Contingent Work and Staffing Industry - N. Theodore

8/3/2019 Contingent Work and Staffing Industry - N. Theodore

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CONTINGENT WORK AND THE STAFFING INDUSTRY:

A REVIEW OF WORKER-CENTERED POLICY AND PRACTICE

Nikolas Theodore & Chirag Mehta

Center for Urban Economic DevelopmentUniversity of Illinois at Chicago

October 1999

Report prepared for the Ford Foundation


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Acknowledgements

Thanks to Mara Manus of the Ford Foundation and Mark Elliott of Public/Private Venturesfor their guidance and feedback during the preparation of this report.

Thanks also to the following organizations for contributing information:

National Employment Law ProjectAFL-CIOPrimavera WorksNational Alliance for Fair Employment9 to 5 National Association of Working WomenWorkers Organizing CommitteeWashTechProgreso LatinoCampaign on Contingent WorkCommunity Voices HeardService Employees International UnionCarolina Alliance for Fair EmploymentPeople Organized to Win Economic PowerAtlanta Labor Pool Workers Union

Finally, thanks to Bill Howard, Tim Lohrentz, and Marya Morris for comments on an earlierdraft of this report.

We gratefully acknowledge funding from Public/Private Ventures.

Please direct comments to:

Nik TheodoreDirector of ResearchUIC Center for Urban Economic Development (M/C 345)

400 South Peoria StreetChicago, Illinois 60607-7035

Tel: 312-996-6336Fax: 312-996-8378E-mail: [email protected] site: http://data.cued.uic.edu/cued/


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Table of Contents

INTRODUCTION.........................................................................................................1

SECTION I: CONTINGENT WORK AND THE STAFFING INDUSTRY.............6

CONTINGENT WORK DEFINED ....................................................................................... 6WHY DO EMPLOYERS USE CONTINGENT WORKERS?.....................................................8WORKERS PREFERENCES FOR CONTINGENT WORK..................................................... 10CHARACTERISTICS OF CONTINGENT WORKERS ............................................................ 12

Distribution of workers by industry......................................................................... 12

Distribution of workers by occupation .................................................................... 13

Wages of workers in nonstandard arrangements..................................................... 14

STAFFING INDUSTRY TRENDS...................................................................................... 18Temporary Help Services........................................................................................ 19

Professional Employer Organizations (PEOs) ........................................................ 22

SECTION II: STAFFING INDUSTRY GROWTH STRATEGIES........................ 24

VENDER ON PREMISES SERVICES................................................................................. 25EXPANSION STRATEGIES ............................................................................................. 29

Branches, Franchises, and Licensed Agencies ........................................................ 29

Mergers and Acquisitions ....................................................................................... 30

Internal Growth ...................................................................................................... 32

FACTOR FUND INVESTMENT FOR THE STAFFING INDUSTRY .......................................... 32STAFFING INDUSTRY TRENDS BY MARKET SEGMENT ................................................... 33

Healthcare Staffing.................................................................................................33

Information Technology.......................................................................................... 35

Accounting and Finance ......................................................................................... 36

SECTION III: THE INFLUENCE OF PUBLIC POLICY ON CONTINGENT

STAFFING ARRANGEMENTS................................................................................ 38

WORKERS COMPENSATION AND THE AGENCY-CLIENT RELATIONSHIP ........................ 39REGULATION OF EMPLOYEE LEASING.......................................................................... 40ENFORCEMENT OF ERISA...........................................................................................43THE MICROSOFT CASE A POTENTIAL VICTORY FOR PERMATEMPS.......................... 43INDEPENDENT CONTRACTOR CLASSIFICATION AND COST-REDUCTION STRATEGIES......46NLRA AND ITS OUTDATED VIEW ON EMPLOYER-EMPLOYEE RELATIONS..................... 47JOINT LIABILITY UNDER FEDERAL EMPLOYMENT LAWS............................................... 49

FAMILY AND MEDICAL LEAVE ACT............................................................................. 50FEDERAL FAIR LABOR STANDARDS ACT...................................................................... 51RECENT POLICY INITIATIVES ....................................................................................... 51

Equal pay and benefits for equal work .................................................................... 51

