How Much Should My Temporary Employee Cost?
How Much Should My Temporary Employee Cost?
This blog has been written to provider our readers with a quick guide to the pricing practices of the staffing industry and to help users of temporary staffing services make sense out of the bill rates being charged for staffing services.
A common misperception is that temporary staffing services cost a whole lot more than an employee you’ve hired direct. While some high talent contract staff can cost a client more than what they might have to pay a regular employee doing the same work, for many job categories, the relative costs of using a “temp” as opposed to hiring directly is kind of like “six to one, half dozen to the other.”
But if you’re one of those folks who has been tempted to have a bill rate dialogue with your staffing vendor starting with – “You’ve got to be kidding- you’re paying ‘our’ employee $25/hr. and billing us $37? This doesn’t seem right” – this blog is for you. We’ve heard customers share comments like this countless times, so thought it time to set the record straight and arm the users of temporary staffing services with the facts. Nowhere in this blog will we suggest you shouldn’t negotiate for a lower bill rate, but instead are arming you with when and how to negotiate from a place of “knowing” rather than guessing.
When it comes time to purchase temporary or contract staffing services, we’d like this blog to help you get the most out of your staffing agency dollar!
This blog will also review the two most popular pricing models used by most staffing companies plus provide an overview of the pricing model our company uses and why.
Let’s get started…
What You Need to Know About Staffing Agency Bill Rates….
The most important thing for you to know about your staffing agencies bill rate is just how much of it covers all the DIRECT and otherwise MANDATED costs associated with your staffing agency’s legal responsibilities as the employer of record for the employee assigned to your workplace.
We say this knowing that many staffing managers simply aren’t aware of what it costs in today’s regulatory environment to be an employer. The Pacific Northwest has one of the highest mandatory benefits costs of anywhere in the US…. with the State of Washington, in particular, requiring employers to pay either directly or via payroll based taxes a large number of mandated benefits (Sick and Safe, Parental Leave, Long Term care etc.). Add these costs the costs of obtaining workers compensation coverage from a state managed workers comp fund, the costs of federal Social Security and Medicare taxes, State and Federal unemployment insurance, that portion of Washington’s B and O tax that is directly attributable to employee costs, and the costs of ACA compliant healthcare, and you quickly get to a point where temporary staffing companies doing business in Washington must carve out anywhere from 70-85% of their bill rate just to pay the basic costs of being an employer.
This also means that only 15-30% of your staffing agency’s bill rate can be used by them to cover the actual services they provide – the sourcing, recruiting, and management of their temporary or contract workers – and a small percentage that goes for the profit they need to make for providing that service. As an example, in a bill rate of $40/hr, $34-35/hr of that bill rate is used to pay for all the non negotiable direct costs it takes to be the employer of record. $4 – $5 dollars of that bill rate typically go to pay for services, while only $1 – $2 per hour gets set aside for profits.
Keep in mind that all mandated regulatory costs, tax liabilities and the monies paid to the temporary employee directly for pay and benefits represent the same COSTS an employer would incur if they hired the employee directly.
Are you with me so far? Staffing agency bill rates are simply not what they seem.
About Staffing Agency Pricing Models
Bill Rate Based Pricing
Some agencies working in specialized markets typically with high pay rate employees, use a pricing model whereby they simply quote a bill rate to a customer either using a menu that organizes bill rates by job function, or by special agreement between client and vendor. The employee’s pay rate is not disclosed and in some areas of professional staffing, it is off limits in terms of the conversation that will go on between the client and the employee’s agent regarding bill rate.
While there are lots of good things about a bill rate only pricing model, one of its downsides is that it creates the perception that all agency pay plans, per hour rates, service packages, or profit targets are the same – which is NOT the case. There is considerable variability in both the bill rate that gets quoted to a customer for the same work, and the pay rate that is paid to the employee doing the work. Bill rate only pricing models are basically buyer be aware. Unfortunately, we see way too many buyers choosing to stay unaware.
