9

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...

  • "those staffing agencies are making money" -- that's just specialisation of the logistics of making the right number of people show up. The people who make the toilet paper are making money too, but that doesn't mean every large company wants to manufacture its own toilet paper to capture that profit. It's not always the right decision to outsource something to a specialist, but it's not always the wrong decision either. – Steve Jessop Jul 22 '16 at 1:51
16

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.
  • 3
    This doesn't contradict your answer at all and I'm just adding for information only in case it might be useful to someone. Regarding #6, while the company using the contractor has no unemployment compensation requirements, if you're a W2 contractor, you're an employee of the staffing agency and in most cases will still be entitled to unemployment compensation when a project ends as long as you try to have the staffing company place you elsewhere. – Chris E Jul 21 '16 at 16:17
  • @ChristopherEstep, I completely agree, and your comment goes not only for #6, but for #2 as well, and, basically, most of the other numbers, too, except for 9. :-) – cnst Jul 21 '16 at 16:27
  • A head hunting company often charges a finder's fee of 5-10% of the yearly salary of the hired person which the hiring company must pay, and the company often avoids this when converting the temporary staffer to full time. – simpleuser Jul 21 '16 at 23:39
  • @user9999999: It's probably closer to 25 to 30 percent. – Robert Harvey Jul 21 '16 at 23:45
8

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.

  • but the "contractor" is usually still employed as a W2 by the staffing agency, which would then have to let the person go; what difference does it make compared to a possible 2-week review process through the original org? – cnst Jul 21 '16 at 16:20
  • 2
    That is the staffing company's problem, not the worksite location. That's part of the reason why you pay a premium on the contractor. – Anthony Genovese Jul 21 '16 at 18:46
  • @cnst In practice, the Staffing Agency can say, "Ooops. Guess we don't have that job opening anymore" and fire the "employee". The better staffing agencies will attempt to get the person hired somewhere else or occasionally hire them directly for their own use. One small benefit to the employee is this arrangement underscores the short-term nature of the job. – JS. Jul 21 '16 at 23:46
2

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.

  • This is all understandable; but the unemployment benefits would still have to be paid by the staffing agency, so, they certainly account for that in their markup for their contractors, don't they? – cnst Jul 21 '16 at 16:22
  • @cnst probably. But it is still administrative overhead that the company employing the agency worker does not need to carry. – JasonJ Jul 21 '16 at 16:37
  • but then what's the point of having an extra middlemen? if the company is small, sure, it makes sense to outsource some work. if the company is huge, what's the real benefit of paying for this outsourcing where it sounds like there should certainly be enough resources to do the same thing in-house anyways? – cnst Jul 21 '16 at 16:47
  • @cnst, a major part of employment costs come from benefits. Good competitive benefits in IT can make an employee anywhere from 1.75 - 2x as expensive as their 'on paper' salary cost indicates. So while you may end up paying more on paper per hour for a contractor though an agency it can still be less expensive in the long run. – Ryan Jul 21 '16 at 23:30
  • @cnst IANAL, but I suspect a big benefit staffing agencies bring to big companies is the legal isolation. If the employee decides to sue after being terminated, likely their only legal target is the staffing agency, not the hiring company. – JS. Jul 21 '16 at 23:49
1

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.

  • Most of the bigger IT staffing agencies that I'm aware of still hire their own contractors as W2, so, the ease with which people are let go shouldn't be all that different in the end. – cnst Jul 21 '16 at 16:44
  • I concur this is a big driving issue for IT jobs. Judging a person's IT capability in an interview is very difficult in practice, even with today's online tools. – JS. Jul 21 '16 at 23:54
1

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.

  • I have no idea what your industry is, but It sounds like you worked for a smaller firm if you were paid 1099. The big contracting orgs all appear to be hiring software engineers under W2. – cnst Jul 21 '16 at 16:32
  • 1
    @cnst Right now I am working for a multi-national as a 1099. It's a case of being known by the company for a long time. For my gig last year I had a choice between W2 and 1099 but decided that I was better off as 1099 EG the supplied health care was crap compared to what I was getting elsewhere - so why pay for it? Plus the W2 contract had some suspicious terms in it. – Peter M Jul 21 '16 at 16:39
  • From what I've heard, most of the staffing agencies don't give one an option between 1099 and W2. The whole concept of having such an option is probably against the government regulations on employment, and may put the company at risk for their portion of the employment-related taxes. – cnst Jul 21 '16 at 16:50
  • @cnst Some contracting jobs are offered as 1099, others as W2. Sometimes the employee is given a choice of either, sometimes not. – JS. Jul 21 '16 at 23:51
0

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.

  • I'm in Austin / San Antonio, and I know more people who are Rackspace contractors than those who work directly for Rackspace. (So much for information security!) – cnst Jul 26 '16 at 15:33

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