Stopping the misclassification of workers as independent contractors..................... 52

Staffing industry model unemployment insurance laws............................................ 53

THE IMPACT OF EMPLOYMENT POLICIES ON CONDITIONS FOR CONTINGENT WORKERS. 54


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SECTION IV: WORKER-CENTERED PRACTICE............................................... 56

NON-PROFIT TEMPORARY HELP AGENCIES ................................................................. 56CORPORATE CAMPAIGNS ............................................................................................ 57POLICY ADVOCACY .................................................................................................... 60WORK FIRST, WELFARE REFORM, AND THE CONTINGENT LABOR FORCE ..................... 62LABOR ORGANIZING STRATEGIES................................................................................ 64NATIONAL COALITION BUILDING ................................................................................ 66

REFERENCES............................................................................................................68


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INTRODUCTION

Economic analysts are increasingly pointing to a newly emerging economy where

greater flexibility, ongoing workplace transformation, and enhanced responsiveness to

market pressures are the new rules of the game. At the center of this new economy is

the phenomenon of contingent work, fueled both by employers desires to increase

flexibility while reducing costs and by a growing number of staffing agencies that have

formed to service these needs. Staffing agencies such as temporary help agencies,

professional employer organizations, and other labor contractors now operate as

important for-profit labor market intermediaries, actually hiring workers for their

business clients and brokering the relationships between business clients and workers.

To many observers, the expansion of contingent work and other forms of non-

standard employment contracts is associated with greater turbulence in labor markets as

traditional beliefs and expectations regarding job security, wage progression, and career

advancement have been called in question by employers use of alternative staffing

strategies. The growth in contingent work has contributed to the elimination of rungs on

career ladders, increasing wage polarization between regular employees and

economically marginalized contingent workers, and the erosion of wages, benefits, and

social protections for a large subset of the workforce. At the same time, others have

argued that it is this very adaptability of U.S. employment relations that enhances the job-

creation capacity of the economy. The loosening of restrictions on employers to staff

workplaces more flexibly, it is argued, has led them to take on additional workers.

Because these positions are not necessarily mutually exclusive, there has been

considerable confusion, and at times outright disagreement, over the significance of

employers use of alternative staffing arrangements. Adding to this confusion are labor

market data which seem to be offering mixed messages. For example, on the one hand, it

has been shown that temporary jobs comprise approximately 25 percent of new jobs

created between 1984 and the present (Cappelli, et al. 1997) and that the number of

temporary help agencies has grown by 500 percent since 1982 (HRMagazine, 1998).


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Analyses following these figures would suggest that contingent work is becoming a key

component of the ongoing restructuring of U.S. labor markets, and in the process it is

challenging established employment conventions. At the same time other analyses

indicate that only 2.2 percent to 4.9 percent of workers are employed under contingent

staffing arrangements (Cohany, et al., 1998). This would suggest that while contingent

work is growing, its overall impact on the economy remains modest.

However, before any final conclusions can be drawn from these statistics it should

be noted that many of the commonly accepted estimates used to measure the importance

and magnitude of contingent work have been criticized as anecdotal and unrepresentative

(Blank, 1998; Osterman, 1999). Even in the most sophisticated national surveys,

depending on the methods and definitions used, estimates either systematically over-count or under-count the size of the contingent workforce (Blank, 1998). In addition to

these weaknesses, the national survey data have at least three other drawbacks. First, by

focusing on the number of workers holding contingent employment at a given point in

time, national estimates may greatly underestimate the number of workers who are

employed in contingent arrangements over the course of a year. Contingent work is, after

all, a fluid employment relationship and it is likely that several workers could move

through a single temporary job slot during the year. In summarizing the results of a

W.E. Upjohn Institute national survey of employers, Houseman (1998: 14) found that

the number of positions created for agency temporaries during a year is seven to eight

times the number of temporary agency jobs likely to exist at any point in time.

[Therefore, it] is likely that the number of individuals experiencing some spell of

temporary employment during a year is much greater than captured in a point in time

survey (see also Osterman, 1999).

