Your Employee or Ours? Comparing The Costs of a “Temp” and “Core” Employee!

Your Employee or Ours? Comparing The Costs of a “Temp” and “Core” Employee!

by Jeanne Knutzen | May 31, 2020

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Have you been thinking that a temporary employee is too expensive for your business?  Get Ready to be Surprised!

At some point in our business relationship, some clients will comment about the difference between our hourly bill rate for one of our “temps” compared to the  hourly wage of one of their employees doing the same or similar work.   Why does the “‘temp” cost so much more?   Are you just rolling in dough?  What am I missing?

The reality is that there are a lot of direct and mandatory employer costs  that have to be built into any staffing agency’s bill rates that are the same costs you are currently paying for any employee who works for you directly.  While our bill rate is very visible, the costs you pay to employee someone directly doesn’t show up in such a black and white way and is never accurately reflected when comparing an employee’s pay rate with an agency bill rate.

What I’m trying to say is that a big chunk of a staffing agency’s bill rate includes the same “employer costs” you would be paying if you employed that person directly.      

We started blogging on this topic in 2014 – and quickly uncovered that staffing agency bill rates were not well understood.  To help our readers not only take the mystery out of their staffing agency bill rates, but also to remind them of the real costs of being an employer in today’s regulatory environment, we wanted to provide our readers with some basic information on how these two sets of costs compare – starting with what we call the Direct Costs.

The Employee’s Pay Rate

By far the biggest component of our temporary staffing bill rate is what we pay our employee per hour.    Pay rates are by and large determined by what other competitive employers are paying for similarly skilled employees working either directly or in temporary roles in the local marketplace. The more skills and work experience you request, the more we need to  pay an employee to attract them to your assignment.  At PACE we try not to skimp on an employee’s pay rate, as it almost never works out for our client’s in the long run. .

While many staffing agencies are hesitant to disclose what they pay their employees  (for both valid and invalid reasons), at PACE we like to discuss our employee’s pay rate so that we can calibrate  what our client is requesting in terms of skills and experience in the local marketplace.  What we pay our employee needs to be big enough to accommodate, attract and retain the right candidate thru the duration of their assignment.  Again, cut corners on a pay rate, and run the risk of not meeting our clients business needs.

Payroll Taxes – the Add on Costs All Employers Pay  

There are a variety of taxes that have to be paid to the city, state and federal taxing agencies that have jurisdiction over the employer relationship and our payroll transactions.  These are the same taxes you would pay if you were hiring and paying the employee directly.

  • FICA is the federal tax paid by both employees and employers for Social Security and Medicare benefits. In 2020, the social security tax is 6.2% of wages up to $137,700.   The Medicare tax is 1.45% of all wages – in total no small amount.
  • The SUTA tax includes monies paid into the State of Washington to provide unemployment benefits.   The rate varies depending on the payors experience rating, but generally runs between 2-4% of the employee’s wages up to $52,700.  Washington state SUTA taxes are amongst the highest in the nation.
  • The FUTA tax is the federal version of SUTA and is used to fund state workforce agencies. In WA that tax ends up being .6% of the employee’s first $7000 in earnings.
  • Workers Compensation Insurance. In Washington, employers are required to contribute to a state wide fund to cover the costs of treatment and lost wages in the event of a workplace injury or accident.  Washington employers contribute to this fund based on the employee’s job category and their experience rating with workplace accidents.  For low risk jobs it can be as little as $.10-.15 /hr.  For high risk jobs the state insurance tax can be $5-6/hour.

Mandated Local and State Paid Time-Off Benefits

For all Washington employers,  the costs incurred to fund mandated paid time off benefits has been increasing substantially since 2018 when paid sick time regs went into effect.   All employers are now required to provide their employees with 1 hour of paid time off for any health related issue for every 40 hours worked.  This totals to 52 hours a year, or just under 6.5 days a year.

In 2020 the new Family and Medical leave provisions went into effect that provides employees with 12-16 weeks of paid time off for certain medical issues and/or the arrival of a new child.

The costs of providing these two types of paid time off benefits adds another 3% of the employee’s base pay to their direct costs.   Whether an employer pays these costs directly or via their temporary staffing bill rate, they are the same.

Mandated Healthcare Benefits   

The Affordable Care Act mandates that all employers either provide comprehensive health insurance for their full time employees or pay penalties.  The ACA benefit mandates apply to all temporary employees categorized as full time which is typically about 20% of a staffing agencies temporary workforce.

While not all temporary employees are eligible for this benefit, by the time your staffing agency spreads out the benefit costs of those who are, they need to add 1-3% of the employee’s pay to benefit costs.

Most employers offer much more expensive benefit plans than offered by their temporary staffing company whose plans are typically  designed for the coverage required for an interim rather than long term arrangement.  If your plan, for example, costs $500 month for one employee, that costs $3-3.50/hr.

Compliance Costs

The costs of getting the employee ready to work in one of your facilities can vary depending on your specific compliance requirements.  The costs associated with a typical compliance profile (including a  background check and drug screen)  can range between $35 to $100 per employee.   If vaccinations and immunizations are required, as in most healthcare environments involving patient contact, costs can be significantly higher.  If you require comprehensive educational or reference checking the costs go even higher.

