With an aging population and a shift toward flexible working relationships, companies are continuing to put resources toward building specialized programs designed specifically for older workers (e.g., “semi-retired”) in an effort to retain talent. Using third-party payrolling services is a common and effective way to engage these workers.
Payrolling services, whereby a third-party supplier acts as the “employer of record” for a worker who’s identified or recruited by a client company, has long been considered a non-strategic service by many contingent workforce program owners. Maybe it is because the service is often viewed as a tactical one that amounts to “simply paying the worker” or perhaps because it doesn’t represent a significant amount of spend for most companies. A report on the state of the payroll industry that is about to be published by Staffing Industry Analysts, publisher of this newsletter, finds that approximately 93 percent of all payroll accounts, as reported by payroll providers, represent less than $2 million dollars in spend (not profit). Despite this low spend, payrolling services can be a strategic way to engage workers and it deserves to be re-evaluated.
While many recruiting companies or managed service providers offer payrolling services, it’s often not core to their business and it almost always costs more than it should. By far, the most common pricing method for third-party payroll services is a markup model, where a supplier marks up the worker’s pay rate by a percentage that accounts for federal and state payroll taxes, its expenses, and profit. The traditional markup model is simple to understand, but it doesn’t account for the varying federal and state tax caps. The simplicity of the traditional markup rate often means that contingent workforce buyers are leaving money on the table.
A far less common pricing model, but undeniably the most cost effective, is known as the statutory plus pricing model. In this model, a payrolling supplier charges its clients the actual statutory costs legally required by any government agency for acting as a worker’s employer, plus the payroll provider’s overhead costs and profit for its services. Once the taxable wage base is paid (state unemployment, for example), the supplier stops charging your company for that portion, effectively lowering the cost of its services. These “savings” can be considerable when you consider that the average SUTA rate across all states is approximately 3.5 percent and the taxable wage basis for some states can be as little as a few thousand dollars. And if you engage highly paid workers (those earning more than $40 per hour) for extended assignment lengths (a year or more), FICA charges of 6.2 percent can also come into play, resulting in even more savings.
Given this, how your company utilizes payrolling services is worth another look.
This post first appeared in Contingent Workforce Strategies 3.0, June 19, 2013.