Second, national estimates may underplay the significance of contingent work in

certain local labor markets (such as older, industrial cities like Chicago and new

industrial districts like Silicon Valley) and among certain segments of the labor force

(such as disadvantaged workers and recent immigrants). For example, while somewhat

selective and often anecdotal, recent research has found that the employment conditions


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and prospects of certain groups of low-wage workers are greatly shaped by the

emergence of temporary help agencies as the employers of last resort. Even in a booming

economy and at a time when employers are experiencing worker shortages, many

workers still are left with few options other than turning to contingent work in an attempt

to make ends meet. Other groups of workers who occupy more privileged positions in

the labor market by virtue of their employment credentials and highly demanded skills

may also find that their job opportunities are reliant on securing positions through

temporary help agencies and other employment contractors. Contracts between

employment agencies and their business clients may restrict the hiring of selected

occupations to these labor market intermediaries, effectively foreclosing such

occupations to all but those workers placed by staffing agencies. Thus, contingent work

arrangements may have a strong and disproportionate influence on the employment

prospects of certain groups of workers while having only a modest impact on the labor

force as a whole.

Finally, because all indications point to the continued expansion of contingent

work and other forms of non-standard employment, alternative staffing arrangements and

the agencies that broker these relationships may represent the leading edge of workplace

transformation. Experimentation by employers with alternative arrangements and the

more widespread use of contingent staffing strategies are a direct challenge both to long-

held views of employment rights and privileges and to many of the employment

protections and public policies that workers have come to count on and expect. The

staffing industry has been active in promoting legislation at the federal and state levels

that would facilitate the expansion of contingent staffing arrangements and perhaps erode

worker protections. For example, industry representatives have successfully lobbied

many state legislatures to make changes in unemployment insurance regulations that

would reduce claims that might be made by temporary help agency workers whose long-

term work assignments have ended. While worker-centered organizations have contested

some employment policies as well as employer practices in this arena through litigation,

policy advocacy, and alternative worker-centered practice, there is considerable


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momentum behind industry efforts to open up avenues for the continued expansion of

contingent work via public policy reform.

Consequently, there is now a need to move beyond the focus on counting the

stock of contingent workers toward examining the wider changes in employment

strategies and public policy that are underway. Despite recent efforts to shed light on

emerging trends and the variety of forms that workplace transformation now takes, many

aspects of contingent employment remain unexplored and inadequately understood. As a

result, the impact of the rise in contingent staffing arrangements on working conditions

may be minimized or obscured. Equally as important, there is a need to assess the

strategies and outcomes of union and community-based efforts to provide workers with

greater leverage as they negotiate alternative employment arrangements. A growingnumber of local organizations have created non-profit staffing agencies, hiring halls,

collective bargaining units, and other institutional innovations that are designed to bolster

workers positions in the job market while reforming industry practice. Many of these

organizations have also joined national networks that include established policy advocacy

organizations to promote an employment policy agenda that keeps pace with recent

developments in this rapidly changing field.

This report presents an overview of the major issues facing contingent workers,

recent developments in the staffing industry, an analysis of the current policy landscape,

and a review of worker-centered policy advocacy and practice. Section I presents a

summary and analysis of data on the contingent workforce. In this section, analyses of

employer and worker surveys are reviewed and data on the temporary help industry are

presented. Section II examines the growth strategies of various segments of the staffing

industry. In this section, trends in industry restructuring are presented along with an

examination of the growth strategies being pursued by leaders in the temporary help

industry. Section III analyzes the adequacy of current public policies as well as current

policy proposals that are being debated in Congress and at the state level. Contingent

workers, and the staffing agencies and business clients that employ these workers, are

subject to a complex array of public policies that in many ways are growing increasingly


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out of date and ineffective in meeting the needs of workers. This section provides a

broad overview of these policies and suggests policy gaps in existing laws governing

contingent work relationships. Section IV presents a review of worker-centered

employment policies and alternative practice. A growing number of unions, community

organizations, and policy advocates are devising strategies to address issues faced by

contingent workers. This section reviews current efforts, with a particular emphasis on

efforts that have received little national attention.


