Pay Rates for Contingent Workers

Thursday, April 12, 2007

The following table illustrates how the contingent worker’s status may affect the bill rate and the agency’s profits:

W-2 Bill Rate
Pay Rate (Direct Labor Rate): $50 per Hour
Negotiated Markup 30%: $15 per Hour
Bill Rate: $65 per Hour
Agency Cost (No Benefits): $10 per Hour
Agency Profit: $5 per Hour

IC 1099 Bill Rate
Pay Rate (Direct Labor Rate): $50 per Hour
Negotiated Markup 30%: $15 per Hour
Bill Rate: $65 per Hour
Agency Cost (No Benefits): $5 per Hour
Agency Profit: $10 per Hour

The principal difference in cost in the above example is due to the fact that for a W-2 employee, the agency must pay the employer’s share of certain employment related taxes such as FICA, FUTA, state unemployment, etc. On the surface, a 30% markup is competitive. However, by understanding that the placement was not a W-2 employee of the agency, a lower markup should have been negotiated that could have led to savings of approximately $10,000 per year on this single placement.

In order to assist you in evaluating markups, our experience indicates that acceptable markup percentages from agencies generally fall in the ranges defined below:

W-2: 30% - 45%
IC 1099: 12% - 22%

Co-Employment in IRS Section 1706

Tuesday, April 10, 2007

It's tax season, and for busy HR professionals that means reviewing the hiring practices and management of temps and other contingent workers over the past year. Most importantly, these detailed reviews focus on exposure to and instances of "co-employment".

According to ContingentLaw.com, co-employment is "a legal doctrine which applies when two businesses exert some control over an employee's work or working conditions. Relationships between temporary staffing agencies and business clients are typical examples and consequently, easy targets for lawsuits initiated by temporary or other contingent workers."

Contingent staffing can be costly to organizations that do not handle it carefully and correctly. Any company or agency that hires, refers, or manages temporary or contract workers can face costly legal battles as a co-employer of temporary, contract, or other contingent workers. Complex legal requirements and federal statues are dramatically transforming the risks and potential liabilities involved in the hiring and managing of contingent workers. In a co-employment lawsuit, your company and the other co-employer will be equally liable even if there was no wrong-doing on the part of your company. Among many other workforce management issues, risk mitigation with regard to co-employment been pushed up the priority list because of the devastating effects it can inflict upon unsuspecting employers.

Compounding the complex issue of co-employment is IRS Section 1706 of the Tax Reform Act of 1986 (1986–3, Vol. 1, C.B. 698) (TRA '86) . Section 1706 places strict limits on who can be classed as a contractor in technical services industries. This can eliminate independent contracting as an option in many situations where it would be ideal. Having the flexibility to bring in an outside contractor is of crucial importance for many businesses, especially in the technical field. Many IT professionals also view the right to be self-employed as essential to their livelihoods.

Yet section 1706 amended section 530 by adding subsection (d). "Section 530(d) provides that relief under section 530(a) is not available in the case of a worker who, pursuant to an arrangement between the business and a client, provides services for that client as any of the following: engineer, designer, drafter, computer programmer, systems analyst, and other similarly skilled worker engaged in a similar line of work. Section 1706 of TRA '86 applies only to the business in a three-party situation, namely, the business providing workers to a client. The fact that the worker is incorporated is immaterial. The intent of Congress was to classify, under the common law rules, workers retained by businesses to provide technical services, without regard to section 530 of the Revenue Act of 1978. Section 1706 does not change anyone from an independent contractor to an employee. The examiner must still look at the common law rules. Section 1706 applies to remuneration paid and services rendered after December 31, 1986."

The potential harm caused by Section 1706 is that with only the common law employment test to prove a worker's status to the IRS, many high-tech firms will not hire independent contractors in order to avoid an IRS audit. The time and expenses to contest the IRS would outweigh the benefit, even if the audit is favorable. For independent contractors, this means less employment opportunities.

Alternatively, employers may choose to avoid co-employment risks by using risk mitigation services such as payrolling. nextSource, Inc. offers payroll and benefits administration services to afford employers the flexibility to engage independent contractors (1099s). nextSource payrolling entails adding your non-agency represented contingent workers to the nextSource payroll, thus minimizing co-employment risks and eliminating paperwork associated with benefits, payroll and related tax issues.

