with the reception area for just one week, in which case a temp-to-perm relationship makes little sense. On the other hand, another company may know that it will need support for a minimum of six months, perhaps because of a special project being implemented, a sudden spike in business, or even while a permanent employee is recruited and hired. In these cases, a temp-to-perm relationship is generally favorable to the company.
Another key area to consider for an employer is legal compliance. Because of the rapid growth of temporary employment agencies, there are a myriad of federal, state, and local labor laws, regulations, and best practices that now govern temp-to-perm relationships. In addition to basic payroll taxes, there are laws specifically addressing issues such as overtime, occupational safety and health, workers’ compensation, wage payment, and retirement and health coverage. These areas are also covered in various state and local ordinances that add additional layers of compliance.
For many years, separate standards for permanent and temporary employees were found under the Fair Labor Standards Act (FLSA), whereby a temporary employee could be considered exempt from overtime rules under section 13(a)(3) if the agency assigns the employee as a substitute for an employee on sick leave. To address the continual growth of staffing companies, however, the Department of Labor (DOL) now expects all staffing firms to make an individualized exempt classification determination regarding whether any FLSA exemptions apply. Because the DOL is looking for a more permanent, ongoing work relationship, exempt status will often not apply. The best advice on this point is for employers to recognize the differences as the temp-to-perm relationship continues from the agency to the company (and vice versa), and this fact coupled with the DOL’s focus on such relationships would support decisions to make non-exempt determinations. This does not, however, remove the primary obligation of the staffing agency to pay the correct wages, and so the bottom line in many of these situations is that the primary employer may still need to make some additional accommodations for overtime liability exposures.
Employee Entitlements in Temp to Perm Agreements
Employees who transfer from temporary status to permanent employment status in a temp to perm transition are afforded certain rights as a result of this change in their employment status.
Equal Treatment. Just as employers must treat new employees fairly and without discrimination, the same is true for newly hired temporary employees – that is, workers without a permanent position. Temp to perm employees are initially considered temporary employees until they become permanent employees. This does not mean, though, that employers are free to offer less favorable terms to temp to perm employees than to permanent employees. In this sense, temp to perm employees have the same rights as permanent employees. Although a temp to perm employee may or may not be eligible for the same benefits as a permanent employee, such as retirement benefits, health insurance, and other employee benefits, the terms of his or her temp to perm employment must not be less favorable than those offered to permanent employees. Benefits Eligibility. The only major difference between a temp to perm employee and a permanent employee is the benefit eligibility requirements. Temp to perm employees may be categorized as temporary under the law, but they still have the right to participate in benefits programs that are available to permanent employees if they meet the eligibility requirements. Career Progression. A temp to perm employee also enjoys equal treatment in terms of career progression. For instance, temp to perm employees have the same opportunities to apply for jobs that are exclusively open to in-house employees. Furthermore, if temp to perm employees are provided with training opportunities and advancement paths, they must be afforded access to these opportunities equally. This means that employers can continue to develop temp to perm employees for permanent positions.
How to Negotiate a Temp to Perm Agreement
The steps to negotiating a temp to perm agreement can vary, but they should include the following steps, at a minimum:
- Offer letter. In the offer letter, it will be important for the temp agency employee to include the date of start, the specific wage rate, billing rate and schedule, and the terms of employment. Ideally, the offer letter will clearly state if the position is in fact only temporary in nature. The offer letter is an opportunity for the temp agency employee to take advantage of his or her leverage with the employer. On the flip side, the employer should try to negotiate with the temp agency regarding the actual pay rate, billing rate and employee schedule. If the employer has a course of conduct with a temp agency, many temp agencies will be willing to negotiate if there has been a steady rotation of employees. This is especially true if the employer offers employees steady placements.
- Contract. The temp agency might include a contract for the temp agency employee to sign. This contract may cover termination, intellectual property rights, confidentiality, and many other topics. It is always best for the employee to consult with an attorney to review the terms and negotiate as necessary.
- Start date. It will be important to identify the start date. If the employer tries to move up the start date, if you are not available, this should be covered in the contract . Generally, temp employees will be paid for the first day. However, it should always be in the contract and offer letter to avoid problems.
- Duties and responsibilities. Although this is covered in the job description, it will help if it is included in the offer letter or contract. It should also cover boundaries, for example, whether the temp employee should speak to employees in the employer’s organization.
- Training. Many temp agency employees are typically not trained for the job. Instead, there is a crash course in learning how to perform required tasks. The employer may want to clarify that there will be training or no training and what the employee can expect.
- Benefits. In many cases, temp employees do not receive the same benefits as the employer’s employees. Again, this will be important to cover in the offer letter and contract. Additionally, the employer may want to make it clear that if this is a temp to perm position, the temp employee will obtain health insurance, retirement benefits, etc., on the same basis as the employer’s regular employees.
- Termination. Again, this is another area to have in writing in the offer letter and/or contract. In most cases, a temp agency and the employer can end the relationship without notice or cause. If the temp is being converted to regular employee status, then a standard employer policy would apply regarding termination.
Legal Considerations and Responsibilities
Temp to perm agreements are popular because they shift workforce management risk from employers to staffing companies. This is fine, right? Wrong. This can create liability for the client company in a number of contexts. Counsel to the client company must consider all of the relevant facts in a particular matter and develop a comprehensive strategy to mitigate risk.
