If you had to make a list of some of the organizations that are truly pivotal to the ongoing success of the United States economy, temp staffing agencies would undoubtedly be right at the top.
According to one recent study, temp staffing was able to provide both job placement and career opportunities for an average of 16 million people per year prior to 2020.
Even during the height of the COVID-19 pandemic, that number only dropped to roughly 13.6 million.
Yet at the same time, these organizations have a significant number of costs to deal with that often make it difficult - and in some cases impossible - to easily remain profitable.
Another study indicated that the industry national average for temp staffing is a net profitability rate of roughly 3.3%, or $0.85 per hour.
If a temp staffing company would need to bill almost $26 per hour on an hourly pay rate of $17 just to cover operating expenses and all legally mandated labor costs alone.
Since injury-related claims are naturally a major hurdle to overcome in terms of a temp staffing agency remaining profitable, reducing workers' compensation costs (without sacrificing necessary protections) becomes a top priority.
This is true for a wide range of different reasons, all of which are worth a closer look.
The Impact of Workers' Compensation Costs on Temp Staffing Agencies
The experts at ProPublica conducted an analysis of workers' compensatio claims in California, Oregon, Massachusetts, Minnesota, and Florida over a five-year period.
They found that the rate at which temp workers filed claims for workplace injuries was between 36% and 72% higher than their permanently employed counterparts.
To return to the previous discussion of hourly bill rates and temp staffing agency profitability, consider all the legally mandated labor costs that apply to each worker.
Keep in mind that this is prior to any examination of the general operation costs related to an agency.
Some of the things agencies have to deal with include:
- Social Security
- Medicare
- FUTA, otherwise known as the Federal Unemployment Tax Act.
- SUTA, or the State Unemployment Tax Act
- Workers' Compensation Insurance
The last three of those, including workers' compensation, will vary (often significantly) depending on the state you're operating in.
Workers' compensation, which will also vary depending on the type of job being performed by the temp employee, makes up close to 2% of the overall cost.
The Financial Burden of Workers' Compensation
So if temp staffing agencies need to decrease the rate they charge clients per hour for each employee in order to remain competitive, those workers' compensation costs don't change.
If it costs them more in terms of operating expenses to attract the top talent that their clients need to fill available positions, those workers' compensation costs are still a constant.
Another study indicated that the typical fee for businesses using temp staffing agencies is anywhere between 12% and 50% of the hourly rate for the position.
So if an employee takes home $10 per hour, the temp staffing agency needs to charge their client about $15 to make that possible.
But with operating expenses and all those legally mandated expenses like workers' compensation, that staffing agency's profitability quickly drops back to that national average of 3.3%.
Meaning that even in the above scenario of charging a client $15, they'd be taking home about $0.50 per hour per worker.
Exploring Cost Implications
Now, what happens if workers' compensation costs increase due to a larger number of claims?
It's legally mandated - there's literally no way to get around paying it.
Likewise, costs like Social Security and Medicare remain a fixed percentage regardless of where you operate.
But if you can reduce something like workers' compensation strategically, while still offering protection to all involved and meeting legal requirements, you can suddenly increase the profitability of a temp staffing agency without putting forth much in the way of additional effort in order to do it.
Identifying Key Cost Drivers in Workers' Compensation
As of 2024, it cost a business between $1.25 to $2.50 in workers' compensation premiums for every $100 of payroll.
To be clear: that's already a huge number. But when you remember that claims for temp workers tend to be between 36% and 72% higher than permanent workers, things become even more distressing.
Naturally, one of the major factors influencing workers' compensation rates is the industry that you're talking about.
Some types of businesses are more dangerous than others, and are thus likely to have A) more claims, and B) more expensive claims.
Your workers' compensation costs will be higher if you place temp employees in a construction environment as opposed to an office environment, for example.
Payroll will also be used to calculate a business' yearly workers' compensation costs, as outlined above.
The same is true of state laws - where a temp staffing agency is located will absolutely play a role in how much it pays to that end.
Having said all that, claims history is another one of the most important drivers of workers' compensation costs to be aware of.
If a temp staffing agency has a "bad" history - meaning that they tend to place employees who are consistently getting injured and filing claims - those workers' compensation costs will skyrocket.
Both the total number of claims that are filed, along with the severity of those claims, are taken into consideration when a provider determines a rate.
It's that last point in particular that you'll want to pay careful attention to when implementing strategies for reducing workers' compensation costs in any way that you can.
