Why An Ultra Low Staffing Markup Is A Red Flag

An ultra low staffing markup is a red flaf for small and medium-sized businesses that are using staffing agencies for the first time are often looking for the most cost-effective way to acquire the necessary workforce without compromising on quality or exposing themselves to undue risks. All too often, businesses are enticed by offers of ultra-low staffing markups that promise significant cost savings in the hiring process. However, beneath the surface of the seemingly attractive rates are risks and liabilities that no business owner wants to deal with. 

Employers must use caution when considering the staffing agencies that offer rates that are too good to be true, especially when it comes to workers comp insurance and tax compliance.

Here are a few reasons why staffing agencies with ultra-low markups should serve as a red flag for businesses: 

What Is A Staffing Markup?

Staffing agency markup rates are the fees that companies pay to the agency for their services. These fees are on top of the wages paid to the new staff members and come out of the company's budget. The final percentage of this fee depends on factors like how many workers are available, how big the agency is, and how skilled the hired worker is. The average staffing agency markup for temporary employees or independent contractors can range anywhere between 27 – 75%. The biggest factors are geography (what state your business is located in), workers compensation classification code for the type of industry and work performed by your business, volume, and how difficult it is to fill the positions.

The Illusion Of Savings With A Staffing Agency

Staffing agencies that try to entice businesses with their ultra-low staffing markups are often cutting corners in other areas. While it may seem like you're saving money, the savings often come at a significant price in the long run. Staffing agencies that are cutting costs upfront may be cutting corners in other areas that compromise the quality of the service that they offer. Their shortcuts could expose businesses to unforeseen risks. 

For example, they might reduce spending on candidate screening and vetting processes, leading to lower-quality hires. Or they may not be paying their employment taxes and most commonly mis-categorizing employees workers compensation class codes to save money.

Worker Compensation Insurance Fraud

One of the most critical considerations for businesses when engaging with a staffing agency is workers' compensation insurance. This insurance provides essential protection for employees in the event of workplace injuries or illnesses, covering medical expenses, lost wages, and other related costs. However, staffing agencies with ultra-low markups may skimp on workers' compensation insurance coverage to reduce their overhead costs, leaving both workers and businesses vulnerable in the event of an accident. It’s not uncommon to see staffing agencies miscategorizing class codes to save money. This puts the host employer and the staffing agency at risk and is illegal.

Legal Obligations and Financial Risks Caused By A Low Markup Staffing Agency

In addition to workers' compensation insurance, staffing agencies must follow tax compliance regulations, including payroll taxes, unemployment insurance, and other employment-related taxes. An ultra-low staffing markup may indicate that the agency is cutting corners in tax compliance, potentially exposing businesses to legal and financial risks. Unpaid taxes and penalties resulting from non-compliance can lead to costly audits, fines, and legal liabilities for both the agency and the businesses that engage their services.

Exposing Businesses to Liability

By engaging with a staffing agency that offers an ultra-low markup, businesses unwittingly expose themselves to countless liabilities. Inadequate workers' compensation coverage and tax compliance issues can leave businesses vulnerable to lawsuits, financial losses, and damage to their reputations. Moreover, businesses may find themselves held responsible for covering medical expenses and other costs associated with workplace injuries if the staffing agency fails to provide adequate insurance coverage. All because businesses were looking for a cheaper way to fill in the gaps or build their teams. 

The Importance of Due Diligence When Choosing A Staffing Agency

Before jumping into an agreement with a staffing agency that boasts ultra-low fees, businesses should proceed cautiously and thoroughly investigate their options. It's crucial to ensure that the agency provides high-quality service, including thorough candidate screening and support. For instance, businesses can inquire about the agency's process for vetting candidates and providing ongoing training and development.

Comprehensive workers' compensation coverage is non-negotiable. This insurance protects both the agency's workers and the businesses hiring them in case of on-the-job injuries or accidents. For example, a reputable agency like Great Hire not only ensures that its workers are covered by adequate insurance but also assists businesses in understanding their liability in such situations.

Final Thoughts 

While ultra-low staffing markups may seem tempting, the risks outweigh the savings. Compromised service quality, inadequate insurance, and tax issues are significant concerns. Therefore, choosing a reputable agency is crucial. Many businesses make the mistake of thinking that they are insulated from a staffing agencies practices, however in the eye of the law there are many joint exposures and potential litigation that can arise from not paying, or miscategorizing worker injuries. Great Hire prioritizes compliance, transparency, and quality service. By partnering with us, businesses can mitigate risks, ensure compliance, and secure a reliable workforce. Learn more here