Why are the hourly rates for contract positions frequently quoted higher than the equivalent salaried rate for direct-hire employees doing the same job?

The client company avoids costs associated with long-term employment like retirement matching and paid vacation time

Contract hourly rates typically include a premium compared to salaried equivalents because the hiring company is shifting significant long-term financial burdens associated with traditional employment onto the worker or the agency. These avoided costs include mandated contributions like employer-side payroll taxes, funding retirement matching programs (like 401k matching), and paying for non-working time such as accrued paid vacation or sick leave. Because the client avoids these substantial overheads, they can afford to pay a higher gross hourly rate while potentially spending less overall for the required service compared to maintaining a permanent employee.