Staffing agency conversion fees are what you pay the agency when you hire one of its contractors as your own employee. The conversion fee is set in your contract, usually as a percentage of the person's first-year salary or as a schedule that shrinks the longer they have worked for you. There is no national standard, and the two state rules people cite (Illinois and New York) do not reach a typical software engineer. In practice, the number in your MSA is usually the number you pay.
General information, not legal advice. Have a lawyer review the conversion clause before you sign.
I like conversion clauses that are boring and predictable. The bad ones are vague, or set a flat fee that never declines, which punishes you for keeping someone the agency already got paid for.
Key Takeaways
- A conversion fee compensates the agency for losing a placement it recruited. Some contracts call it "liquidated damages."
- The direct-hire benchmark: SHRM reported in 2016 that contingency recruiter fees run "in the area of 20 percent to 25 percent" of first-year cash compensation.
- Illinois caps conversion fees for day and temporary labor, but the Act excludes professional and clerical work, so it is unlikely to cover software engineers.
- Negotiate a fee that declines with tenure, a clear definition of "hire," and a time limit on the restriction.
How a Staffing Agency Conversion Fee Is Structured
The American Staffing Association describes temp-to-hire as an arrangement where "a staffing firm employee works for a client for a trial period during which both the employee and the client consider establishing a 'permanent' employment relationship" (ASA). The conversion fee is the agency's compensation when that trial turns into a hire.
You will see three shapes:
| Structure | How it works | Who it favors |
|---|---|---|
| Flat percentage | A fixed share of first-year salary, whenever you hire | Agency |
| Declining schedule | Fee drops as months or hours worked increase, sometimes to zero | You, if you keep people a while |
| Multiple of the monthly rate | A set number of months of the bill rate, stepping down with tenure | Middle ground; easy to budget |
The logic behind a declining fee is fair. Early on, the agency has billed very little for someone it spent weeks finding. After a year of billing, it has been paid for its work, and a big fee looks like a tax on your loyalty.
To benchmark, compare against direct hire. A 2016 SHRM article put contingency recruiter fees at about 20 to 25 percent of first-year cash compensation, and retained search at about 33 percent. You will see "15 to 25 percent" all over agency blogs; that range is commonly quoted but I could not trace it to SHRM.
What the Law Actually Caps (Less Than You Think)
Founders often assume a conversion fee is unenforceable. In tech, that assumption usually fails.
Illinois. The Day and Temporary Labor Services Act limits placement fees to the agency's daily commission over 60 days, reduced for each day the worker already worked through the agency in the past 12 months (Illinois Department of Labor). But the statute says "day and temporary labor" does not include labor or employment "of a professional or clerical nature." Senior software engineering will usually land on the professional side, so the cap is unlikely to apply. If you are in Illinois and the role is borderline, ask counsel.
New York. A 2023 law prohibits employment fees or liquidated damages when a temporary worker is converted to a permanent hire, but only for temporary health care staffing agencies (LeadingAge NY summary). Not tech.
So for a startup converting a contract developer, the contract usually governs. Read it before the first engineer starts, not when you want to make the offer.
What to Negotiate Before You Sign
- A declining schedule. The fee should fall with tenure. At Ruzora the conversion fee steps down the longer the engineer has worked with you, because that is the fair version.
- A clear trigger. Define "hire" to include hiring through another entity, an EOR, or as a direct contractor. Agencies will insist on this; you want it written plainly so nobody argues about it later.
- A time limit. The restriction should end at a fixed point after the engagement ends. Open-ended restrictions are a red flag.
- The fee base. Is it a percentage of the offered salary, of total compensation including bonus, or a multiple of the bill rate? Each produces a different number.
We cover the rest of the contract in staff augmentation contracts: what to check.
A Concrete Version
A seed-stage startup brings on a senior backend contractor through an agency and, nine months in, wants to make them a full-time offer at $150,000 base.
If the contract says 25% of first-year salary, flat: 0.25 x $150,000 = $37,500.
If the contract uses a declining schedule, say 25% before month six, 15% from month six to twelve, and zero after twelve months (a hypothetical schedule for illustration): 0.15 x $150,000 = $22,500. Waiting three more months brings the fee to $0.
Compare both to going direct: a contingency recruiter at 20% would cost $30,000, and you would be hiring a stranger. With conversion, you are paying to hire someone you have watched ship code for nine months. That is the most de-risked hire you will ever make, and the declining schedule makes it cheaper than a recruiter.
The Honest Counterpoint
Conversion is not always the smart move. If the engineer is in Latin America, converting them means you now need an entity, an EOR, or a direct contractor setup, along with payroll, benefits, and local compliance. Once those costs are counted, keeping the staff augmentation arrangement can come out cheaper than the employee version. Run the full-time vs staff augmentation math before you pay any fee.
And if your plan is to convert everyone fast, you are using an agency as a recruiter. Pay recruiter fees instead and compare honestly; see recruiter fees vs staff augmentation.
Frequently Asked Questions
How much is a staffing agency conversion fee?
It depends entirely on the contract. Common structures are a percentage of first-year salary, a declining schedule based on time worked, or a multiple of the monthly bill rate. For a benchmark, SHRM reported contingency recruiter fees of about 20 to 25 percent of first-year cash compensation.
Can I avoid a conversion fee by waiting until the contract ends?
Usually not. Many contracts keep the restriction for a period after the engagement ends and define "hire" broadly. Read the time limit and the definition before you assume you are free.
Are conversion fees legal for software engineers?
Generally yes, as far as the commonly cited state rules go. Illinois caps fees for day and temporary labor but excludes professional and clerical work, and New York's ban covers only health care staffing agencies. Have counsel read yours anyway. See contract-to-hire developers: how it works.
The Bottom Line
Read the conversion clause on day one. Ask for a fee that declines with tenure, a clear trigger, and a time limit. If you want senior LATAM engineers with a conversion path that gets cheaper the longer they stay, see our pricing or request a shortlist.
Roberto Espinoza is CEO of Ruzora, which helps US startups hire pre-vetted senior LATAM engineers, with a vetted shortlist in 72 hours. See available engineers.
