The recruitment industry is undergoing a transformation, with a growing emphasis on flexible staffing solutions that are better suited to the changing characteristics of the modern labor market. As part of this shift, independent recruiters in the United States must understand the nuances between permanent and contract staffing models. The differences between these models extends further than just the length of employment. Permanent hiring and contract staffing models also carry distinct fee structures which can significantly impact business profitability and valuation.
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Table of Contents
Understanding the Staffing Models
Fee Structures Explained
Contract Staffing: A Profitable Alternative
Maximizing Profits with Contract Staffing
Business Valuation and Longevity
Expanding Your Staffing Model
Business Valuation and Longevity
Your Expert Guide to Contract Staffing
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When presented with the choice between permanent and contract staffing, independent recruiters have historically leaned towards permanent hiring. This is becoming less and less the case as the market moves towards favoring contract and temporary roles to fill gaps within the workforce as well as for project specific work. This is why we want to provide independent recruiters with a comprehensive guide highlighting why contract staffing can be more profitable than permanent placements.
According to the American Staffing Association, the U.S. staffing industry generated $186 billion in revenue in 2022, with contract staffing accounting for 85% of this income. Even with the significant changes to the job market after the pandemic, the top staffing firms have kept growing their contract staffing businesses. This is especially true for firms that specialize in healthcare, which has seen the most growth within the U.S. contract staffing market. You can learn more about the changes in the recruitment market here: Adapting to Trends in the US Recruitment Market: The Rise of the Contract and Gig Economy.
Independent recruiters must understand the key differences, the common fee structures, and the impact diversifying their offering will have. This is why we provide real-world examples and statistics to demonstrate the benefits of contract staffing and explore strategies that recruiters can employ to maximize profits and improve their business valuation.
Permanent and contract staffing are two core approaches in recruitment, each with distinct benefits and drawbacks for independent recruiters.
In permanent staffing, recruiters focus on finding individuals for long-term, full-time positions at a client's company. Their job is to search for, assess, and successfully place candidates who will join the client's company as their own employees. The main advantage of this method is the opportunity to build lasting relationships with clients. The payment for this service is a one-time fee, usually a portion of the candidate's first-year salary, often ranging from 15% to 25%.
However, focusing solely on the permanent recruitment market also poses specific challenges for independent recruiters. The market is highly competitive, with recruiters vying for a limited number of roles and clients, which can lead to longer sales cycles and increased difficulty in securing exclusive contracts. The one-time fee structure for permanent placements means that recruiters must constantly acquire new clients to maintain a steady income. This can lead to financial instability, especially if faced with unforeseen hiring freezes or economic downturns.
In contrast, contract staffing caters to the growing need for temporary or project-focused workers. Contract staffing recruiters place candidates in jobs for a set period, which could be as short as a few months or extend over several years. During this time, these contract workers are typically on the payroll of the staffing agency or an Employer of Record (EOR). Instead of a one-time payment for the placement, contract staffing is paid throughout the tenure of the contract and is based on an hourly rate. The recurring income through hourly rates billed to the client is a substantial benefit of contract staffing, ensuring a stable cashflow as opposed to the one-time fee structure of permanent staffing. Another difference between the two models is that contract staffing gives recruiters the flexibility to quickly respond to changes in the job market and meet clients' needs for a flexible workforce, which has become increasingly important.
However, contract staffing isn’t without its share of challenges too. Entering the contract staffing market, particularly in the United States, means having to understand and navigate the complex legal landscape which will incur significant additional costs. Compliance with labor laws, such as the Fair Labor Standards Act (FLSA) and state employment regulations, requires meticulous attention to detail and often the assistance of legal expertise. The Affordable Care Act (ACA) mandates providing health insurance to eligible contract employees, adding financial burdens. Additionally, securing the right business and liability insurance, including errors and omissions coverage, is another expense which is entirely necessary. Independent recruiters must also invest in workers' compensation insurance, which can be a substantial expense, particularly with a growing number of contractors. These challenges, coupled with the administrative demands of managing contracts, payroll, and tax withholdings, make setting up as an independent recruiter in the contract staffing sector very difficult. Fortunately, there is a way to mitigate these challenges by using an Employer of Record (EOR) who specialises in contract staffing within the US. We will cover this in more detail down below.