Vendor Management for Today's Market

Aside from simply having a vendor management program in place, truly efficient vendor management requires effective collaborations with your vendors and a deep understanding of your business needs and internal processes. Additionally, you must consistently monitor your vendor base to ensure that quality and high performance are rewarded accordingly. When developing metrics, ComputerWorld suggests that, "Metrics are the foundation of your vendor management program. You get what you measure, not what is in the contract. Choose metrics that support your goals and reward the behavior you want to encourage." Having clearly defined goals and measurements will encourage vendor performance and loyalty.

Your VMS should be customizable such that your organization’s goals and vendor metrics are easily attainable via real-time reports. nextSource's Talent Acquisition Management Solution (TAMS) not only automates the entire acquisition and management lifecycle for on- and off-boarding contingent labor and direct hires, but TAMS also provides online reporting of diversity spend, and supplier accrual and spend in real-time. By streamlining reporting and other vendor management processes, TAMS can bring you closer to the perfect balance of services, cost, and accountability which are all needed for optimal efficiency of vendor services.

Staffing Experience

Monday, April 9, 2007

Every company has their own way of defining experience levels. For example, some companies may consider a Junior level to represent 0 – 1 years of experience while another company may consider a Junior level to have 1 – 3 years of experience. nextSource has created one process that works even if the job/applicant market has no banding definition at all. Career banding is a human resources and procurment system that affects the classification, hiring, pay, promotion, evaluation, and career development opportunities for employees. The benefits of banding include increased flexibility for managers to adjust pay for eligible employees, and making is easer for employees to move up throught the pay range by acquiring and demonstrating new job-related competencies, education, or training. Career banding can attract and keep more talented employees by opening up potential for career advancement.

Regardless of how a company defines experience level banding, one pattern emerges: the lower the experience level, the lower the rate or salary and the higher the experience level, the higher the rate or salary. This is the basic premise that allows nextSource to examine and categorize the unbanded marketplace. Using the following methodology it is possible to define experience level banding against the un-banded marketplace and satisfy the demands of all companies regardless of the experience levels that they may use.

nextSource has found that a natural segmentation occurs among the experience years and related rate or salary that they have been able to capture in their methodology for experience banding. Identifying the rate and salary limits associated with this segmentation is the exercise of the banding utilized within The People Ticker. The People Ticker incorporates default assumptions about the unbanded job/applicant marketplace based on this segmentation. For example, the segmentation assumptions reflect that the pay rates falling in the lowest 25% of the reported pay rates are representative of pay rates for a Junior experience level while the top 10% of the pay rates (between 90% and 100% of pay rates reported) are representative of the GURU experience level. In its segmentation assumptions, The People Ticker uses a total of four experience levels. The corresponding banding ranges applicable to each experience level are defined below:

Junior: 0% - 25% of Pay Rates Reported

Mid-Level: 25% - 50% of Pay Rates Reported

Senior: 50% - 90% of Pay Rates Reported

Guru: 90% - 100% of Pay Rates Reported

Experience Level banding in the marketplace is defined as a function of Pay Rate Range. Professionals who have been defined as Senior by companies will fall to the higher end of the banding scale than professionals companies have defined as Junior which will fall to the lower end of the banding scale.

Negotiating New Placements

Thursday, April 5, 2007

Since you are not dealing with changes to existing pay and bill arrangements, the negotiation of new placements may be easier than renegotiating the embedded base of contingent workers. However, the bottom line impact may be just as significant. Your company may or may not have created a Rate Card (ideally based on Pay Rate) for hiring contingent workers using The People Ticker. A Rate Card created with The People Ticker can be a valuable guide during negotiations since you will probably have the same or better market rate information than that possessed by the Staffing Agency. The Rate Card defines competitive parameters relative to engagement rates and such parameters should not be viewed as fixed or unchangeable. Will situations occur when it makes sense to hire out of scope from the Rate Card? Of course, but it is vital to know when and why these occurrences happen to avoid setting expensive precedents.