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SECTION I: CONTINGENT WORK AND THE STAFFING INDUSTRY

Contingent Work Defined

The term contingent workwas first proposed by Audrey Freedman (1985: 35) to

describe conditional and transitory employment arrangements that might be put in

place when a company has increased demand for a particular service or a product or

technology, at a particular place, at a specific time. Thus, the concept of contingent

work was designed to reflect the greater emphasis being placed on labor flexibility by

employers as a response to the variability of product demand. In some senses, contingent

work was viewed as the labor corollary to just-in-time production and the primary forms

of contingent work were initially seen as being part-time employment and temporarywork. However, this definition of contingent work has proven too restrictive. While

employers continue to use non-standard employment contracts to respond to short-term

staffing needs arising from fluctuations in product demand, empoyers have adopted

contingent staffing arrangements for other reasons as well. As a result, the uses, types,

and nature of contingent staffing have changed.

To keep pace with the variety of forms that nonstandard work now takes, the

concept of contingent work has been expanded and refined. Roberta Spalter-Roth and

Heidi Hartmann (1998: 72-3) suggest that contingent work can be seen as having three

dimensions:

1. work schedules that are either temporary or unpredictable in terms ofhours and weeks of work;

2. wages that tend to be low (overall and in comparison to full-time,permanent employees) and benefits are either not provided or inadequate;

and

3. relationships between workers and employers that are conditional andwithout permanence.


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Through a supplement to the 1995 and 1997 Current Population Survey, the

Bureau of Labor Statistics has gathered the most complete national information to date on

workers in alternative employment arrangements. Information has been collected on

workers holding four types of nonstandard employment (see Cohany, 1998):

q Independent contractors: workers who are identified as independent contractors,independent consultants, or freelance workers, including both self-employed andwage and salary workers.

q On-call workers: workers called to work only when needed, although they maybe scheduled to work for several days or weeks in a row.

q Temporary help agency workers: workers paid by a temporary help agency,whether or not their job was actually temporary.1

q Workers provided by contract firms: workers employed by a company thatprovides them or their services to other companies under contract and who areusually assigned to only one customer and usually work at the customersworksite.

Although this definition has become the standard for data collection and for

researchers examining the contingent work phenomenon, it excludes two other forms of

nonstandard employment arrangements.

q Regular part-time workers: workers hired onto a companys payroll and whowork less than full-time hours each week and who are not short-term hires.Although some part-time workers should not be considered to be contingentlyemployed because they permanently hold part-time jobs, other part-time workersare conditionally employed and should be included in definitions of contingentwork.

q Short-term hires: workers who are hired and paid directly by a business for alimited period of time, and who work at that business work site and whos work

is directed by that business.

1 This includes the office staff of temporary help agencies, a small number of total agency workers.


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Why Do Employers Use Contingent Workers?

The growing use of contingent workers by businesses is part of ongoing processes

of workplace transformation that are altering the terms and conditions of employment for

large numbers of workers. Many observers have linked the use of contingent staffing

arrangements to downsizing and other cost-hunting strategies of U.S. businesses. Even

during the current economic expansion, layoffs and downsizing remain surprisingly

common occurrences. A survey of 1,200 major U.S. companies conducted by the

American Management Association, found that 41 percent of companies reported job cuts

in 1997, down somewhat from 49 percent in 1996 (cited in Hirschman, 1998). The most

common reasons for eliminating jobs were organizational restructuring (cited by 64

percent of respondents) and re-engineering of business processes (cited by 49 percent ofrespondents).

For most of the past 20 years, the use of contingent staffing arrangements has

been viewed as somewhat of an anomaly. Businesses use of contingent workers has

been explained as a reaction to market pressures, a necessary short-term strategy for

businesses to compete during tough economic times. Only recently has a consensus

formed that contingent work is more than a short-run deviation from regular business

practices. Recent survey evidence indicates that contingent working has become

institutionalized in the majority of businesses. According to the National Association of

Temporary and Staffing Services, 90 percent of companies now use temporary help

services (National Association of Temporary and Staffing Services, 1999b). A survey of

large companies conducted by OfficeTeam found that 82 percent have permanent line

items for temporary workers in their human resources budgets (cited in CPA Journal,

1998). And a survey by Olsten Corp. found that 49 percent of manufacturers now use

blended workforces, work systems designed to make use of temporary, outsourced, and

part-time workers as well as independent contractors alongside their full-time employees

(cited in Quality, 1998). Manufacturers reported that the leading reason for using

blended workforces is to control labor costs 71 percent of manufacturers responding

indicated that cost control was one of the benefits of workforce blending.