On the surface (at least), temp to perm agreements ensure that clients will not be deemed the employer of the temporary worker. However, this is not the case if the client company has too much control over the day to day activities of the temporary worker. Additionally, the client company must pay the staffing company a "temp to perm" fee (typically a percentage of the worker’s salary) when it decides to hire the temporary worker as a permanent employee. Should the staffing company ultimately refuse to provide workers to a client company or should the client company refuse to pay a temp to perm fee if the temporary worker converts to a permanent employee for the staffing company? We have litigated these issues when the parties to a temp to perm agreement disagree.
A potential benefit of a temp to perm arrangement is avoided overtime compensation claims under the Fair Labor Standards Act ("FLSA"). An FLSA claim can be triggered if the employer requires the employee to work any amount of time off the clock, but a temp to perm arrangement generally covers only the hours actually worked by the temporary employee. This is sufficient to ensure compliance with the overtime provisions of the FLSA even with employees who are not exempt from overtime requirements. Furthermore, the client company’s classification of all employees as exempt from overtime compensation under the FLSA is sufficient to defeat an overtime compensation claim unless evidence of non-exempt employees exists.
The Americans with Disabilities Act implicates potential liability here in several ways. First, if the client company hires the temporary employee as a permanent employee after he or she was with the staffing company, it cannot require a medical examination or drug test prior to making a job offer. Previous conditioning of employment on medical examinations and drug tests was the focus of a successful Florida class action against the client company. Moreover, even if the medical examination and drug test were permissible, it is not a safe harbor if the job offer was conditioned on passing the medical exam and drug test. Furthermore, if the client company refuses to hire the individual until he or she is medically cleared, the client company cannot require the temporary worker to divulge previously confidential information such as a prior health condition.
Avoiding Common Pitfalls
Temp to perm agreements require keen attention from both employers and employees. Below, some common mistakes and strategies to mitigate them.
Misclassifying Employee Status
A temp to perm employee is not an employee until the agreement is signed and should not be classified as an employee prior to that time. Failure to engage and pay taxes on the periods of employment before the employee officially sign the temp to perm agreement could expose an employer to liability for unpaid taxes. It may also affect contributions to employee plans such as 401(k)s due to miscalculating the length of service and entitlements to participation in such plans.
Not Making Clear and Accurate Representations
If the employer has properly represented the position and the chances of being converted to a permanent position, the employee should have no legal recourse. If the employer has made false statements, Federal Trade Commission rules bar employers from making any "deceptive acts or practices" in recruiting.
Without a job description, the employer may place unrealistic expectations on the employee. A well written job description ensures that both the employer and the employee agree on the duties of the job.
Job Security
Some employers promise that all temp to perm positions will convert but not all promises are fulfilled. Employers need to be clear with their expectations that for the employee to be converted, he/she must meet certain criteria. The employment relationship is at will and the company can terminate on the basis of poor performance, attendance or any number of problems. Employees should not depend on the conversion from temporary to permanent employment.
Conversion from a temp to perm position can be made more difficult if the consent to date into a permanent position is not without condition. Elements of coercion or attempts to rename duties and responsibilities may make an employee reconsider.
Workplace Culture
Many times there is a disparity between the workplace culture of the temp agency and the workplace culture of the employer. An employee may have difficulty adjusting to a new way of doing things or may not like the way individual co-workers prefer to communicate. An awareness of the differences in workplace culture and the flexibility to adapt to them can overcome this mistake.
Future Outlook for Temp to Perm Agreements
One of the significant future trends in temp-to-perm agreements will be greater scrutiny by regulators of whether the work performed by a temporary employee is truly on an "as needed" basis or is de facto a permanent position. The practice of an employer historically bringing in workers through a staffing agency and then converting significant percentages of those individuals to permanent, regular employees has been challenged in federal and state court in recent years. For example, the Equal Employment Opportunity Commission sued under the Americans with Disabilities Act in 2015, alleging that a trucking company’s temp-to-perm policy had a disparate impact on disabled individuals, resulting in a higher rate of temporary employment for disabled individuals compared with employees without disabilities. We can expect to see that litigation trend continue.
Another future trend in temp-to-perm agreements may be increased litigation over overtime in the context of alleged temp-to-perm positions. For example, an overworked existing employee may contend that the employer has converted temps to regular, permanent employment so frequently and rapidly that the employee has no reason to believe a permanent employee can ever be able to take even a few days off. In that scenario , the employee may claim that an employer’s failure to pay overtime to temporary employees violates the overtime exemptions because a job description with duties requiring 50+ hours or even with a minimum "availability" of 50 hours or more, when compared to the temp employee’s actual work schedule of 20-25 hours per week, renders the exemption inapplicable to the temp employees.
A final forward-looking trend involves how technological developments impact the laws and regulations governing temp-to-perm agreements, and ultimately what regulatory changes employers can expect. The ultimate outcome of an investigation or lawsuit may depend on how a regulator interprets the "as needed" requirement. For example, the U.S Department of Labor is currently enforcing the 2019 Final Rule on "Regular Rate." The Rule provides guidance on calculating overtime compensation under the Fair Labor Standards Act, including detailed guidance on when an individual is considered to be "working," and therefore must be paid overtime, as opposed to when the individual is "on call" and not working and so need not be compensated for periods when he or she is not performing work. Equally important is how an employer deals with the practical aspects of managing temp-to-perm employees and what safeguards must be put in place to minimize risk.