Pros & Cons of Bill Rate Only Pricing
While the upside of using this “bill rate only” pricing practice is its simplicity – theoretically making it easy to shop and compare different staffing agency pricing – the downside is the lack of transparency regarding how bill rates are determined. When buyers don’t price shop, competition between vendors becomes irrelevant. The margins tend to be high, but so are the recruiting costs for the high value talent a bill rate only agency represents. That said, once an agency recruits and is able to represent a high value employee in the staffing marketplace, the bill rate only model is probably the most profitable of any of the pricing and service models that are part of the staffing industry.
Because the typical buyers of staffing services based on bill rate only are hiring managers with little to no idea what their bill rate is paying for, they typically don’t set standards for either employee quality or the services they need from their staffing agency. This means they are vulnerable to issues with quality – agreed to deliverables not met.
Because bill rate pricing models are used primarily in situations involving specific high value employees and “one-off” purchasing scenarios, the final bill rate is often agreed to up front between a hiring manager and a vendor and rarely involve considerations of market competitiveness.
Mark-Up Over Pay Rate Pricing
A more popular pricing practice in the staffing industry, the mark up over pay rate model, was created to increase bill rate transparency and normalize staffing agency fees. Using a markup based pricing model, the customer either sets or provides guidance around the employee’s pay rate and asks their staffing agency to quote them a mark up over that pay rate.
This pricing practice is not without rationale. Unmanaged, pricing mark ups can vary significantly between agencies and when normalized can have a significant impact on a company’s overall staffing spend. For example, if an employer specifies a $20/hr. pay rate and Agency A quotes a mark-up of 40%, the bill rate is $28/hr. If Agency B quotes a 60% mark-up, the bill rate is $32/hr. Other service elements equal, a purchaser selecting Supplier A will save $4/hr. or 14%.
The mark-up over pay rate model is probably the most prevalent in the staffing industry but unfortunately once again fosters the mythe that all staffing agencies (with the same mark up) provide the same levels of service or will deliver the same quality of employee. Unfortunately, mark-up over pay rate pricing models tend to work against agencies with a strong quality focus who simply need a larger margin to afford the level of services they are missioned to deliver.
In fact, the mark up pricing model can end up working against its own self interests, particularly in high volume staffing purchasing scenarios. For example, if competition drives down staffing company mark-ups, and the regulatory environment drives up mandated DIRECT COSTS, a staffing agency can find itself either having to eat the cost increases, compromise its focus on quality, or off load the customer completely. If high quality agencies walk away from a customer, the only agencies left to provide them with employees they need are low quality agencies who frequently compromise their service promises just to stay in business. We’ve seen situations where purchasers of large volume staffing services were asking for mark ups at rates that were actually below their DIRECT COSTS, which basically set up a scenario where only non-compliant or legally compromised vendors could afford to consider the business.
Keep in mind that while DIRECT COSTS can vary based on the service location and the type of employee being provided, all agencies and their customers drink from the same employer-based regulatory pool. Both must find a way to deal with increased employer costs, preferably by working together. At a minimum, buyers of high volume staffing agency services should be wary of bill rates or mark-ups that seem too good to be true!
PACE Staffing Network’s Innovative Pricing Model
Another pricing model that we think is more innovative in how it addresses the issues listed above is a model that is based on MARK UP, but a mark up over all DIRECT COSTS, not just pay rate.
It is our preferred pricing model, reflecting our commitment to client/vendor partnering. The Mark Up Over Direct Cost pricing model requires us to…
1) Fully disclose all DIRECT COSTS associated with the Employer of Record role – laid out, itemized.
2) Create a customized service agreement focused on the services our clients need, no more
3) Normalize Pay Rates – fix pay rates for each job category turning pay into a fixed rather than variable component of our bill rate
4) Establish a mark up percentage that will be used against all DIRECT COSTS, just just an employee’s pay rate.