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The findings from several national employer surveys have shed light on many of

the reasons behind the growing use of nonstandard employment arrangements (Abraham,

1990; Houseman, 1997; Osterman, 1994, 1999). The findings from these surveys suggest

that employers make use of nonstandard employment contracts for four primary reasons.

The most common reason is to staff peak periods or to handle unexpected increases in

demand for products or services. Houseman (1998) found that 52 percent of employers

surveyed reported hiring workers from temporary employment agencies and 50 percent

reported hiring on-call workers to handle workload fluctuations. This reason for hiring

temporary workers is closely followed by hiring workers through an agency to fill-in

until a regular employee is hired (47 percent) and hiring temporary workers to fill-in for a

regular employee who is ill, on vacation, or on family medical leave (47 percent).

Houseman also found that a significant percentage of employers use contingent

workers to reduce labor costs (see also Mangum, Mayall and Nelson, 1985). Twelve

percent of employers reported using agency temporaries and 21 percent reported using

part-time workers to reduce wage and benefits costs. Importantly, in her statistical

analysis of the survey data, Houseman also found that the use of contingent workers by

employers was positively related to the provision of good benefits packages (pension

and health insurance benefits) to their regular, full-time employees. Houseman offers

two possible explanations for this finding. First, employers may wish to provide different

benefits packages to different groups of workers, a practice that would be in violation of

federal labor laws. Staffing certain occupations through alternative, nonstandard

employment arrangements such as contracting with temporary help agencies would allow

employers to offer premium benefit packages to regular workers while excluding

contingent workers from such benefits. An overall savings from the wage and benefits

bill could then be achieved. A second possible explanation is that before employers are

willing to provide costly benefits packages to workers they prefer to screen prospective

employees, initially hiring them as temporaries prior to offering them regular

employment.


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And finally, a fourth and related reason that employers use contingent workers is

to screen workers for regular jobs. Houseman found that 21 percent of employers

reported using temporary help agencies to screen workers for regular jobs and 15 percent

reported using part-time workers for this purpose.

Workers Preferences for Contingent Work

While recent employer surveys have confirmed what many had suspected lay

behind the growing use of contingent workers by businesses, other observers have

suggested that the rise in contingent staffing arrangements has occurred to meet workers

desires for greater working-time flexibility. In particular, leaders in the staffing industry

have offered this explanation, although they are by no means alone. Findings from thecontingent worker supplement to the Current Population Survey can be used to evaluate

such claims as well as to explore other reasons why workers are turning to various forms

of contingent work as their source of employment. This section briefly examines supply-

side reasons behind the increase in contingent employment while other findings from the

Current Population Survey are presented in greater detail in the following section.

Economists from the U.S. Bureau of Labor Statistics have analyzed data from

both the 1995 and 1997 contingent worker supplements to the Current Population Survey

(Cohany, 1998; Cohany, et al., 1998; Hipple, 1998). Because the data showed very little

in the way of change between 1995 and 1997, the focus here will be on the 1997 data.

Several findings stand out. Overall, nearly 60 percent of contingent workers indicated

that they would prefer to hold a non-contingent job (Hipple, 1998). This figure is

consistent with findings from a survey conducted by the National Association of

Temporary Staffing Services (1994) in which 38 percent of temporary workers surveyed

reported that they had turned down a full-time permanent job, preferring to remainworking for a staffing agency. While the questions that were asked of workers in these

two surveys are not identical, the rough similarity of these findings should be noted.


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Younger workers were more likely to prefer contingent work than were older

workers. Almost half of contingent workers aged 16 to 24 reported that they were

satisfied with their contingent employment arrangement, compared to only one-third of

workers aged 25 and older. The reasons behind this preference were mainly those

typically ascribed to part-time and temporary workers: preference for working-time

flexibility, particularly to accommodate school schedules. As would be expected based

on these preferences, younger workers are disproportionately represented in the

contingent workforce.

