Often, people will have questions regarding how staffing agencies make money and how much money that is. There is a gap between what a contract employee is being paid and what a staffing agency is billing per hour. What happens to the money in the middle of those rates? At Visium, we believe in treating everyone fairly and providing the best rate possible to both employers and employees.
In truth, many direct costs in a staffing agency bill rates are not overly apparent. However, a large portion of bill rates are costs equal to the ones that any company would be paying if they had decided to hire the candidate directly. In this post, we hope to help our readers take the mystery out of the staffing agency bill rate.
The Employee’s Pay Rate
The largest portion of any staffing agency bill rate is the hourly salary of our contract employee. Pay rates are determined by what competitive employers are paying for similar skill sets in the local market. The more experienced the candidate, the more it costs to obtain those skills and attract those candidates. As with most things in business, it is supply and demand which sets the costs for skills. We do not typically disclose any employee’s rate. However, we will always work with our partners to estimate the cost to attract and retain the right candidate. If we skimp on this section, we will often find it hard to find and retain the correct candidate.
Of course, the reality of doing business means there are a multitude of taxes which must be paid to the various governments that have control over the relationship between employer and employee and specifically the payroll transactions. These are the same taxes that would have to be paid if you hired and paid the employee directly.
FICA is a federally mandated tax that must be paid by both employees and employers for Social Security and Medicare benefits. The latest tax rates, in 2018, had the social security tax at 6.2% of wages and the Medicare tax is 1.45% of all wages. As you can see, these FICO taxes are not a small amount of money, but they need to be covered to legally employ any candidate.
Another tax that must be paid is the SUTA tax. This is money that must be paid to the state of Florida to cover unemployment benefits to former employees, this is roughly 2.7%.
The FUTA tax is just the federal version of the SUTA and is used to fund state workforce agencies. This tax, in Florida, comes out to 6% of an employee’s earnings over the course of the year.
All staffing agency clients require some level of insurance. Larger clients require increased coverage, which the agency must obtain for the entire organization. For example, Visium currently holds: $5 million umbrella business liability, an employee practice liability, auto and accident insurance, cyber and theft insurance, and errors and omissions insurance. These all add up to over $25,000 in insurance costs per year. These costs only grow with new customers always adding additional requirements.
In addition, Florida has mandatory workers compensation insurance. In Florida, employers must provide monies to a statewide fund that will cover the costs incurred in the event of a workplace accident or injury. The cost for this insurance varies depending on the job classification and an “experience factor” of every company. This factor is based on how many injuries and claims on workers compensation each year. This cost could be up to an addition 2% on the cost.
Finally, Visium Resources must provide the mandated ACA health insurance as a benefit to our employees. We also provide holidays and PTO benefits to our qualified employees. These additional benefits add approximately 6.5% to the labor over the course of the year.
All the costs of getting an employee ready to work for your company can vary. This is depending on each individual client’s compliance requirements. A typical compliance portfolio consists of a drug and background screening can range anywhere from $35 to upwards of $100 per employee. If significant clearance checks are required these costs can be higher.
The above costs are usually considered “direct costs” in that they are not negotiable and must be considered and included when in a staffing firm bill rate for any particular employee.
When you add all these costs and subtract them from the bill rate, you will see what the agency will refer to as their GROSS PROFIT.
NET PROFIT, however, is what is left of the gross profit after the costs associated with the service and delivery of the candidates plus the recruiting and other operational costs.
Service Fees and Net Profit
The only negotiable part of a staffing agency bill rate is the costs related to their service fees and net profit. All the direct costs are fixed – or outside of their control. These service fees can vary based on several important factors:
- Recruiting and Selection Costs: The more difficult to locate and secure a candidate is or the more screening is required for a potential employee the higher the agency’s recruiting and evaluation costs will be and conversely.
- Operating Costs: This includes all of the costs associated with doing business in the staffing industry, including: office space, staff, marketing, technology and software costs along with other miscellaneous costs. For most staffing agencies, like other businesses, these costs increase with the additional layers of complexity in the business. In the staffing firms, there are many complexities associated with the number of regulations and costs dealing with payroll and HR. These operational costs are a significant portion of service fees.
- Exclusivity Based Cost Reductions: The reductions are sometimes possible if a staffing firm is given exclusive or beneficial job placement opportunities.
- Length of Assignment Cost Reductions: Are possible when a client request a long term contract, in which the costs associated with recruiting the candidate can be spread over a longer period of time.
- Volume Based Cost Reductions: Could be possible when a client requires multiple contractors within the same organization within a given period of time.
The difference between the pay rate and the staffing agency bill rate must cover all of the recruiting, benefits, administrative and HR costs associated with handling employees. We can see, most staffing agency bill rates are less than the costs of hiring and managing the same employee directly. Find out how Visium can help you today!