How staffing agencies work, for employers and job seekers
A staffing agency sits between a company that needs people and people who need work, and its contract with each side shapes the deal for the other. Knowing how the models, the money and the legal duties fit together helps both sides ask better questions.
The main staffing models
Most agencies offer several arrangements. The right one depends on how long you need the person, how sure you are about the role and who you want handling payroll.
- Temporary: the agency recruits, employs and pays a worker who works at your site for a set period.
- Temp-to-hire: a temporary assignment with the option to hire the worker directly after a trial period.
- Direct hire: the agency finds the candidate, and you hire them as your own employee for a one-time fee.
- Contract: a longer assignment for a specific project or skill, common in IT, engineering and finance.
- Payrolling: you choose the worker, and the agency puts them on its payroll and handles employment paperwork.
- Employer of record: a firm becomes the legal employer for payroll, taxes and benefits, often where you have no legal entity.
How the money works
For temporary and contract workers, the agency charges you a bill rate for each hour worked and pays the worker a lower pay rate. The gap, usually expressed as a markup on the pay rate, has to cover the employer’s payroll taxes, unemployment insurance, workers’ compensation, any benefits, recruiting, overhead and the agency’s profit.
As an example, a worker paid $25 an hour and billed at $36 carries a 44 percent markup. That looks steep until you price the employer costs you would otherwise carry yourself. Overtime hours are usually billed at a higher rate, so ask how the agency calculates it.
Direct-hire fees are commonly figured as a percentage of the new hire’s first-year base salary, often 15 to 25 percent, and more for hard-to-fill roles. A 20 percent fee on a $90,000 salary, for example, comes to $18,000.
Who the employer is
For temporary workers, the agency is usually the employer on paper. It issues the W-2, withholds taxes, carries workers’ compensation and completes Form I-9, which is handled by the employer of record. Your company directs the daily work and supervises the person on site.
That split is called co-employment, and responsibilities can overlap. Under anti-discrimination and wage laws, a client company can be treated as a joint employer when it controls working conditions, so give temporary workers the same respect, training and fair treatment as your own staff.
Safety is shared too. OSHA treats host employers and staffing agencies as sharing responsibility for temporary workers’ safety. The agency typically provides general training, while the host trains workers on site-specific hazards and records their injuries if it supervises them day to day.
Choosing an agency
Agencies differ more than their websites suggest. One that focuses on your industry usually has a deeper bench of candidates and a better sense of fair pay. Ask how it screens people before you sign anything.
For direct hires, a replacement guarantee typically promises a free replacement or partial refund if the hire leaves or is let go within a set window, often 30 to 90 days. Read the conditions, since many guarantees require prompt payment of the fee and exclude layoffs.
- Which roles do you fill most often in this area?
- How do you test skills, check references and run background checks?
- What happens if a temporary worker is not a good fit in the first days?
- What guarantee comes with a direct hire, and on what conditions?
- Can you show proof of workers’ compensation and liability insurance?
Read the contract terms
Agency agreements are negotiable, especially for larger or longer engagements. The clauses that cause the most disputes govern what happens when you want to hire the agency’s workers yourself.
- Conversion fees: what you pay to hire a temp directly, and whether the fee shrinks after a set number of hours.
- Non-solicitation: how long you are barred from hiring the agency’s workers outside the agreement.
- Candidate ownership: how long a resume the agency sent you counts as its referral.
- Rates: bill rates, overtime and holiday multipliers, and when rates can rise.
- Payment terms, insurance, indemnification and how either side can end an assignment.
Advice for job seekers
Reputable staffing agencies are paid by employers, not by candidates, so be wary of any agency that asks you for a registration, training or placement fee. Some states regulate the fees employment agencies may charge, but a request for money up front is a red flag either way.
Remember that the recruiter’s paying client is the employer. Ask for the pay rate, assignment length, schedule and benefits in writing, and ask whether the role could become permanent. Ask the agency to get your approval before it sends your resume anywhere, so two agencies never submit you for the same job.
As an agency employee, you keep the usual wage protections. Hourly temporary workers are generally owed overtime under federal law after 40 hours in a workweek, just like permanent staff.