Interestingly, this was not the case with women with children. It is frequently

suggested that women with children seek contingent employment to balance work and

family responsibilities. However, the percentage of contingent workers among bothmarried and unmarried women with children under the age of 18 was actually lowerthan

the percentage for all workers (Hipple, 1998). This suggests that the data do not confirm

the commonly held belief that women are demanding contingent work arrangements.

The Current Population Survey groups the reasons why workers hold contingent

employment into two categories: economic reasons and personal reasons. The most

common reason that workers held a contingent job was an economic one it was the only

work that could be found (18.2 24.8 percent of contingent workers depending on the

estimate used).2 The second most common economic reason was the hope that the

contingent job would lead to permanent employment (6.7 8.1 percent).

The most common personal reason for seeking contingent work was the need to

coordinate work and schooling or training (19.2 21.6 percent). Only about 3 percent of

workers cited family or personal obligations (2.8 3.2 percent) and less than 2 percent

indicated that the wages paid were higher than could be found in traditional employment(1.4 1.7 percent). About 12 percent reported that they preferred the flexibility and only

wanted to work over a short period of time (11.2 12.6 percent).

2 The Bureau of Labor Statistics has created three definitions of contingent work and estimated the numberof workers that are considered to be in contingent employment under each definition.


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The data presented in this section suggest that it is highly unlikely that workers

demands for contingent staffing arrangements are a key factor driving the phenomenal

increase in contingent work. While a subset of workers seek contingent jobs because the

flexibility offered suits their needs, many others that find themselves in contingent

employment despite preferring jobs under traditional employment arrangements. But

even after considering data on some of the supply-side aspects of contingent

employment, the assessment of contingent work is still incomplete. There exist

significant differences in the employment experiences of workers holding various forms

of nonstandard employment. The following section reviews the diversity of employment

conditions that have come to be lumped into the category of contingent work.

Characteristics of Contingent Workers

While independent contractors, temporary help agency workers, on-call workers,

and workers employed by contract firms are often grouped together into the category of

the contingent workforce, there are significant differences in the terms and conditions of

employment for workers under the various arrangements. Primarily relying on data from

the Current Population Survey and analysis conducted by Cohany (1998) and Hipple

(1998), this section summarizes data on the industrial and occupational distribution of

workers employed under nonstandard work arrangements as well as data on differences

in average wages.

Distribution of workers by industry

Large percentages of workers in alternative arrangements are employed in

services industries (Table 1). Independent contractors are concentrated in services (41.4

percent) and construction (20.7 percent). On-call workers are concentrated in services

(47.8 percent), construction (14.5 percent), and wholesale and retail trade (14.4 percent).

Temporary help agency workers are concentrated in services (42.0 percent) and

manufacturing (31.8 percent). And workers provided by contract firms are also

concentrated in services (35.5 percent) and manufacturing (20.3 percent).


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Table 1: Distribution of workers in alternative and traditional work

arrangements by industry, February 1997

Independentcontractors

On-callworkers

Temporaryhelp agencyworkers

Workersprovided bycontract firms

Workers intraditionalarrangements

Agriculture 5.7 3.4 - 0.3 2.1Mining 0.2 0.4 0.7 2.2 0.5Construction 20.7 14.5 2.5 5.0 4.9Manufacturing 4.7 5.3 31.8 20.3 17.5Transportation &

public utilities5.1 8.7 6.1 13.7 7.1

Wholesale & retailTrade

13.6 14.4 8.4 8.3 21.1

Finance, insurance& real estate

8.4 1.6 8.5 7.9 6.4

Services 41.4 47.8 42.0 28.2 35.5Public administration 0.2 4.0 - 14.0 4.8

Source: Data from the 1997 Current Population Survey reported by Sharon R. Cohany, 1998,Table 7.