One thing to keep in mind is having designated individuals with appropriate training in the negotiation of bill rates for contingent workers. The danger in non-centralized negotiations is that Hiring Managers and Agencies tend to rely on past history to dictate pricing for the next placement and that they are not always privy to current market rates. Once a manager engages a contingent worker at a rate of $75/hr, the precedent has been set with that agency and other similar, new placements by that agency tend to follow the same pricing. This may result in enormous costs to your organization.

In order to help control this activity and to insure the maximum opportunity for savings, nextSource recommends the review and negotiation, if applicable, of every new placement even though a Rate Card may be in place. Why? Savings opportunities should be identified and realized whenever possible and skilled users should be aware of all possibilities that may impact the bill rate. For example, the type of contingent worker being placed can greatly affect the final bill rate. Without understanding whether or not the contingent worker being placed is a W-2 employee of the agency or a subcontractor (IC/1099) to the agency, the agreed upon markups may result in additional cost to the user.

Applicant Tracking Systems

Wednesday, April 4, 2007

An Applicant Tracking System (ATS) is an application that enables the electronic handling of corporate recruitment needs by tracking candidates through each stage from sourcing to hire. According to Business Week, there is a great need to "consider centralization of recruitment resources and investment in recruitment technology to maximize the effectiveness of the workforce plan" and "improve the ability to measure the effectiveness of the organization." Is an applicant tracking system (ATS) the answer to centralization and standardization of internal hiring practices?

Although talent acquisition has been shown to work best as a defined process, a wide variance often exists amongst different managers a typical company’s hiring process. Recruitment practices impact everything from the ability to attract top talent to a company's bottom line. Without an ATS in place, inconsistent hiring practices can lead to discrimination and other unfavorable recruitment tactics that expose an employer to hefty fines and millions in lost revenue. Compliant recordkeeping is a growing concern for corporate recruitment as the Office of Federal Contract Compliance Programs (OFCCP) and the Equal Employment Opportunity Commission (EEOC) set new guidelines regarding discrimination. Consequently, the effort to track hiring procedures continues to gain momentum.

BusinessWeek notes that there are many benefits of an ATS. Notably, "the defined recruitment stages within an ATS force recruiters and hiring managers to document their recruitment, resulting in a higher level of consistency and visibility. The resulting data can be analyzed for systemic discrimination as well as a host of other issues (e.g., time-to-fill, source of candidates, interview-to-offer ratio, etc.) to help pinpoint areas for improvement in the talent-acquisition pipeline." In other words, standardization improves execution and promotes the accountability of the brand.

nextSource's VMS solution, TAMS (Talent Acquisition Management Solution), goes beyond an applicant tracking system by fully integrating the hiring process for full-time labor with the procurement process for temporary labor. TAMS eliminates the need for Procurement and HR departments to use separate systems for tracking full-time candidates and temporary workers. Additionally, TAMS offers access to The People Ticker, the industry's only real-time rate and salary benchmarking tool developed to assist HR and Procurement professionals in pricing labor. The People Ticker helps organizations set internal rate structures by ensuring that salary and rate offers are competitive and aligned with the current labor market. Together, TAMS and The People Ticker can help organizations standardize hiring and labor procurement practices while tracking, managing and pricing their workforce in a cost-efficient and timely manner.

Canada Job Market

Tuesday, March 27, 2007

As The People Ticker is launching in Canada, it's the perfect time to take a closer look into what is going on in the Canadian job market. Technology jobs are on the rise with many opportunities in the field. This job availability may help slow the "Brain Drain" that has been much discussed in Canada in recent years. Many skilled workers have been leaving Canada to seek higher paying jobs in the US but more tech jobs can keep workers in the area.

So what are the other trends going on in Canada? Where is job market picking up and where is it slowing down? It looks like it's time for job seekers in Canada to head west. Statistics Canada has the following information about the current job trends in the Great White North:

"While employment was little changed in February 2007, a long term trend that continues to hold is robust employment growth in Canada's three westernmost provinces. Since February 2006, growth in Saskatchewan, Alberta, and British Columbia has exceeded the national growth rate of 2.4%. This is in contrast to Central Canada where employment gains in both Quebec and Ontario have been more restrained with growth below the national average."

In fact, our research reflects that Calgary is one of the fastest-growing markets.




