CWS 3.0: April 17, 2013


Payrolling Services: Maximizing the Benefits of Self-Sourcing

There’s been a lot of talk about payrolling services lately. And it’s not all positive. You would think staffing firms would be delighted to payroll a client-sourced candidate. However, staffing firms are built to recruit and operate with healthy margins, and the much lower payroll margins wind up diluting the value and dragging down their profitability. Fortunately, the marketplace evolved and along came specialized firms that focused not only on payrolling firms but also on risk mitigation around the engagement of independent contractors.  

Companies use payrolling firms to engage workers who are typically company sourced, often as a referral from an employee. And with all of the focus on independent contractor compliance, it’s almost a natural corollary that companies would prefer to payroll self-sourced workers rather than engage these workers as independent contractors.

The recruitment of these workers is typically done by an internal hiring manager, who notifies HR that the worker will be coming in and dictates the pay rate. HR then contacts a payrolling firms, which applies its contracted markup and onboards the worker. The payrolling firm incurs no recruitment fees and carries limited liability for the quality of the work performed because the worker is referred by an employee of the client company.

But, the downside is that there is also very little cost control. Rather than the company realizing the savings from the lower margins of payrolling firms, hiring managers often will try to pass that on in the form of a higher pay rate to the worker. This stems from the fact that the manager may often know the worker personally and justify the higher rate because they have a lower payroll margin. The best way to avoid this is to adhere to job descriptions with corresponding pay rates for all contingent workers — even those who are self-sourced.

Over the years I have seen several client companies with managed programs make a concerted effort to grow the payrolled contingent population and search for ways to retain and re-deploy them on a project-to-project basis. I have seen as much as 40 percent of a company’s contingent worker population engaged as payrolled workers. Imagine if you were able to reduce the cost of engagement of your contingent workforce, and instead shift to using more workers but at a lower cost payroll solution. There are those who believe that this could cannibalize the staffing industry as we know it.

Reality, however, paints a different picture. I see staffing firms working on skill sets that are more specialized and warrant healthier margins. With the shortage of talent in North America, companies have to pursue all talent acquisition avenues, and certain skills will continue to be acquired on referrals and onboarded through a payrolling firm.  

Companies have some work to do in this area. First, they need to develop procedures to retain and re-deploy payrolled workers in order to maximize their savings and efforts. Further, technology will need to catch up. Thus far, few VMS tools enable re-deployment. Since a payrolled worker is sourced by you, re-deployment sounds like a good idea. The challenge is how to do it and make it easy, while keeping your engagement methods and controls in line with each new project requirement.

And payrolling firms can do their bit by figuring out how they can be more closely involved in the talent management process, with a focus on retention and re-deployment.


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MBO Partners

Jay Lash 04/18/2013 02:47 pm

Client sourced workers can look like a huge win for companies but if not handled correctly the exposure can be great. The obvious one is co-employment. The more involved the client is in the process and ultimately in the workers day to day supervision, the chances for co-employment increases. If the rate is set between the client and the worker that not only adds to the case for a co-employer but now there is a good chance the company is overpaying. Competitively sourcing through the supply chain and using Rate Card maximums is a proven best practice for rate setting. Client referred workers generally negotiate their own rates and are generally higher. The difference in mark-up is small compared to the rate difference.

The biggest mistake has to do with the recommendation in the blog,” And with all of the focus on independent contractor compliance, it’s almost a natural corollary that companies would prefer to payroll self-sourced workers rather than engage these workers as independent contractors”. Maybe companies prefer to payroll an IC but what if the IC is actually a self-employed, independent business? There are legitimate businesses as well as Consultants who prefer Independent relationships vs. employment by a payroll firm. Not only does this usually add up to an duplicate charge for the statutory portion of the mark-ups but it eliminate the IC’s ability to maintain continuity of self-employment, thus loosing the tax advantage and their credibility as an independent brand.

Companies should not be so quick to jump into payrolling arrangements with any of their non-employees especially if this is in anyway becoming a workforce strategy (as in the 40% company referenced). I strongly advise due diligence and counsel before engaging any company sourced worker. You need options for the different situations and people involved. It reminds me of the old parable, “When the only tool you have is a hammer, everything looks like a nail “. This is a major trend and will not go away, think long-term and make sure your plans are sound.

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