The REAL Cost of Staffing

 (This article is taken from my most recently published newsletter, if you would like to be added to my mailing list, let me know!)

A (FICTIONAL) REAL-LIFE SCENARIO

 After our recent poll that we administered in which we asked what we could do to improve our services, I noticed that we received many of the same answers to the question “What would you like to know more about our staffing services?” The biggest response that we received was directed towards learning more about how staffing agencies make money, and how we decide on our billing rates for our staffing services.   These are great questions and a bit tricky to answer, and I will do my best, so here goes!

   The inquiries that I referenced above are often formed in a question something like this, “Why do you charge our company $13.00 per hour, and only pay the employees $10.00 per hour?”. This is probably the most frequently asked questions that we hear from clients and potential clients - one so common that, in fact, we will have a permanent link to address it on our new website that will hopefully be up within a few weeks’ time, but since the site is not up yet, I will do my best to address that here!

 Let me try to do so by using a (fictional) real-life scenario.

  Let’s say that your business calls our office to place a job order (which means that you are requesting our services to help you find the right candidate(s) for a job opening(s) within your organization) and you then proceed to tell me that you would like to pay $10.00 per hour for this position. I reply something along the lines of “Well that is wonderful! Our billing rate for that position would be 30%, or $13.00 per hour.” You pause, struck silent on the other end of the phone line, wondering how $10.00 per hour just increased to $13.00 per hour with one phone call.

 This is where we lose a lot of people. And admittedly, the blame falls to us. We (by 'we' I am implicating our entire industry) are not always known for doing a fantastic job of explaining the reason for our pricing; and why we probably feel like we have just quoted you at a phenomenal rate.

  So now, I am going to attempt to explain why we just quoted you at a 30% mark-up, and why it is not nearly as high of a mark-up as it may initially appear.  (For the following example we will use a flat pay rate of $10.00 per hour simply because the math is easier to figure with a well-rounded number such as 10).

 As you may already know, when you decide to pay an employee $10.00 per hour you are already paying more than just $10.00 per hour.  In addition to the $10.00 per hour paid directly to said employee (we’ll refer to our scenario's employee as 'Jim' from here on out), there is also a responsibility for the employer to remit the additionally accumulated payroll taxes and insurance that are due. **This example covers only the mandatory, payroll related and state / federal taxes and insurance we are talking about, this does not include health insurance or other additional benefits, which of course is an additional cost. (Our agency does provide ACA compliant insurance after 90 days however, as well as afford the employees the option to purchase AFLAC policies after 30 days, but we will not include them here either; if for no other reason than trying to keep this explanation as simple as possible.)

 Payroll taxes due break down like this:  

-         FICA taxes are 7.65 % (Medicare / Medicaid @ 1.45%, Social Security @ 6.2%)

-         Federal Unemployment Insurance “for 2016, the FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is the federal wage base. Your state wage base may be different.” cited taxmap.ntis.gov

-         State Unemployment Insurance varies based on your previous “claims history” and some other factors, but this is a citation directly from Arkansas.gov website: “In addition to the experience based rates (0.1% – 14%) or the new employer rate (2.9%), the 2016 rate will include

-         0.4% stabilization tax. The taxable wage base will continue to be $12,000. FUTA Tax Credit.”

-         Workers’ Compensation Insurance varies depending on the risk of the type of work being performed during the compensable wage period. So this number will be a lot lower if the type of work being performed is clerical as opposed to a much more injury-prone, high-risk job such as dam construction or perhaps underwater welding. This rate can vary from 0.05, to $8.22, to $50.00 per hundred, meaning every one hundred dollars of payroll becomes a multiplier for the base rate payable. For our figuring, we’ll use the middle-ground rate of $8.22 per hundred. Let’s say Jim worked a 40 hour workweek and was paid a gross wage amount of $400.00, then the insurance payment on those wages would come out to $32.88. (ie if Jim is paid $400.00, at a risk rate of $8.22, then the insurance payment would be 8.22 (risk rate) x’s 4 (per amount of hundred payroll) to equal 32.88.

Now, let's piece it all together and find the real cost of employing Jim. 

 Firstly, we will add in the FICA taxes at the rate of 7.65%, which brings the $10.00 per hour pay rate to 10.77 per hour, adding an additional tax of 0.77. Next, we’ll add in our Federal unemployment insurance at a rate of 6.0% of $10.00, which brings $10.00 per hour to 10.60 per hour, adding an additional tax of 0.60 (10.00 + 0.77 + 0.60 = 11.33). Our next addition is our State Unemployment Insurance. As mentioned, this will vary greatly depending on the business, but for our purposes we’ll once again pick a middle-ground number of 4.0% for SUI, which brings $10.00 per hour to 10.40 per hour, adding an additional tax of 0.40. Our updated hourly total for Jim is now $11.77 per hour (10.00 + 0.77 + 0.60 + .40 = 11.77). But we're not done just yet. Now we need to add in our workers’ compensation insurance, which for this example we have set it at $8.22 per hundred dollars. So, with $10.00 per hour being 1/10th of $100, we need to multiply $8.22 per hour by 10% and add it in to our totals, bringing our new hourly pay for Jim to $12.59.

 An increase from the original $10.00 per hour that we started out paying Jim, now comes out to a total of 12.59 per hour, which is an additional increase of nearly 26%!  So, when a staffing agency “charges $13.00 per hour and pays an employee $10.00 per hour, that means, according to this scenario, that the agency is actually only making 0.41 per hour on Jim. After 10 hours of billable labor, this agency would make $4.10. Etc, etc.

 Now, the question is “What does that 0.41 an hour pay for?”. Well, that will be in our next newsletter as I know my mind is worn out just from writing all of this! Let’s just say that I believe it to be just as intricate, and hopefully, just as enlightening and valuable as the information that we just covered.

A quick, just-by-the-numbers look of what Jim actually costs:

-         Jim's original hourly rate of pay = $10.00 per hour

-         Plus 7.65% for Social Security / Medicare (FICA) = Now Jim costs $10.77 per hour

-         Plus 6.0% for Federal Unemployment Insurance (FUI) =Now Jim costs $11.33 per hour

-         Plus 4.0% for State Unemployment Insurance =Now Jim costs $11.77 per hour

-         Plus $8.22 per hundred dollars in payroll =Now Jim costs $12.59 per hour

***Note: REMEMBER: This does not include ACA Health Insurance!! If you are mandated to provide employer sponsored, ACA compliant health-care, this cost will inflate further. Due to the vast potential of rate fluctuations when it comes to group employee health insurance, you would be better informed to request this number from your insurance agent / broker.

I hope this information was valuable (or at least useful!) to you. 

As always, thank you for reading and your ongoing support. Please let me know if you have any questions or feedback.  I always welcome conversation.

(To paraphrase Shakespeare's Mark Antony)

Friends, Americans, Arkansans,

Thank you for lending me your ears.

-Miles H. Crawford