Blog Archive January 2007 February 2007 March 2007 April 2007 Subscribe Pay Rates for Contingent Workers Thursday, April 12, 2007 The following table illustrates how the contingent worker’s status may affect the bill rate and the agency’s profits: W-2 Bill Rate Pay Rate (Direct Labor Rate): $50 per Hour Negotiated Markup 30%: $15 per Hour Bill Rate: $65 per Hour Agency Cost (No Benefits): $10 per Hour Agency Profit: $5 per Hour IC 1099 Bill Rate Pay Rate (Direct Labor Rate): $50 per Hour Negotiated Markup 30%: $15 per Hour Bill Rate: $65 per Hour Agency Cost (No Benefits): $5 per Hour Agency Profit: $10 per Hour The principal difference in cost in the above example is due to the fact that for a W-2 employee, the agency must pay the employer’s share of certain employment related taxes such as FICA, FUTA, state unemployment, etc. On the surface, a 30% markup is competitive. However, by understanding that the placement was not a W-2 employee of the agency, a lower markup should have been negotiated that could have led to savings of approximately $10,000 per year on this single placement. In order to assist you in evaluating markups, our experience indicates that acceptable markup percentages from agencies generally fall in the ranges defined below: W-2: 30% - 45% IC 1099: 12% - 22% Co-Employment in IRS Section 1706 Tuesday, April 10, 2007 It's tax season, and for busy HR professionals that means reviewing the hiring practices and management of temps and other contingent workers over the past year. Most importantly, these detailed reviews focus on exposure to and instances of "co-employment". According to ContingentLaw.com, co-employment is "a legal doctrine which applies when two businesses exert some control over an employee's work or working conditions. Relationships between temporary staffing agencies and business clients are typical examples and consequently, easy targets for lawsuits initiated by temporary or other contingent workers." Contingent staffing can be costly to organizations that do not handle it carefully and correctly. Any company or agency that hires, refers, or manages temporary or contract workers can face costly legal battles as a co-employer of temporary, contract, or other contingent workers. Complex legal requirements and federal statues are dramatically transforming the risks and potential liabilities involved in the hiring and managing of contingent workers. In a co-employment lawsuit, your company and the other co-employer will be equally liable even if there was no wrong-doing on the part of your company. Among many other workforce management issues, risk mitigation with regard to co-employment been pushed up the priority list because of the devastating effects it can inflict upon unsuspecting employers. Compounding the complex issue of co-employment is IRS Section 1706 of the Tax Reform Act of 1986 (1986–3, Vol. 1, C.B. 698) (TRA '86) . Section 1706 places strict limits on who can be classed as a contractor in technical services industries. This can eliminate independent contracting as an option in many situations where it would be ideal. Having the flexibility to bring in an outside contractor is of crucial importance for many businesses, especially in the technical field. Many IT professionals also view the right to be self-employed as essential to their livelihoods. Yet section 1706 amended section 530 by adding subsection (d). "Section 530(d) provides that relief under section 530(a) is not available in the case of a worker who, pursuant to an arrangement between the business and a client, provides services for that client as any of the following: engineer, designer, drafter, computer programmer, systems analyst, and other similarly skilled worker engaged in a similar line of work. Section 1706 of TRA '86 applies only to the business in a three-party situation, namely, the business providing workers to a client. The fact that the worker is incorporated is immaterial. The intent of Congress was to classify, under the common law rules, workers retained by businesses to provide technical services, without regard to section 530 of the Revenue Act of 1978. Section 1706 does not change anyone from an independent contractor to an employee. The examiner must still look at the common law rules. Section 1706 applies to remuneration paid and services rendered after December 31, 1986." The potential harm caused by Section 1706 is that with only the common law employment test to prove a worker's status to the IRS, many high-tech firms will not hire independent contractors in order to avoid an IRS audit. The time and expenses to contest the IRS would outweigh the benefit, even if the audit is favorable. For independent contractors, this means less employment opportunities. Alternatively, employers may choose to avoid co-employment risks by using risk mitigation services such as payrolling. nextSource, Inc. offers payroll and benefits administration services to afford employers the flexibility to engage independent contractors (1099s). nextSource payrolling entails adding your non-agency represented contingent workers to the nextSource payroll, thus minimizing co-employment risks and eliminating paperwork associated with benefits, payroll and related tax issues. Vendor Management for Today's Market Aside from simply having a vendor management