Why Staffing Agencies Should Offer Payrolling To Their Clients

McKinsey estimates that nearly 60 million American workers now identify themselves as independent workers in some way. Whether freelancers, independent contractors, or temp workers, this quickly becomes a key foundation of the American labor market. 

Crucially for staffing agencies, with this rise in alternative work, there has also been a rise in the popularity of companies' self-sourcing candidates (also called "direct sourcing"). Whether through retirees, alumni, internal referrals, or even transfers, self-sourced is becoming increasingly popular. 

This may sound like bad news for staffing agencies that hinge on the markups associated with the recruiting process. However, if a staffing agency can diversify its range of services, it can still take advantage of a growing market. According to Staffing Industry Analysts (SIA), up to 15% of the global staffing market spend is from directly sourced candidates.

Although many companies are happy to self-source their candidates, payroll management and compliance remain major concerns for companies that engage with independent workers. Consequently, there’s still a huge market for agencies that can incorporate payroll services for their clients, even if they choose to self-source their candidates.

What are Payrolling Services?

On its most basic level, contractual payrolling refers to when a company uses a third party to manage their temporary employees' employment and payroll management. This can include anything from the pay they receive, the benefits they’re entitled to, their tax classification, and HR and risk management.

This can cover any temp employee, from seasonal hires to project-based hires or employees on call. The key difference between contractual payrolling and traditional staffing is the lack of recruitment involved in the process. Essentially, a staffing agency acts as an Employer of Record (EOR) for their client and assumes all legal and financial responsibilities of hiring a temporary employee. Typically, payrolling markups are around 30% of payroll versus the normal markups of 50% or higher in traditional staffing.

Why Should Staffing Agencies Offer It?

That said, it can be easy for staffing agencies to see payrolling as a process that removes all their value from the equation. However, by offering contractual payroll, you can still offer significant value for your clients. 

The biggest advantage for your clients is a reduction in risks. You’re probably aware of the many pitfalls of hiring temporary workers, especially across multiple states. Staffing agencies have an inherent advantage over other businesses as they deal with compliance. 

To operate effectively, you must deal with different wage and hour laws, know the difference between W-2 and 1099 classifications, and navigate various HR regulations. This experience can make your staffing agency a valuable asset for companies looking to self-source employees who aren’t literate in how to stay compliant with hiring laws. 

Similarly, a contract payrolling service can ease the administrative burden on a client’s current HR department. When handled in-house, it’s typical for a company's HR department to be responsible for all compliance and management issues. This has the obvious problem of taking up a lot of time, which can distract from their day-to-day operations.

Another key benefit for staffing agency clients is payroll services' inherent flexibility. If they’re experiencing a rise in demand, they can easily engage in-house talent without worrying about compliance issues.

There’s still a lot of value that a staffing agency can bring beyond the actual recruitment process. 

What Benefits Are There for My Staffing Agency? 

It’s common for staffing agencies to look at services like contractual payrolling and assume it’s taking away from the markups their margins depend on. However, while mark-ups are often lower, there are still some key benefits for staffing agencies themselves. 

Revenue Diversification.

Payrolling services offer staffing agencies a great chance to diversify their revenue streams. Essentially, you’re opening yourself up to a new market; you can get clients who may be satisfied with their hiring process but still require support with employment logistics.  

Offering a payroll service can be a great way to generate new revenue if you're looking for growth opportunities. Moreover, because the client sources the candidate, your agency doesn’t have to pay recruiting costs for payrolled workers, which can help keep profit margins healthy despite the initially lower markup. 

Client Retention

By offering payroll services, you essentially make being a client of your staffing agency more valuable. Your staffing agency becomes a source of a more holistic workforce solution rather than simply temporary talent. 

For example, you may have placed talent with a company in the past; however, they might no longer need the talent you’ve placed, instead opting for a self-sourcing option. If you can offer payroll services, you can keep that client on instead of losing them to a dedicated platform. 

Enhancing Agency Competitiveness and Attracting More Clients

Ultimately, offering payroll services strengthens your staffing agency's market position. You become a full-service provider, which means you can attract more clients. 

If a client needs talent sourcing for one position and payroll management for a position for which they’ve already sourced talent, they are more likely to choose the agency that can provide both services rather than look for two. 

Business Outcomes Only 

When sourcing and placing talent, your staffing agency becomes liable for the talent’s success and performance. This is generally a subjective thing to measure; your client may simply dislike the candidate even if they’re qualified and successful in their placement. This process puts a significant amount of risk on your agency, some of which you can’t control. 

However, when offering a managed service like payroll, your agency is only liable for compliance. Consequently, as long as you successfully maintain compliance, you’re meeting the end of the relationship. This means you can operate as efficiently as possible to keep costs down without risking your relationship with a client.

Using an External Employer of Record 

Staffing agencies can seize a profitable opportunity in the growing market of self-sourced talent by offering payrolling services, even when utilizing an external Employer of Record (EOR) like Ascen. Partnering with an EOR allows staffing agencies to offer payroll management and compliance services while retaining flexibility and reducing operational burden. With an EOR like Ascen handling compliance, onboarding, and payroll, the staffing agency can offer payrolling as a pure profit service without incurring recruitment or additional HR costs.

EORs like Ascen work seamlessly with direct sourcing platforms and staffing firms, enabling these agencies to serve as essential workforce management partners for clients who self-source their candidates but need help managing employment logistics. By diversifying with payroll services, staffing agencies not only enhance client retention and revenue but also strengthen their competitive positioning as full-service providers. This shift allows staffing agencies to generate revenue from administrative and compliance solutions, creating a sustainable business model that meets modern workforce needs.