Distribution of workers by occupation

Persons employment in nonstandard work arrangements tend to be concentrated

in three or four occupation groups, depending on the form of nonstandard arrangement

(Table 2). In contrast, workers in traditional arrangements are fairly evenly distributed

across occupational groupings. Independent contractors are clustered in executive,

administrative, and managerial occupations (20.7 percent), professional specialty

occupations (17.9 percent), sales (17.9 percent), and precision production, craft, and

repair (17.9 percent). On-call workers are concentrated in professional specialty

occupations (21.2 percent), service occupations (20.4 percent), and operators, fabricators,

and laborers (18.8 percent). Temporary help agency workers are mainly found in

administrative support occupations (34.1 percent) and operators, fabricators, and laborers

(29.1 percent). Workers provided by contract firms are concentrated in service

occupations (27.7 percent), professional specialty occupations (19.8 percent) and

precision production craft and repair (19.8 percent).


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Table 2: Occupational distribution of workers in alternative and traditional

work arrangements, February 1997


On-callworkers




Executive,Administrative &Managerial

20.7 2.7 6.9 8.0 14.1

Professional specialty 17.9 21.2 6.6 19.8 15.3Technicians & related

support0.8 4.1 5.8 7.2 3.4

Sales occupations 17.9 6.7 1.7 2.8 11.7Administrative support,

including clerical3.9 8.6 34.1 5.2 15.3

Service occupations 9.1 20.4 9.1 27.7 13.5Precision production,

craft & repair17.9 14.7 5.1 19.8 10.3

Operators, fabricators& laborers

6.8 18.8 29.1 9.3 14.3

Farming, forestry &

fishing

5.1 2.8 1.6 0.2 2.2


These figures suggest that employers have developed different contingent-staffing

strategies depending on the occupational categories that need to be filled. It is possible to

make several generalizations from the data presented above. First, employers seeking to

use alternative staffing arrangements to fill higher-level executive, managerial, and

professional occupations are likely to favor independent contractor and on-call worker

arrangements for these positions. Second, employers seeking to fill service occupations

tend to favor temporary help agency workers, on-call workers, and workers provided by

contract firms. Third, employers seeking to fill operator, fabricator, and laborer jobs tend

to rely on temporary help agency and on-call workers.

Wages of workers in nonstandard arrangements

Not only are there significant differences in earnings between contingent and non-

contingent workers, large differences in earnings exist between contingent workers

employed under the various staffing arrangements. Overall, persons working as

independent contractors and workers who are employed by contract firms have median


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weekly earnings that are higher than workers in traditional arrangements, while on-call

and temporary help agency workers have lower average earnings (Table 3). But these

overall differences tell only part of the story. On average, it is men employed as

independent contractors and contract-firm workers who enjoy weekly earnings that are

higher than those paid to their counterparts holding jobs under traditional arrangements.

In contrast, men employed as on-call workers earn, on average, 12 percent less than

workers in traditional arrangements, while temporary help agency workers earn 33

percent less than men who hold regular employment.

Table 3: Median weekly earnings of full-time workers in nonstandard and

traditional work arrangements by gender, 1997


On-callworkers




All workers, 16years and older $587 $432 $329 $619 $510

Men, 16 years andolder $621 $508 $385 $685 $578

Women, 16 yearsand older $409 $286 $305 $439 $450


The earnings picture for women employed in nonstandard work arrangements is

even bleaker. The median weekly earnings of women employed in all four of the

alternative arrangements independent contractors and temporary help agency, on-call,

and contract-firm workers are less than the earnings of women in traditional

arrangements. Furthermore, the fact that the median weekly earnings of women in

traditional arrangements are substantially lower than mens earnings to begin with adds to

the significance of this finding. In two forms of contingent work on-call and temporary

agency employment the differentials between the median wages of women in

traditional and these two nonstandard arrangements are greater than the differentials for

men. In other words, not only are women who are employed in contingent jobs worse off


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when compared to men, they are also worse off relative to other women holding

traditional employment. Median earnings are particularly low for women working as on-

call workers ($286 per week, 36 percent lower than the average earnings of women

employed in traditional arrangements) and for women working through temporary help

agencies ($305 per week, 32 percent lower than the average earnings of women in

traditional arrangements).

Data on the median weekly wages earned by workers in nonstandard

arrangements also reveal significant differences between white, African-American, and

Latino workers (Table 4). The median earnings of African-American independent

contractors is one-third lower than that for whites, while the median earnings of African-

American workers provided by contract firms are 42 percent lower than that of whites.This indicates that even within subcategories of contingent work (such as independent

contractor), groups of workers experience quite different working conditions and pay

levels. Finally, among temporary help agency workers, average wages are low regardless

of the race or ethnicity of workers, ranging from $332 per week for African Americans,

to $324 for whites and only $281 for Latinos.

