Guide: What Should Contract Staffing Agencies Look Out For Expanding Into the US

Regardless of location, any staffing agency will be familiar with contract placement. They offer a great resource for companies who need talent without long-term commitment. Whether a client is going through a period of change or even something like an audit, the right contract worker can be vital to getting a project over the line. 

47% of employers globally now say they seek a short-term worker. In the US, contract workers are even more critical to company operations, with 1 in 5 of every job being temporary. 

This has led to multiple types of placements, from a more traditional temporary contractor role to retiree re-training and internships.

For UK recruitment agencies specializing in contract placements, this makes the US a very attractive market, with more opportunities to deliver placements, higher potential salaries, and bigger markups.

However, there are significant differences between how the UK regulates contract placements versus the US. This can catch many staffing agencies out and lead to hefty penalties, including fines that can reach millions, depending on the severity of the infraction. 

How does US Legislation Differ From the UK?

UK Legislation

In the UK, contract placements are governed by IR35 legislation. Introduced in 2000, IR35 encompasses any type of off-payroll paid through an intermediary company, including those employed by a staffing agency. This is a fairly simple piece of legislation that deems that if your agency is the responsible employer of a contractor, it must make the correct income tax and National Insurance contributions for the employee.

IR35 is a blanket regulation, which means if you are deemed responsible, you simply have to follow procedures and pay the correct contributions regardless of where you are based and the nature of your employment.

The point to which an agency is deemed an intermediary is also relatively simple. You're responsible if you’re an agency that supplies workers who aren’t employed by you directly.

Similarly, the penalties for violating IR35 are relatively simple. Only 30% of the unpaid tax is penalized if an agency makes a mistake.

US Legislation

The legislation surrounding contract workers and staffing agencies in the US is much more complicated. There are multiple agencies responsible for regulating employment classification at both the federal and state levels. The Internal Revenue Service (IRS) and Department of Labor (DOL) regulate employment nationally, and each state has its own tax authority and Department of Labor. Thus, instead of dealing with one set of rules as you do in the UK, recruitment agencies must comply with dozens of sets of rules in the US, depending on where their workers are based. While most state laws are similar, some states have dramatically more strict rules than others (such as California or New York).

On a national level, the classification of an independent contractor is also more vague in the US. The IRS classifies employees by the degree of control and independence they have within their work relationship. 

The IRS publishes updated guidelines on what it considers markers of an independent contractor relationship, such as setting one’s hours and providing tools. However, there are no set guidelines for staffing agencies, which can make misclassification common.

In addition, the penalties for misclassification can be very severe. A staffing agency will not only face penalties from the IRS and DOL, including fines and back taxes, but it is also liable to legal action. It’s common for employees to file lawsuits against staffing agencies for benefits, overtime pay, and employee rights. 

Despite the risks inherent in classification, contract placements are still hugely popular in the US and have advanced greatly compared to the UK. 

Types of Contract Placement in the US

Temporary 

The most common type of contract placement in the US is the traditional short-term worker arrangement. A company will have a required job they need to fulfill and put out an advert. A staffing agency will then provide and employ the talent throughout the job.

Temp-To-Direct Hire 

This placement allows companies to “try before they buy.” Essentially, they will hire a contractor through the staffing agency first to ensure they’re a good fit before employing them full-time. This can be very profitable for staffing agencies, as they will receive a conversion fee when the employee becomes full-time. 

Payrolling for Self-Recruited Candidates 

Payrolling is where a company locates its ideal candidate without the help of a staffing agency (also called "Direct Sourcing"), but wants to avoid dealing with the responsibility of hiring the contractor, so it outsources the responsibility to the staffing agency, which employs the contractor as an intermediary. 

Retiree Re-Staffing and Internships 

Companies will use retiree re-staffing when looking for the experience and skills of a retired worker on a consultant basis. Due to the short-term nature of their role, employers will opt to outsource employee management to a staffing firm to manage their employment.

Similarly, many employers will use a staffing agency when employing younger employees on an internship, as they are also employed for a short period.

Classifying Workers Correctly in US Staffing

Companies in the US expect staffing agencies to be the experts when it comes to classifying workers correctly. As such, they often trust staffing agencies to decide whether a worker should be an independent contractor (sometimes called 1099 or Corp-to-Corp) or a W-2 employee. In some industries like software development and life sciences, highly paid independent contractors are common (up to 50% of placements in some specialties). In other areas, such as light industrial staffing or healthcare, employee-based assignments are much more common. Given the risks and client expectations, it's critical to be informed about federal and state regulations on classification before starting to work with end clients in the US.

Ascen

Ultimately, employing short-term staff is never easy, as more risk is involved. However, the US offers a large market and the opportunity to increase revenue for any UK staffing agency looking to grow. 

Getting classification right and dealing with the various types of contract placement can be difficult at the best times, especially when expanding into the US. 

We designed Ascen with staffing agencies in mind. Ascen is an Employer of Record (EOR) platform that automates contractor management from onboarding to payment. Ascen’s designed for the US market, so you can be sure you’re compliant even if you haven’t set up a legal entity yet. 

If you’d like to see Ascen in action, please book a demo here.