The True Dollar Cost of Staffing Agencies

May 13, 2009 – 4:26 pm

Busting the Myth That Staffing Agencies Are Free –

In earlier posts, I have examined - and busted - the industry-promulgated myth that staffing agencies charge no fee to help independent professionals find a temporary job. I have shown that staffing agencies charge a very high hidden fee and that, in fact, staffing agencies take a much higher percentage of gross compensation than what Hollywood talent agencies charge to represent entertainers or what sports agents charge to represent professional athletes.

In this post, I will put a dollar value on staffing agency charges. But first, I want you to answer as honestly as possible this one question:

How much am I willing to pay someone else to successfully market my consulting services to prospective clients?

Is a three-month (500-hour) project that pays $50 per hour worth $500 to you or, maybe, $1,000 or $2,000? Would you be willing to pay someone $5,000 or $10,000 or more for a three-month gig?

How much more would you be willing to pay if the project had a duration of six months or a full year? Would you pay more if the project paid $100 per hour, $150 per hour or $200 per hour? How much more, if anything at all, would you be willing to pay?

Recall that I wrote:

“Staffing agencies do, indeed, charge a fee for helping independent professionals find temporary work, and the true fee for that service is 25.25% of billings on the low side and 42.5% - or more - on the high side.”

The true fee is the amount of the billing rate that you give up when a staffing agency finds a temporary job for you. In practice, it is the difference, or margin, between what your staffing agency bills the client and what it pays you as gross wage less the employer’s share of payroll taxes and payroll processing costs.

The table below shows the true fee of using a staffing agency to find a temporary job, expressed as a percentage of the staffing agency’s billing rate to the client.

Table 1. True Fee Varies with Agency Margin

Agency Margin	Percentage of Billing Rate
50%	42.50%
35%	25.25%
25%	13.75%

Notice that the true fee varies with the agency’s margin. When the agency takes only 35% off the top, the true fee is 25.25% of the billing rate. The true fee increases to 42.50% when the margin is 50% of the billing rate. The fee decreases to just 13.75% when the margin is only 25%.

The percentage varies because the payrolling overhead is a fixed percentage of gross wage. When the agency’s margin is high, your gross wage is low and the agency’s payrolling overhead is also low. Conversely, when the agency’s margin is low, your gross wage is higher and the agency takes a bigger hit on the payrolling overhead.

This is one reason why staffing agencies rarely accept a margin that is less than 35% of the billing rate. Their profits get squeezed two ways by lower margins; first, by the lower margin itself and, second, by the higher payroll costs.

Staffing agencies have a strong incentive to take more than 35% when they can get away with it, because their gross profit - the true fee for using a staffing agency - increases disproportionately when staffing agencies take more off the top.

If you knew the agency margin, you would have the information you need to negotiate the lowest possible fee and, thus, the highest possible gross wage. You would know if you were being treated fairly or not.

Learning the billing rate should be easy, shouldn’t it? You just ask the staffing agency how much it is billing for your direct consulting services to the client. Subtract your gross wage from the billing rate and, ta-da, you have the agency’s margin.

Running Up Against the Code of Silence

Oh, you say you asked the agency rep how much the client was paying for your direct services and the rep refused to tell you? You say she murmured something about proprietary and confidential information? I see. Then she said if you asked again she would put you on her agency’s do-not-call list and if you asked the client what it was paying for your consulting services the agency would pull you off the project and terminate your employment contract.

Congratulations, you have just run up against the staffing industry’s code of silence. Staffing agencies have long enforced a code of silence around the terms of employment in order to intimidate their temporary employees and prevent them from learning the billing rate or from revealing their pay rate to other temps or to the staffing agency’s client. It would be just too embarrassing for the staffing agency if either you or the client were to learn how much the agency took off the top.

Nevertheless, it is highly desirable that you do learn the billing rate because that is the only way you can learn how much the staffing agency is charging to place you on a temporary project with the client. If you ask discretely, many project managers will disclose what they are paying the agency for the work you are performing.

Professional Service Providers Publish Their Fees

A hallmark characteristic of professional service providers is full disclosure of services and fees. Staffing agencies are the only service providers I know of that systematically prohibit their employees who are actually doing the work from knowing the price of the work they are doing.

Therefore, in the interest of full disclosure, I will publish the actual dollar cost of using a staffing agency to find a temporary job. Using the values in Table 1., I will show the true dollar cost of using a staffing agency as a function of these three variables:

1. Agency Margin
2. Billing Rate
3. Duration of Contract Assignment

I think the results will astound you.

Table 2. The True Dollar Cost of a Three-Month (500-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$10,625	$21,250	$31,875	$42,500
35%	$6,313	$12,625	$18,938	$25,250
25%	$3,438	$6,875	$10,313	$13,750

Table 2. gives the true cost of using a staffing agency to find a temporary job that lasts only three months (500 hours). Most staffing agencies take 35% off the top. Would you be willing to pay an agency that takes 35% off the top $6,313 for a three-month gig that paid only $50 per hour?

Remember, if you located the gig on your own and signed directly with the client, this money would be yours to keep. Would you be willing to give an agency that takes 50% off the top $10,625 for a three-month gig? Would you be willing to give up twice as much, $21,250, for a gig that paid $100 per hour?

Table 3. The True Dollar Cost of a Six-Month (1000-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$21,250	$42,500	$63,750	$85,000
35%	$12,625	$25,250	$37,875	$50,500
25%	$6,875	$13,750	$20,625	$27,500

Table 3 gives the true cost of using a staffing agency to find you a six-month gig. Assuming your consulting services are worth $100 per hour to a client company, would you be willing to pay a staffing agency the price of a new car to find you a six-month gig?

Table 4. The True Dollar Cost of a One-Year (2000-Hour) Gig

Agency Margin	Hourly Billing Rate
	$50	$100	$150	$200
50%	$42,500	$85,000	$127,500	$170,000
35%	$25,250	$50,500	$75,750	$101,000
25%	$13,750	$27,500	$41,250	$55,000

Table 4 gives the cost of using a staffing agency to keep you in temporary work for an entire year, regardless of whether the work is one gig or several gigs.

I do not know of anyone who, knowingly, would gladly pay a staffing agency more than $25,000 to keep them employed full-time in a $50-per-hour job. Do you? Would you pay a staffing agency more than $50,000 a year to keep you employed as a $100-per-hour consultant? What about more than $100,000 for a $200 per hour gig?

So, there it is. Now you know the true dollar cost of using a staffing agency to find a temporary job. What are you going to do about it?

James R. Ziegler, Ph.D.