Most staffing agencies will build those costs into their bill-rate by dividing total compliance costs (incurred at the point of placement) by the number of hours the employee will be on assignment.  The typical add-on charge can be anywhere from $.10 to $1/hr depending on the upfront required costs and the length of the assignment.

City and State B & O Tax 

In 2020, all staffing agencies in the state of Washington pay 1.75% of the bill rate you are charged to the Department of Revenue as a B & O Tax.  Most city governments will levy another  .5% for city based taxes.

The portion of these taxes, related directly to the employee’s direct costs, have to be factored into the bill rate because they directly relate to the agency’s employer role.

—————————————–

In the staffing agency’s world all of these costs are considered Direct Costs in that they have to be built into our bill rates for all employees we assign into temporary roles.   Direct Costs are also the same costs you would be paying if you hired that same employee direct.

In reality, most employers have enhanced healthcare benefits and paid time off programs that will increase their direct costs considerably.  For example….

  • Most employers offer paid time off in addition to the mandated state requirements. If, for example, you offered 2 weeks of vacation in addition to 6 sick days your costs per hour increase by 3.8% of the employee’s pay rate.
  • If you provide 10 paid holidays your costs per increase by another 3.8%.
  • A  401K matching plan or other retirement programs often adds 2-5% of the employee’s pay to their direct costs.

Other Service, Administrative and Overhead Costs  

In addition to both hour agency’s and your own direct costs, there are additional costs of hiring and managing an employee that have to be built into a realistic cost comparison between a temporary employee and an employee working for you directly.   These are the costs that a staffing agency builds into their service fees and are embedded somewhere in the operating budgets of most employers.

These costs include….

Employee Recruiting and Selection Costs  – According to the Society of Human Resource Managers, the costs for an employer to hire directly averages about $4k/hire.  Those costs, averaged over the first year of an employee’s employment can add another $2-3 to an employee’s costs per hour.

Administrative Costs – include the costs of paying the employee, administering their benefits and supporting their work while on assignment – all services that employers would need to provide internally if they didn’t receive them from their staffing agency.  We estimate that the costs of providing these types of services add another 1-3% to the cost of each employee.

Unforeseen Legal Liabilities –  accompany every employer-employee relationship and are the unforeseen costs that can be incurred if an employee is injured, files a claim for unemployment or worse yet, a claim for discrimination or workplace harassment.  A cost of 1.5% of the employee’s base pay is the typical percentage attached to cover these unforeseen liabilities.

How do all these employee costs compare to what you pay for an agency temp?    

Here’s what the math typically looks like on a per hour basis for an employee doing basic administrative work in an office setting…….

Cost Item Temporary Employee Same Employee Hired Direct
Pay Rate $25.00 $25.00
FICA and Medicare  Taxes $2.39 $2.39
Washington State SUTA $0.75 $0.75
FUTA $0.15 $0.15
Workers Compensation Insurance $0.15 $0.15
WA Mandated PTO and Paid Leave $0.41 $0.41
Typical Healthcare Coverage $0.45 $3.13
Compliance $0.10 $0.10
TOTAL DIRECT COSTS/Hour $29.40 $32.07
WA and City B and O Tax $0.63 $0.00
Additional PTO (Vacation, Personal) $0.00 $0.96
Holiday Pay $0.00 $0.96
Retirement or 401K Match (est) $0.00 $0.50
Recruiting and Selection (Est) $0.00 $1.92
Administrative Fees (est) $0.00 $0.50
Other $0.00 $0.38
Agency Service Fees $6.47 $0.00
TOTAL COSTS /Hour $36.49 $37.29
Difference  $$$$ $0.80
Difference % 2.2%

        

This chart  shows that once all the extra benefit, recruiting and administrative costs associated with being an employer are itemized and accounted for, temporary employees can actually cost  less than the same employee hired directly – in this case 2% less.

Information about the “real costs” associated with any staffing model are often surprising …but important to consider when making decisions on the best way to fill an open need.   Temporary or contract workers are often  considered a key element of a “flexible” workforce strategy but they can also provide a way to lower your operating costs. 

If you’d like to check out other blogs on this topic……

Making Cents out of Your Staffing Aency Invoice 

Negotiating With Your Staffing Agency

 

 


PACE Staffing Network is one of the Puget Sound’s premier staffing /recruiting agencies and has been helping Northwest  employers find and hire employees based on the “right fit” for over 40 years.

A  4 time winner of the coveted “Best in Staffing” designation , PACE is ranked in the top 2% of staffing agencies nationwide based on annual surveys of customer satisfaction.

PACE services include temporary and contract staffing, temp to hire auditions, direct hire professional recruiting services, Employer of Record (payroll) services, and a large menu of candidate assessment services our clients can purchase a la carte.

To learn more about how partnering with PACE will make a difference to how you find and hire employees,  contact us at 425-637-3312 or e mail our Partner Service and Solutions Team partnerservices@pacestaffing.com.

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