Both permanent and contract staffing play vital roles in recruitment, each offering distinct advantages and challenges. Instead of choosing to use one over the other, many independent recruiters will run both simultaneously counterbalancing any challenges with the benefits of the other model.
Permanent and contract staffing each have distinct fee structures which have significant impacts on the cash flow and profitability of your business.
For permanent staffing, the fee structure is usually contingency-based. This means that the recruiter only receives payment upon the successful placement of a candidate. The fee is a predetermined percentage of the candidate's first-year salary. Contingency fees incentivize recruiters to fill positions with qualified candidates quickly but also involve the risk of not getting paid if a placement is not made. With each placement representing a single transaction, permanent staffing may result in fewer, but higher value, placements that contribute to the growth of the business in a more linear fashion.
Contract staffing operates on a different model. Recruiters typically charge an hourly bill rate, which includes the contractor's pay rate plus a markup. This markup covers the recruiter's services, overhead, and profit margin. They may pay the contractor an hourly wage and bill the client a higher rate, with the difference representing the agency's earnings. This model allows for ongoing client engagements and repeat business due to the higher volume of placements, fostering strong client relationships through continuous business.
In comparing the two fee structures, contract staffing can offer more consistent and predictable source of revenue. Contract placements often involve longer-term assignments, which means that independent recruiters benefit from a steady income stream over the duration of the contract, mitigating the impact of recruitment cycles and economic fluctuations. The continuous revenue stream from contract staffing also ensures a more immediate and regular cash flow compared to the lump-sum payments in permanent staffing, which are dependent on the successful placement and completion of a guarantee period.
Contract staffing also provides independent recruiters with the opportunity to adjust markups based on the complexity of the roles, volume of business, and the length of the contract, allowing for tailored solutions for clients and providing more flexibility. On the other hand, permanent placements offer a substantial lump sum, which is less frequent and more susceptible to changes in hiring demand.
Contract staffing has become an increasingly attractive option for independent recruiters, largely due to its potential for higher profitability compared to permanent placements. This model provides a stable source of income for independent recruiters and provides an alternative which is more profitable over the duration of the contract when compared to the one-off payment of a permanent placement.
We provide a comprehensive overview of this in our guide Direct Hire vs. Contract Staffing: Which is More Profitable for Independent Recruiters in the USA?
To cover it briefly, contract staffing allows the recruiter to earn a steady income as long as the contractor is working. For example, placing a contractor at a bill rate of $100 per hour with a pay rate of $70 per hour results in a $30 per hour profit for the agency. Over a year, assuming a standard workweek, this single placement could generate approximately $62,400 in profit.
In contrast, permanent placements provide a one-time fee based on the candidate's annual salary. To compare, let's assume the contractor mentioned above is now seeking an equivalent permanent position. This role would have an equivalent annual salary of $145,600, based on $70 per hour for a standard workweek. If the recruitment agency charges a 20% placement fee, with these fees often being between 15% and 30%, this would result in a one-time fee of $29,120.
This means that contract staffing can yield a larger annual income, with a potential profit of $62,400 versus a one-time $29,120 fee from a permanent placement, assuming ongoing employment for the contractor. However, contract income depends on consistent work without breaks, while permanent placement fees are guaranteed after successful placement and any mandatory guarantee period.
Finding Your Niche
Independent recruiters can increase their earning potential by specializing in industries where contract staffing is in high demand, such as technology or healthcare. By focusing on these areas, recruiters develop a deep understanding of the market and can source candidates with the specialized skills that are in short supply. This specialization allows for negotiation of higher bill rates, as clients are willing to pay a premium for access to qualified talent in these niche sectors.
Negotiating Better Rates and Efficient Workforce Management
To enhance profit margins, independent recruiters should negotiate better rates with their clients by staying informed about the current compensation trends in their niche markets. Efficient contractor management is also essential—this means having processes in place for quick and smooth onboarding, managing assignments effectively, and keeping a ready pool of talent to fill roles rapidly. This helps to keep positions filled with less downtime, directly impacting the bottom line.
