Who Costs More – Your Temporary Employee or An Employee You Hire Direct?
Ever Wondered Why Your Temporary Staffing Bill Rate Is So Much Higher Than What You Pay Your Own Employees?
At some point most of our clients have noticed the difference between what they know they are paying their core employee on a per hour basis and what they see on our invoice as their cost per hour for a temporary employee doing the same or similar work. Why does the “‘temp” cost so much more? Are staffing agencies just rolling in dough or what am I missing?
the truth is that there are a lot of what we call direct and mandatory employer costs that have to be built into staffing agency bill rates that are the same costs you have to pay when hiring an employee direct – but you just can’t see them in such a white and black way.
In fact a big chunk of all staffing agency’s bill rates has to include the same “employer costs” you are already paying for the employees you hire direct!
We started blogging on this topic in 2014 – and quickly uncovered that staffing agency bill rates were not only not well understood, but was one of your favorite blogging topics. To help our readers take the mystery out of their staffing agency invoice, here’s a summary of the costs that make up the typical temporary employee bill rate:
The Employee’s Pay Rate
By far the biggest component of your staffing agency’s bill rate is what the employee is paid 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 your agency needs 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 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. Skimp on that, and we might assign an employee who doesn’t meet your 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.
In 2020 the new Family and Medical leave provisions will allow employees to take 12-16 weeks of paid tine off for certain medical issues and/or for both men and womenm, the arrival of a new child.
The costs of providing this paid time off benefits to the etent they fall to the employer need to be built into the staffing agency’s bill rate, increasing the employer’s costs over their pay rate by another 2-4%.
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 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 and $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 $.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 non negotiable and have to be built into our bill rates for all employees we assign into temporary roles. For the most part these are the same costs you pay when hiring direct. In fact most employers have costly benefit and paid time off programs that can escalate your direct costs considerably.
- When you add all these costs together and subtract them from the bill rate, you now have what we call our GROSS PROFIT.
- NET PROFIT, on the other hand, is what is left after all costs associated with the delivery of the service plus 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? How do they compare to the “real costs” of employing someone direct?
Here’s what the math typically looks like on a per hour basis for an employee working in an office (non industrial) environment….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.
We think information about the “real costs” of all employees is important for all hiring managers in order to make smart decisons about how to stay fast moving and nimble in a competitive marketplace. Temporary or contract workers are often a key element in that “flexible” strategy and will actually save companies money in the long run.
If you’d like to check out other blogs on this topic……
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 3 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 Solutions team at firstname.lastname@example.org.