The Size of Staffing Agency Overcharges

May 18, 2009 – 9:18 pm

There Ought to be a Law –

A reader of an earlier blog entry asked, “Can billing rate disclosure be enforced by law? Is there a way to promote change legally?”

Yes, there is a way to promote change legally. State or federal legislators can pass laws requiring staffing agencies to disclose the billing rate.

Every year, a state legislator in one state or another submits a bill that would require staffing agencies to disclose the billing rate, and every year the staffing industry lobby successfully blocks passage. Rarely do the bills even make it out of committee.

I believe the primary contributor to staffing agency abuse and overcharging is the privileged position of staffing agencies as both a job matching service and a payrolling service. This dual role makes it possible for staffing agencies to hide their true cost from the very individuals they are selling their job matching service to.

A lack of transparency hides the true cost of using a staffing agency from normal market forces, making it possible for staffing agencies to charge inflated hidden fees.

By the way, one definition of extortion is the use of one’s privileged position to attain personal financial gain at the expense of another through coercion or intimidation. I believe that, by this definition, many staffing agencies engage in systematic extortion.

A RICO Violation?

There could be a federal RICO (Racketeering Influenced and Corrupt Organizations) case here. As I see it, if a staffing agency advertises that it will find you a temporary job, then that staffing agency is selling a service to you. If the agency is selling a service, then there must be a price for that service. If the staffing agency systematically hides the price for that service, and intimidates individuals who try to learn the price, then the agency’s actions would appear to be a clear violation of the RICO Act.

There could be a juicy settlement in it for any RICO lawyer who decides to take on the case of systematic overcharging of temporary employees (and, therefore, systematic underpaying of gross wages) by staffing agencies.

The True Cost of the Staffing Agency Model

I previously showed that the true hidden cost of using a staffing agency can range from 25.25% of collected revenues (for an agency that takes 35% off the top) to 42.50% (for an agency that takes 50% off the top).

The True Cost of the Hollywood Model

In contrast with the staffing agency model, the Hollywood model is completely transparent. In the Hollywood model, the talent agency matches a talented individual (an actor, for example) with a project. A separate payrolling service then employs the actor for the duration of the project.

The separation of the job matching function and the payrolling function exposes talent agency fees and payrolling service fees to the daylight of full disclosure. Consequently, there are no hidden fees and all costs are out in the open. Market forces, therefore, are able to keep costs reasonably low.

Talent agencies typically take 10% off the top and payrolling services take another 5%. Therefore, the true cost of the Hollywood model is 15% of what the production company pays the talented individual.

Staffing Agency Overcharge is 10.25% to 27.50% or More!

How big is the staffing agency overcharge? One measure is the difference between the true hidden cost of using a staffing agency and the openly transparent cost of using a Hollywood talent agency to find temporary work.

For an agency that takes 35% off the top, the overcharge would be 10.25% (25.25% minus 15%). For an agency that takes 50% off the top, the overcharge would be 27.5% (42.5% minus 15%).

A Possible RICO Judgment: How Much is at Stake?

Regarding the size of such a RICO lawsuit, just multiply the average overcharge by the total number of contractors employed by large staffing companies such as Manpower and Adecco.

Consider the following assumptions and do the arithmetic:

• Average billing rate of $50 per hour.
• On average, 1680 hours billed per contractor per year.
• One hundred thousand, or so, contract professionals at this rate.
• Overcharge is ten percent (or more) of collected revenues.

These figures compute to a total overcharge of $840 million per year. How many years do you want to go back? The total size of a RICO judgment could number in the billons of dollars!

You can play with the assumptions but, any way you figure it, the numbers are staggering. Maybe the lawyers base their case on only 10,000 members (the infamous Viscaino vs Microsoft class-action lawsuit had about 8,000 member contractors), that is still $84 million per year.

If a big RICO law firm believed the case had merit, they just might want to take it on.

The legal battle would be a long, drawn-out dogfight. Recall that the infamous Vizcaino vs. Microsoft permatemp case took eight years and five appeals (Microsoft lost each appeal) until the plaintiffs finally prevailed in 2000 to the tune of a mere $97 million. A RICO lawsuit against staffing industry giants would undoubtedly take as long or longer to reach a settlement. But what a settlement it would be!

James R. Ziegler, Ph.D.