Hidden Costs of Temporary Workers

Excerpt from “The Birth of a New Workforce” by Randall Hatcher.

By Randall Hatcher

During the early days of temporary staffing in the 1960s and ’70s, most companies turned to this option on a short-term, project, or seasonal basis only. As they started to increase their number of temporary workers, the enormous cost savings caught the attention of the number crunchers. Before long, some “temporary” jobs were lasting two, three, or five years, and others would end only if the business folded.

Organizations began viewing this labor expense as a commodity, listing it as a line item on the corporate profit and loss statement. Subsequently, the responsibility for it shifted from HR to the purchasing department with two goals in mind: obtain the lowest price and the most extended payment terms.

Companies now could finance what originally was a statutory, fixed payroll cost as a variable one. Instead of having to accommodate government-mandated payroll timetables for their full-time employees, a business could stretch out that payment to a temporary-staffing vendor for 30, 60, 90, or more days.

Some of the savings in using temporary workers were staggering. The fully loaded bill rate of a staffing provider was often one-half—sometimes even one-quarter—of the company’s full-time pay rate alone, and the savings in benefit and statutory costs were typically 30 to 45 percent on top of that. So it’s easy to understand why the number of temporary workers continued to swell and why businesses increased this group as a percentage of their overall labor force.

Eventually, companies sought to leverage this expense even further by bundling regional, nationwide, and global staffing contracts. Typically, the firm offering the cheapest hourly bill rate won the business. Because 80 percent of every hourly bill rate for temporary services was (and still is) directly related to the employee’s wage, higher pay rates translated into higher bill rates, and lower pay rates translated into lower bill rates. Companies wanted the cheapest bill rate, so temporary worker wages were steadily suppressed over time. Number crunchers squeezed all they could out of the Staffing Model, even beating down competing staffing suppliers to the final pennies that separated their respective hourly bill rates.

This practice of applying cookie-cutter, commodity pricing to people comes at a huge cost. As the temporary staffing industry matured, the typically large disparity in pay between full-time regular employees and temps gave rise to a wide gap in the quality and dedication levels between the two types of workers. Let’s face it: If you’re making half the wage of the person sitting next to you who is performing the same job, will you have the same degree of commitment?

Out of this scenario emerged a two-class employee system. Class one consisted of well-trained, full-time, and stable employees who enjoyed market-based pay and competitive benefits. Tenure and loyalty in this group were strong.

On the other hand, members of class two—the temporary class—had the opposite experience. Their wages were as low as procurement could negotiate them, and their benefits were likewise few, if any. So, as you would expect, when compared to class one, this group exhibited much different characteristics in the workplace:

  • Lower morale
  • Higher absenteeism
  • Greater turnover
  • Less efficiency
  • Poorer work quality

Well-meaning purchasing and finance departments were tasked with saving money on what companies paid for the hourly bill rate, but they didn’t realize their businesses were becoming less efficient. More labor hours were required to get the same amount of work done, largely due to exorbitant turnover and absenteeism, as well as constant retraining. It was not unusual for temporary annual turnover to average 200 to 400 percent on large staffing projects and for absenteeism to reach as high as 35 percent. Could you run a company like that?

Because temporary workers affected the quality and efficiency of operations, their true cost went far beyond the hourly bill rate. Although the number crunchers saved a few cents per hour negotiating that rate, production was absorbing 10 to 20 percent more in labor hours for completing the same amount of work. They were unknowingly penny wise and dollar foolish.

The impact of these liabilities on quality, delivery, and waste was the hardest to measure. Because no one was factoring these variables into the hourly bill rate, companies had no clue what it was really costing them to use a temporary workforce.

At this time, businesses began adopting another often-misaligned staffing approach: the Temp-to-Perm Hiring Model. To illustrate, let’s say for a particular job, temporary workers were paid $7 an hour and their full-time counterparts were paid $14. When a position opened up, the easiest way to fill it was to grab John or Mary “Temp”—someone with a proven track record—and plug him or her in at $14 an hour.

Before this practice took hold, the same company would have placed an ad in the newspaper. Instead, hiring managers made their selection from the temporary workforce, paying a $7-an-hour worker $14 an hour when they could have hired the same person for possibly half that amount. What caliber of worker could they have gotten for $14 an hour had they gone into the marketplace? By taking the easy route, they inadvertently weakened the quality of their workforce.

Those organizations still using this model exacerbate the problem when they fail to set their full-time hourly pay rates to a true market valuation. If the job in the above example is actually valued at $10 an hour, but you’re paying the full-time employee $14 and the temporary worker is earning $7, you have a problem. You’re substantially overpaying your full-time employees (who are by now far less efficient than they were during their first year of employment), and, at the same time, you aren’t paying enough to attract the highest-quality temporary workers.

If you continue to hire from your temporary pool, you must be willing to pay more and move closer to the job’s fair market value. If you choose not to do so, in the long term, you will dramatically reduce your competitive edge derived through your workers.

Since graduating from the University of Georgia in 1978, Randy Hatcher has worked for MAU Workforce Solutions, a family owned business founded by his father, William G. Hatcher Sr. When Hatcher joined the company, it had just seven full-time employees working at customer locations in Augusta, GA. Today, MAU’s reach extends internationally, and it is one of the largest minority-owned staffing and outsourcing firms in North America. To purchase a copy of “The Birth of a New Workforce,” visit http://www.mau.com/blog-0/the-birth-of-a-new-workforce/.

Lorri Freifeld is the editor/publisher of Training magazine. She writes on a number of topics, including talent management, training technology, and leadership development. She spearheads two awards programs: the Training Top 100 and Emerging Training Leaders.