How do staffing agencies make money? Fees, spreads, and what is left

In a direct hire or permanent placement, the client pays a one-time fee after a successful hire, usually a percentage of the candidate’s first-year salary. Madison Resources puts the typical range at 15% to 30%, driven by how hard the role is to fill and what the market will bear.

Example: an $80,000 salary at a 20% fee is a $16,000 invoice. There is no payroll, no workers’ compensation, and no float, which is why it is the common first model. The limit is that it is an event. Revenue from a March placement does not carry into April, so the pipeline of new job orders is what decides the month.

In temporary and contract staffing, the agency is the employer. It pays the worker and bills the client a higher hourly rate. The gap is the spread, but the spread is not the profit, because the agency carries the costs of employing the worker.

Two of those costs are fixed by law. The IRS puts employer Social Security tax at 6.2% and Medicare at 1.45%, so 7.65% of wages. Federal unemployment tax is 6.0% on the first $7,000 of each employee’s wages, and employers who paid their state unemployment tax in full generally receive a credit that brings the net rate to 0.6%. State unemployment and workers’ compensation vary by state and by job class, and Madison Resources calls workers’ compensation the most volatile line.

The example below uses assumed unemployment and workers’ compensation rates. Yours will differ.

Notice that the same hour is a 50% markup and a 25% margin. Mixing those two up is how firms quote work that loses money. Margin is measured against the bill rate, markup against pay. Madison Resources calls this confusion costly for good reason.

Temp-to-perm conversion: when a temp you placed becomes a full-time hire at the client, the agency earns a conversion fee. Advance Partners describes it as a way to earn on a placement after the contract period.

Retained and engaged search: for executive and specialized roles, the client pays some or all of the fee up front or in milestones, in exchange for exclusivity.

Project or SOW staffing: the client pays a set price or milestone amount for a defined deliverable instead of an hourly rate. It shows up most in IT, healthcare, and engineering, according to Advance Partners.

Vendor program fees reduce the take on managed accounts. If a client runs its orders through a VMS or MSP, a fee often comes out of what you are paid, which is covered in the guide to what a VMS is.

Staffing Industry Analysts reported that average gross margin at a basket of 15 publicly traded staffing firms was 27.9% in 2022, up from a level that had stayed around 25% from 2006 to 2020. The report said the rise reflected a richer business mix, including more permanent placement at ManpowerGroup and Robert Half. It also counted non-staffing business such as outplacement, so it is not a pure temp margin. The article is from August 2023, so treat it as a reference point, not a current benchmark.

Net profit is a small share of that. After overhead, sales costs, and financing, Madison Resources says most agencies keep roughly 3% to 8% of revenue, a figure from a staffing finance firm rather than a survey. Use it as a reminder that a few points of rate or a few days of slow cash matter.

A contract placement pays the worker every week, and the client often pays 30 days or more later. Example: twenty workers at 40 hours a week, each costing $28.04 an hour in pay and burden, is about $22,400 of payroll a week. If clients pay six weeks after the work, the firm is carrying about $135,000 before the first dollar comes back, on a profitable book.

This is why fast growth strains a temp firm and why many firms use factoring or a working capital line. It is also why permanent placement, with no float, is common as a first model. Check your own payment terms before you take a large account.

The two lines run on different fuel, and this is the part that decides where business development effort should go.

A fee-based desk needs a steady supply of new job orders. Use a simple expected-value check. Example: if your perm desk fills half the orders it works and the average fee is $16,000, each order you work is worth about $8,000 in expected fees. That is the number to weigh against the hours it takes to land the order.

A temp desk needs accounts that keep ordering. Example: one contract placement of 13 weeks at 40 hours, at $9.46 an hour gross profit, is about $4,900 of gross profit, and it renews when the client extends or adds heads. The value of that account is the stream, so keeping existing clients close is worth more than a new logo.

In both cases the lead that pays is a dated opening with a named hiring manager. Which employers just posted, which past clients are hiring again, and who owns the role is what dreach flags for a staffing firm, with the manager’s current email and phone and the warmest way in, so the team spends its hours on orders it can win.

Pricing from the headline spread instead of from burden. Taking an account that sits in a high workers’ compensation class at the same markup as a clerical account. Ignoring the payroll gap until a large start makes it worse. Treating every order as equal when a few clients produce most of the repeat work.

Each is cheaper to avoid with a worksheet than to fix in a bad quarter. Build rates from the bottom up: pay, burden at your real rates, overhead per hour, then target profit.