Offer Value-Added Services
Independent recruiters can set themselves apart by offering additional services that contribute to the professional growth of their contractors. This could include access to training programs or helping contractors gain certifications relevant to their fields. By enhancing the skills of their talent pool, recruiters not only make their candidates more attractive to clients but also can command higher rates for these skilled professionals.
Focus on Retention and Quick Redeployment
Maintaining high contractor retention rates is a cost-effective way for independent recruiters to sustain profitability. Keeping contractors engaged by ensuring a positive experience encourages them to stay with the recruiter for future assignments, reducing the need to constantly recruit new talent. Additionally, quickly redeploying contractors to new projects minimizes any lapse in employment, which in turn provides a steady stream of revenue.
Partner with an Employer of Record (EOR)
Using an Employer of Record service, such as Agile Partnering, can dramatically lighten the administrative load for independent recruiters. An EOR handles the employment responsibilities, including payroll, taxes, and compliance with employment laws, effectively removing these complex tasks from the recruiter's plate. This partnership allows recruiters to expand their contract staffing services without the need to invest in back-office infrastructure or additional staff, ultimately saving on overhead costs. Find out more about our Employer of Record services.
Business Valuation and Longevity
The staffing model a recruitment agency adopts has a significant impact on the value of the business. Contract staffing can enhance a business's valuation due to its ability to provide recurring revenue, which is often more highly valued than the one-time fees associated with permanent placements. Recurring revenue streams contribute to financial stability and predictability, which are attractive qualities for potential investors or buyers.
Adding contract staffing to your portfolio not only generates immediate revenue but also significantly enhances the long-term valuation of your business. While a recruitment agency that focuses solely on permanent placements might command a valuation of around 1-2X EBITDA, a full-service firm that offers contract staffing can achieve valuations as high as 5X EBITDA. For an independent recruiter, this translates to increased financial security and a more attractive business for potential buyers or investors.
A robust contract staffing portfolio demonstrates to clients that the recruiter has a comprehensive understanding of the workforce market and the ability to provide flexible solutions. This reputation for reliability and versatility can lead to increased business opportunities and, ultimately, a higher valuation.
Contract staffing also demonstrates a business's agility and adaptability, key factors for long-term success and resilience in the recruitment industry. By having a diversified revenue model that includes contract staffing, recruiters can better cope with economic downturns and industry fluctuations. This is because contract labor can be in higher demand during uncertain times when companies are hesitant to commit to permanent hires.
The recruitment sector is constantly adapting, and during these times of uncertainty and economic fluctuations, contract staffing has become an increasingly important part of the recruitment market. For independent recruiters, this opportunity isn't just about offering more services—it's a strategic move to increase profits and business value. Moving into contract staffing can make an agency more adaptable, ready to handle economic changes, by providing a steady flow of income.
However, expanding into contract staffing as an independent recruiter has its challenges. Independent recruiters face the complex task of balancing more administrative work, like handling contracts, sorting out payroll, and keeping up with various tax and insurance requirements. Without the right systems, this can be extremely difficult.
Building a pool of candidates ready for contract work is another hurdle. Contract jobs are typically short-term, so recruiters need to constantly engage with a ready-to-work workforce. This shift from just permanent placements to a mix of contract roles requires a new way of thinking and different marketing tactics to attract a broader client base.
Despite these challenges, the potential for higher profits, building long-term client relationships, and increasing your business's worth make contract staffing an exciting opportunity for independent recruiters looking to grow their business. To overcome the challenges of expanding into contract staffing, independent recruiters can engage with a specialized Employer of Record who will take care of the administrative, insurance and legal aspects involved in contract staffing.
Independent recruiters aiming to add contract staffing to their services can find practical support with Agile Partnering. Our Employer of Record services are specifically tailored towards contract staffing. We have extensive experience and expertise in handling all the administrative, insurance and legal side of contract staffing on behalf of independent recruiters. This means that you can concentrate on matching candidates with the right job openings and expanding your business.
The job market is changing, with more emphasis on being adaptable. Agile Partnering gives recruiters the support and tools they need to thrive in an uncertain market. Working with Agile Partnering allows recruiters to grow their services to include contract staffing, making their first placements in a matter of weeks, which can lead to more placements, higher profit margins and a higher valuation for their business.
Find out more about our Employer of Record services.
If you would like to talk to us about adding contract staffing to your business, please contact us.
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