Why do big companies hire subcontractors through staffing agencies?

Question

I'm curious why so many big companies in the United States hire so many people through the staffing agencies as non-employees?

It would be understandable if they do it for real short-term projects, or domain expertise, but it appears to be very common that all sorts of requisitions end up as contractor positions (including even the very junior positions for routine work).

I mean, those staffing agencies are making money, and, presumably, the people being hired still get paid "market rate" overall, and the lack of benefits in the equation probably ends up being eaten by the extra profits and growth of the staffing agency, so, presumably, the per-year acquisition costs between subcontractors and employees are comparable, and it's not like firing people at-will is an issue in the United States...

Answer 1

Several Reasons:

1. It is not NEARLY as easy to fire a FTE as you think, though it varies from state to state
2. The labor laws in the USA have varying requirements as to what benefits must be supplied, which can make FTE employment difficult
3. Contractors don't fall under Union contracts. Union contracts will supersede a lack of legal requirements as a Union contract is a legal document.
4. The contracting company does pre-screening, so they have in many (not all) cases pre-screened candidates
5. Due to labor laws/union contracts, many companies prefer a "Try before you buy" approach
6. Many industries such as IT are now "project based", when the project is done, you no longer need the worker. In many states in the USA, you need to fire for cause, or you have to pay unemployment, which can and does go on for months.
7. Less Overhead: As mentioned by Jason J, the agency takes all the overhead costs and administrative duties
8. Specialized talent that the company needs, but only short-term (as project example above)
9. Different "buckets". Many companies have separate budgets to hire/pay consultants.

Answer 2

One (of several) reasons why you would get a contractor is the ease of letting the person go. The direct manager only needs to go to the account manager and say "Contractor ABC isn't working out. Please send me another." Even with at-will employment, companies usually have a process for terminating employees that can take some time.

Answer 3

When a employee is working thru a staffing agency, the agency takes all responsibility for the employee. Payroll, taxes, benefits etc are all done thru the agency so the company requires less personnel who are purely administrative. Although it is easy to fire someone in the US, the company who employs them still bears responsibility for paying unemployment benefits which is a relatively long term commitment to someone who is no longer generating revenue.

Outside of the direct financial, having someone start as a contractor allows time to see if they are a good fit for the position and the company before starting what could be a costly onboarding process.

Answer 4

My experience as a contractor is that, in addition to the ease of letting someone go cited elsewhere, it is very hard to evaluate a prospective employee, particularly in software development, by an interview. You can ask them the FizzBuzz question all you want, you can have them whiteboard answers and so on and so forth, but often all that brings you in is a person who has memorized a few programming tests and BSes well in interviews while leaving a more competent but perhaps less socially able candidate outside. And all the while, you have limited time in an interview situation - is there going to be time to judge if a candidate is competent and is a good cultural fit for your team?

What a contractor does for a large business is say to them "we have hired this guy out on other jobs and we think he is worth employing". Even if that information isn't 100% reliable (I have heard horror stories), it's still information that you can use and which most of the time is very useful. And if it does turn out that the guy was one of those BSing types, you can, as noted, get rid of them relatively quickly, and if they're bad in some of those horror-story ways I've heard you can choose not to do business with the contractor. All of this is information at your disposal that you simply do not have if you hire a guy off the street - if they're bad, there's no way of telling from that interaction whether or not the next guy is going to be as bad.

Also, my own gig, for example, is rather specific - I develop and administrate a specific piece of software - and IME there aren't very many of us in the country who can do this. As a large company, your choices are putting out ads on dice and so on and hope that you can find one of us, try to train up somebody from within (which can itself be problematic if you don't actually have anybody else there who can do the job already), or... hire a contractor that specializes in the specific thing that you need. I recently worked at a Fortune 50 company that, over the entire course of the time I worked there (a year and a half; since this company was partially based in California there were limits as to how long they could hire out temps), they had I think my boss said 4 qualified applicants interview (3 of us wound up getting hired). Not everyone is a generic front-end developer or whatever.

Answer 5

Another reason for contractors is that paying for them can come out of a different budget than for full time employees.

presumably, the people being hired still get paid "market rate" overall

Last year I worked 7 months for a staffing company doing contract work in a different state to where I live in. The company paid me $10/hr less than what I would get than when I contract directly (and I am not expensive in the first place) plus I had to look after my own travel and accommodation expenses as well as everything else as I was working as a 1099 and the agency was not paying anything other than a flat rate. Financially the payback was equivalent as if I had been a full time employee. However when you are working short term contracts your earnings need to be much more than a regular salary in order to pay for all of your own overheads as well as for the down time when you are not working.

I went with this gig because I needed the work, it was interesting stuff and I got to see a state that I have never seen before.

However many other staffing agencies I spoke with last year wanted to pay well and truly under the market rate for my field of work.

Answer 6

However, you should also know that "the times, they are a' changin'."

The US Internal Revenue Service is taking a long, hard look at "contractors," and some of the financial rules that made contractors financially advantageous are now under review. I know of several companies who have released, or hired, their former stable of contractors. They are sharply curtailing their use of H-1B and L-1 Visa holders, too.

There are many justifications beyond taxation. Information security is rapidly becoming a hot-button of regulation, and corporate boards are enacting corresponding policies. It is much more difficult to impose that policy upon someone who, technically, "does not work for you." Also, you are relying on the contracting company's vetting processes, and do not have direct control over them. (But the regulations impose legal liability.)

Whereas, a few years ago, "contractors (often, "in name only" ...) were quite the norm, it now seems clear that this arrangement is no longer "the default decision." I anticipate that the demand for staffing agencies will decrease. The nature of it most certainly will change.