program in place, truly efficient vendor management requires effective collaborations with your vendors and a deep understanding of your business needs and internal processes. Additionally, you must consistently monitor your vendor base to ensure that quality and high performance are rewarded accordingly. When developing metrics, ComputerWorld suggests that, "Metrics are the foundation of your vendor management program. You get what you measure, not what is in the contract. Choose metrics that support your goals and reward the behavior you want to encourage." Having clearly defined goals and measurements will encourage vendor performance and loyalty. Your VMS should be customizable such that your organization’s goals and vendor metrics are easily attainable via real-time reports. nextSource's Talent Acquisition Management Solution (TAMS) not only automates the entire acquisition and management lifecycle for on- and off-boarding contingent labor and direct hires, but TAMS also provides online reporting of diversity spend, and supplier accrual and spend in real-time. By streamlining reporting and other vendor management processes, TAMS can bring you closer to the perfect balance of services, cost, and accountability which are all needed for optimal efficiency of vendor services. Staffing Experience Monday, April 9, 2007 Every company has their own way of defining experience levels. For example, some companies may consider a Junior level to represent 0 – 1 years of experience while another company may consider a Junior level to have 1 – 3 years of experience. nextSource has created one process that works even if the job/applicant market has no banding definition at all. Career banding is a human resources and procurment system that affects the classification, hiring, pay, promotion, evaluation, and career development opportunities for employees. The benefits of banding include increased flexibility for managers to adjust pay for eligible employees, and making is easer for employees to move up throught the pay range by acquiring and demonstrating new job-related competencies, education, or training. Career banding can attract and keep more talented employees by opening up potential for career advancement. Regardless of how a company defines experience level banding, one pattern emerges: the lower the experience level, the lower the rate or salary and the higher the experience level, the higher the rate or salary. This is the basic premise that allows nextSource to examine and categorize the unbanded marketplace. Using the following methodology it is possible to define experience level banding against the un-banded marketplace and satisfy the demands of all companies regardless of the experience levels that they may use. nextSource has found that a natural segmentation occurs among the experience years and related rate or salary that they have been able to capture in their methodology for experience banding. Identifying the rate and salary limits associated with this segmentation is the exercise of the banding utilized within The People Ticker. The People Ticker incorporates default assumptions about the unbanded job/applicant marketplace based on this segmentation. For example, the segmentation assumptions reflect that the pay rates falling in the lowest 25% of the reported pay rates are representative of pay rates for a Junior experience level while the top 10% of the pay rates (between 90% and 100% of pay rates reported) are representative of the GURU experience level. In its segmentation assumptions, The People Ticker uses a total of four experience levels. The corresponding banding ranges applicable to each experience level are defined below: Junior: 0% - 25% of Pay Rates Reported Mid-Level: 25% - 50% of Pay Rates Reported Senior: 50% - 90% of Pay Rates Reported Guru: 90% - 100% of Pay Rates Reported Experience Level banding in the marketplace is defined as a function of Pay Rate Range. Professionals who have been defined as Senior by companies will fall to the higher end of the banding scale than professionals companies have defined as Junior which will fall to the lower end of the banding scale. Negotiating New Placements Thursday, April 5, 2007 Since you are not dealing with changes to existing pay and bill arrangements, the negotiation of new placements may be easier than renegotiating the embedded base of contingent workers. However, the bottom line impact may be just as significant. Your company may or may not have created a Rate Card (ideally based on Pay Rate) for hiring contingent workers using The People Ticker. A Rate Card created with The People Ticker can be a valuable guide during negotiations since you will probably have the same or better market rate information than that possessed by the Staffing Agency. The Rate Card defines competitive parameters relative to engagement rates and such parameters should not be viewed as fixed or unchangeable. Will situations occur when it makes sense to hire out of scope from the Rate Card? Of course, but it is vital to know when and why these occurrences happen to avoid setting expensive precedents. One thing to keep in mind is having designated individuals with appropriate training in the negotiation of bill rates for contingent workers. The danger in non-centralized negotiations is that Hiring Managers