The $$$ difference between DIRECT COSTS and BILL RATE represent our SERVICE FEES plus a small and fixed percentage devoted to profit.
Service fees are negotiated with each customer based on their real needs for service – not prepackaged assumptions! We want PACE customers to pay for the services that add value to what they are already doing, but not services that either that would be redundant to what they can do internally or that don’t add value in their work environment.
As example, the following table details all the DIRECT COSTS associated with a temporary employee earning $25/hr. and assigned to work in an administrative or professional role.
|Employee Pay Rate/Hr.||$25.00|
|FICA Tax/Medicare Tax||$2.45|
|WSES (State Unemployment Tax)||$0.15|
|FES (Federal Unemployment Tax)||$0.12|
|State Workers Compensation Fund||$0.15|
|ACA Compliant Healthcare Coverage||$2.39|
|Seattle Sick and Safe and Parental Leave Benefits||$0.80|
|B and O Tax on Employee Costs||$0.42|
|Prorated Onboarding and Compliance Costs||$0.08|
|TOTAL DIRECT COSTS||$31.56|
(26.2% of pay rate)
Once direct costs are detailed, the bill rate is calculated as a mark-up over those costs. For example, if the mark-up is set at 20%, the bill rate would be $37.87 which translates into a SERVICE FEE of $6.31 /hr.
In the DIRECT COST PRICING model….
- When DIRECT COSTS change, bill rates change proportionately in fully rationalized ways.
- SERVICE FEES are lowered (or increased) based on changes in service requirements.
- Bill rates are fully transparent with a complete disclosure of the fees actually paid to us for the services performed – taking the mystery out of your bill rate.
If the upside of this pricing model is its transparency, the downside is the amount of information that is made available to purchasers who aren’t always as interested in staffing math or employer costs as we are. Our solution is to customize our presentation of this model to fit our client. We recognize the importance of educating those clients who who want to know more, while simplifying the conversation for those who don’t.
We believe the DIRECT COST PRICING model is the most transparent and easy to manage pricing model in the staffing industry. We have found it to be the right platform to inspire honest and direct conversations between ourselves and our clients re: ways to raise or lower our bill rate to fit budgets while also setting shared expectations for service and employee quality.
The actual pricing agreement including mark ups is reviewed annually, making sure the client is fully aware of the regulatory changes impacting the Direct Cost component of our bill rate, while also providing them with a way to o reconsider their own needs for service.
Want to learn more about our Direct Cost Pricing Model?
If you are interested in learning more about staffing agency pricing practices in general, or our DIRECT COST PRICING model in particular, or if you simply want to benchmark your current bill rates against what might be available to you in the current marketplace, our Partner Services and Solutions team would be happy to answer your questions or concerns in a confidential conversation. To be honest, 2023 is a year inundated by demands for talent while talent availability is not improving, so not a good time to be looking for significant decreases in bill rates. This is not to say the purchasers of staffing services should not shop for the best price or pricing model that is the right fit for their business.
If you’d like to learn more about the whens and how tos of negotiating a reduced bill rate with your staffing agency, check out this blog that addresses that topic directly.
We believe that pricing transparency is crucial to building trust between our staffing firm and your business, so take pride in explaining how we price our business and helping you build a service model customized specifically to your needs.
Who is PACE?
PACE Staffing Network is one of the Puget Sound’s premier recruitment/staffing agencies and has been helping Northwest employers find and hire employees based on the “right fit” for over 4r years. We have been locally and woman owned since our founding in 1975.
We are a 5-time winner of the coveted “Best in Staffing” designation, and are consistently ranked in the top 2% of staffing agencies nationwide.
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 hiring help and candidate assessment services purchased a la carte.
To learn more about how partnering with PACE can make a difference to the people side of your business, contact us at 425-637-3312, email our Partner Services and Solutions team at firstname.lastname@example.org, or complete the form below and we’ll be in touch!
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In today’s market, its never too early to get started on your next staffing challenge…..