Implementing Cost Reduction Strategies in Temp Staffing Agencies
One of the most immediate steps that temp staffing agencies can take towards reducing workers' compensation costs involves making sure that all worker information is accurate and up-to-date whenever possible.
This is actually a problem that is unique to staffing agencies that smaller organizations in particular have a hard time with.
Barring special scenarios, the turnover rate at your average business with permanent workers isn't necessarily high.
It might be higher than entrepreneurs would like, but people certainly don't leave and join the organization far faster than administrative employees can keep up with.
By the nature of a temp staffing agency, however, the available pool of candidates is always changing.
People come and go. One worker might get placed with multiple businesses before they find the appropriate fit.
If your temp staffing agency isn't careful, this can easily lead to worker misclassification - which will almost always translate to inaccurate payroll reporting, too.
This is an issue, as the study above indicated that payroll is directly related to the amount you pay for workers' compensation coverage.
If you're needlessly paying too much in payroll due to clerical errors, that means you're needlessly paying too much for workers' compensation as well.
Therefore, fixing the issue can help solve two distinct (and expensive) problems at the same time.
Another step a temp staffing agency can take to help reduce workers' compensation costs involves promoting a culture of safety whenever possible.
Should the clients that you're placing people with already be doing this?
Yes - but if your own costs are on the rise, that isn't necessarily enough.
Prior to sending someone for job placement, verify that they're a good fit for the role beyond more than just skill level.
Make sure that they've gone through the necessary training and safety education they'll need to safely navigate their new environment or if they haven't, make sure the employer will take care of this once they arrive.
Verify that some type of emergency response plan is in place.
Make sure that you're aware of all OSHA violations or hazards at a job site so that you can avoid sending people there to begin with, thus reducing the number of successful claims you'll have to deal with.
If you have to send someone out to a client's site yourself to conduct a safety inspection, do it.
Note that this should extend to making sure you know exactly what safety equipment someone would need to operate in an environment in the first place.
Don't send an office worker onto a construction site dressed like an office worker.
If they need something to prevent back injuries, make sure they have it.
If eye protection is required, make sure they're aware of this and that steps have been taken to account for it.
Are they working in dusty conditions?
Make sure that you're not placing employees who are overly sensitive to avoid respiratory ailments.
It's a bit of additional effort, yes - but you'd be surprised by just what a major impact it can ultimately make.
Again, the total number of claims that you file - along with the severity - will play a role in determining how much you'll pay for coverage.
But don't think that just because your average claim value is small doesn't mean that your provider won't consider you a big risk.
If you have 10 successful workers' compensation claims that total up to $50,000 in value, you'll actually be considered riskier than an employer that only filed one claim that was also worth $50,000.
So if prioritizing things like safety training and education means that you reduce the overall volume of claims, you therefore take a meaningful step towards reducing the amount you're paying for coverage as well.
In the End
At this point, it's also important to note that workers' compensation costs are on-the-rise in virtually every industry you can name.
According to the Bureau of Labor Statistics, costs to those with service occupations increased by 7.8% between March 2021 and March 2022.
That was after an already significant 3.9% increase between 2020 and 2021.
Yes, some of that had to do with a very specific event that happened to be going on in the world at the time - but it's also indicative of a much larger trend.
Temp staffing agencies often have a difficult time remaining profitable as it is - to say nothing of how challenging it becomes when you're also dealing with rising workers' compensation costs.
That's why doing anything that you can to intelligently reduce those costs, all while keeping up with legal mandates and offering adequate protection to workers, needs to be a top priority.
Make sure that all worker information is accurate and up-to-date.
Do what it takes to minimize your temp worker's risk of injuries, including by conducting safety checks.
Make sure that you're matching the right person with the right position in the first place.
Workers' compensation costs are never something you'll be able to totally eliminate, but by being proactive about things you can do your part to help minimize the issue as much as you can.
All this also underlines the importance of going beyond just another insurance policy when it comes to meeting your workers' compensation needs.
You need a true partner in every sense of the term - one that understands the unique challenges you face and that can offer the innovative solutions you need to overcome them.
Over the years, we've proudly acted as that partner for many organizations both large and small and are honored for the opportunity to do the same for you, too.
If you'd like to find out more information about the techniques you can use to help with reducing workers' compensation costs in temp staffing, or if you have any additional questions that you'd like to go over with someone in a bit more detail, please don't delay - contact us today.