and Agencies tend to rely on past history to dictate pricing for the next placement and that they are not always privy to current market rates. Once a manager engages a contingent worker at a rate of $75/hr, the precedent has been set with that agency and other similar, new placements by that agency tend to follow the same pricing. This may result in enormous costs to your organization. In order to help control this activity and to insure the maximum opportunity for savings, nextSource recommends the review and negotiation, if applicable, of every new placement even though a Rate Card may be in place. Why? Savings opportunities should be identified and realized whenever possible and skilled users should be aware of all possibilities that may impact the bill rate. For example, the type of contingent worker being placed can greatly affect the final bill rate. Without understanding whether or not the contingent worker being placed is a W-2 employee of the agency or a subcontractor (IC/1099) to the agency, the agreed upon markups may result in additional cost to the user. Applicant Tracking Systems Wednesday, April 4, 2007 An Applicant Tracking System (ATS) is an application that enables the electronic handling of corporate recruitment needs by tracking candidates through each stage from sourcing to hire. According to Business Week, there is a great need to "consider centralization of recruitment resources and investment in recruitment technology to maximize the effectiveness of the workforce plan" and "improve the ability to measure the effectiveness of the organization." Is an applicant tracking system (ATS) the answer to centralization and standardization of internal hiring practices? Although talent acquisition has been shown to work best as a defined process, a wide variance often exists amongst different managers a typical company’s hiring process. Recruitment practices impact everything from the ability to attract top talent to a company's bottom line. Without an ATS in place, inconsistent hiring practices can lead to discrimination and other unfavorable recruitment tactics that expose an employer to hefty fines and millions in lost revenue. Compliant recordkeeping is a growing concern for corporate recruitment as the Office of Federal Contract Compliance Programs (OFCCP) and the Equal Employment Opportunity Commission (EEOC) set new guidelines regarding discrimination. Consequently, the effort to track hiring procedures continues to gain momentum. BusinessWeek notes that there are many benefits of an ATS. Notably, "the defined recruitment stages within an ATS force recruiters and hiring managers to document their recruitment, resulting in a higher level of consistency and visibility. The resulting data can be analyzed for systemic discrimination as well as a host of other issues (e.g., time-to-fill, source of candidates, interview-to-offer ratio, etc.) to help pinpoint areas for improvement in the talent-acquisition pipeline." In other words, standardization improves execution and promotes the accountability of the brand. nextSource's VMS solution, TAMS (Talent Acquisition Management Solution), goes beyond an applicant tracking system by fully integrating the hiring process for full-time labor with the procurement process for temporary labor. TAMS eliminates the need for Procurement and HR departments to use separate systems for tracking full-time candidates and temporary workers. Additionally, TAMS offers access to The People Ticker, the industry's only real-time rate and salary benchmarking tool developed to assist HR and Procurement professionals in pricing labor. The People Ticker helps organizations set internal rate structures by ensuring that salary and rate offers are competitive and aligned with the current labor market. Together, TAMS and The People Ticker can help organizations standardize hiring and labor procurement practices while tracking, managing and pricing their workforce in a cost-efficient and timely manner. Canada Job Market Tuesday, March 27, 2007 As The People Ticker is launching in Canada, it's the perfect time to take a closer look into what is going on in the Canadian job market. Technology jobs are on the rise with many opportunities in the field. This job availability may help slow the "Brain Drain" that has been much discussed in Canada in recent years. Many skilled workers have been leaving Canada to seek higher paying jobs in the US but more tech jobs can keep workers in the area. So what are the other trends going on in Canada? Where is job market picking up and where is it slowing down? It looks like it's time for job seekers in Canada to head west. Statistics Canada has the following information about the current job trends in the Great White North: "While employment was little changed in February 2007, a long term trend that continues to hold is robust employment growth in Canada's three westernmost provinces. Since February 2006, growth in Saskatchewan, Alberta, and British Columbia has exceeded the national growth rate of 2.4%. This is in contrast to Central Canada where employment gains in both Quebec and Ontario have been more restrained with growth below the national average." In fact, our research reflects that Calgary is one of the fastest-growing markets.

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