Curious About What Goes Into Your Staffing Agency Bill Rate?
We thought you might be – particularly when you see that gap between what the “temp” is being paid per hour, and what your agency is billing you per hour. What happens to all that money in between? Is your staffing agency just rolling in dough, or do agency bill rates just need to be more transparent so that everyone knows who pays for what?
We think the latter, as truth be known there are a lot of direct costs that have to be built into a staffing agency’s bill rate that aren’t always apparent. In fact a big chunk of that bill rate are the same costs you would incur if you hired the employee directly!
We started blogging on staffing agency pricing models in 2014 – and learned that information about staffing agency bill rates was one of your favorite topics. So to help our readers take the mystery out of staffing agency math and your staffing agency invoice, here’s a summary of the costs that make up the typical staffing agency bill rate:
The Employee’s Pay Rate
By far the biggest component of your staffing agency’s bill rate is the employee’s per hour pay rate. 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 your agency has to pay an employee to attract them to your assignment.
While many staffing agencies are hesitant to disclose what they pay an employee assigned to your company (for both valid and invalid reasons), at PACE we disclose our employee’s pay rate to calibrate what our client is requesting in terms of skills and experience in the local marketplace. What we agree to pay the employee as part of our calculation of our bill rate has to be big enough to accommodate, attract and retain the right candidate. Skimp on that, and we might assign an employee who doesn’t meet our client’s expectations.
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 all 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 2018, the social security tax is 6.2% of wages up to $128,400. The Medicare tax is 1.45% of all wages – no small amount.
- The SUTA tax is the monies paid into the State of Washington to provide unemployment benefits to former employees. The rate varies depending on the staffing agency’s experience rating, but generally runs between 2-4% of the employee’s wages up to $47,300. 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 benefits increased substantially in 2018 for all employers. All employers are now required to provide their employees with 1 hour of paid time off for every 40 hours worked to allow for paid absences due to health or safety concerns. This totals to 52 hours a year, or just under 6.5 days a year.
The costs of providing this paid time off has to be built into your staffing agency’s bill rate, increasing the employer’s costs by 2.5% of the employee’s pay rate.
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, you have to add another 1-3% of the employee’s pay to direct costs.
The costs of getting the employee ready to be in your workforce, even if employed by the temporary staffing agency, vary depending on your compliance requirements. The costs associated with a typical compliance profile that includes background checks and drug screens, can range between $35 and $100 per employee. If vaccinations and immunizations are required, as in most healthcare environments involving patient contact, costs can be significantly higher.
Most staffing agencies will build those costs directly 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 $.04 to $1/hr depending on the upfront required costs and the length of the assignment.
City and State B & O Tax
All staffing agencies in the state of Washington pay 1.5% of their bill rate 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.
All of the above costs are considered Direct Costs in that they are the non negotiable items that must be considered when setting a bill rate for any particular employee.
- When you add all these costs together and subtract them from the bill rate, you now have what your staffing agency calls its GROSS PROFIT.
- NET PROFIT, on the other hand, is what is left after all costs associated with the delivery of the service plus their recruiting and other operational costs.
About Service Fees and Net Profit
As a client of temporary staffing services, it might be helpful to know that the only portion of your staffing agency’s bill rate they can negotiate are the costs related to their service fees and and profits. All the rest of their direct costs are fixed – outside their control.
Service fees and profit, on the other hand, can vary based on several factors:
- Recruiting and Selection Costs – The more difficult it is to find the type of employee a client wants or the type of screening your agency needs to perform, the higher your agency’s recruiting and evaluation costs will be and the higher the bill rate.
- Service Delivery Costs – vary based on what services the client requests. For example, employers who allow their staffing agencies to “just send” an agency vetted candidate, tend to have lower service fees than employers who require their agency to refer multiple candidates for internal vetting. Employers who require their staffing agency to partner with them for actual on the job performance are using up more dollars to deliver services than employers who don’t require any “after the placement” services.
- Agency Operating Costs – includes all the office space, professional staff, insurance, marketing, and technology expenses required to support the operation of the staffing agency’s business. A staffing agency’s operating costs, like all businesses, tend to increase with additional layers of business complexity. For most staffing companies, there is considerable complexity associated with the number of regulations and regulatory agencies involved in the HR and payroll function, making their operational costs a significant portion of their service fees.
- Volume Based Cost Reductions – are possible any time an employer requests multiple candidates for the same job description.
- Length of Assignment Cost Reductions – are possible for longer term assignments where the up front costs can be spread over more billable hours. In general terms, the longer the assignment, the lower the service fees per hour.
- Profit Objectives – are different from operating costs and are determined by how much the agency owner chooses to earn from each service transaction. Profit objectives for individual agencies can range from 3% to 15%. Publicly owned and multi location companies tend to have higher profit objectives than privately owned local staffing companies.
How do all these direct costs add up to a bill rate?
Here’s what the math typically looks like on a per hour basis for an employee performing basic office work:
- Pay Rate Per Hour $ 25.00
- FICA and Medicare $ 1.86
- WS SUTA $ .75
- FUTA $ .15
- WC $ .15
- Mandated PTO $ .63
- ACA Healthcare Coverage $ .63
- Compliance Costs $ .08
- WA State and City B and O Tax $ .59
- TOTAL DIRECT COSTS $ 29.84
- Service Fees/Hour $ 7.00
- Profit $ 1.85
- BILL RATE $38.69
This math shows that once all the recruiting, benefit, administrative and HR costs associated with being an employer are itemized and accounted for…..
….most staffing agency bill rates are actually less than their own costs of hiring and managing the same employee directly.
If you’d like to check out other blogs related to this topic……
This article was written by Jeanne Knutzen, founder and CEO of the PACE Staffing Network, a leading Northwest based staffing and recruiting agency who has been helping local employers find and hire high-talent employees for over 40 years.
If you’re getting ready to find a new employee for either a temporary or core role, the PACE team would love to hear from you. Contact us by calling 425-637-3312 or email us at email@example.com