Table 4: Median weekly earnings of full-time workers in nonstandard and

traditional work arrangements by race and Hispanic origin, 1997


On-callworkers




White $603 $455 $324 $675 $524Black $399 $378 $332 $394 $428Hispanic origin $438 $321 $281 * $357


Tabulations by Houseman (1997) from the 1995 Current Population Survey

highlight the low-wage nature of many forms of nonstandard employment arrangements.

Using groupings that differed slightly from those adopted by the Bureau of Labor

Statistics, Houseman found that 25 percent of on-call workers or day laborers earned


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wages that placed them in the bottom 10 percent of all workers. Nearly one in five

agency temporary workers and short-term hires by businesses earned wages that were in

the bottom 10 percent for all workers. Using the federal poverty line as a measure of

minimum income adequacy, Houseman found that more than one quarter of agency

temporary workers, and approximately 17 percent of on-call or day laborers, short-term

hires by businesses, and regular part-time workers earned wages that were low enough to

place them below the official poverty line. In short, large segments of the contingent

workforce earn very low wages leading to poverty, despite work. In assessing the figures

presented by both Cohany and Housemen, it is clear that economic hardship associated

with contingent employment is concentrated among women, African Americans, and

Latinos, perhaps compounding other disadvantages that these groups experience in the

job market.

Table 5: Incidence of low wages and poverty by type of employment

arrangement, February 1995

Employment arrangementPercent of workers in bottom 10%

of hourly wage distributionPercent of workers below the

poverty lineAgency temporaries 19.0 25.3

On-call or day laborers 25.0 17.0

Contract workers 5.6 9.1

Independent contractors 13.7 9.8

Short-term hires 19.5 16.9

Regular part-time workers 31.9 16.9

Regular full-time workers 5.7 7.1

Source: Tabulations from the February 1995 Current Population Survey by Susan Houseman,1997, Table 1.


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Staffing Industry Trends

It is well known that the staffing industry is one of the fastest growing sectors of

the U.S. economy. As the industry has grown it has developed a diverse set of staffing

functions to service the changing demands by businesses for alternative arrangements.

The National Association of Temporary and Staffing Services identifies seven forms of

staffing carried out by temporary help agencies and other employment firms (National

Association of Temporary and Staffing Services, no date):

q Temporary Help Services. Temporary help services are staffing services providedby agencies that hire their own employees that in turn are assigned to work at abusiness clients work site. The agency is responsible for payroll and associated

taxes, laws, and regulations, while the client is responsible for workplacesupervision.

q Managed Services. Managed services (also known as outsourcing) are staffingservices provided by an agency that supplies workers for the ongoingmanagement of a clients facility or functions (such as a mail room or call center).The agency retains responsibility for the supervision of employees as well asaccountability for the results of the facility or function that has been outsourced.The agency is the sole employer of these workers.

q Payrolling Services. Payrolling services are staffing arrangements through which

business clients recruit workers who then are hired onto a staffing agencyspayroll to perform services for the business client.

q Placement Services. Placement services are staffing services provided byagencies that match job seekers with employers for regular, full-time employmentopportunities.

q Temporary-to-Permanent Services. Temp-to-Perm services are staffingservices through which an agency recruits workers seeking regular employment ata business clients work site and hires these workers as temporary workers for a

trial period of employment. If the business client decides to hire the workerpermanently, the worker is moved from the agencys payroll to that of thebusiness client.

q Long-Term Staffing. Long-term staffing is the assignment of agency workers tobusiness clients for long-term and indefinite periods of time.


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Figure 1

Annual Receipts of Temporary Help Agencies 1990-1998

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

Receipts(billionsofdollars

Source: National Association of Temporary and Staffing Services, Quarterly Staffing Surveycited in Brogan, 1999, Chart 1.

Figure 2

Wages Paid to Temporary Workers by Industry Sector, 1991-1998

0

2

4

6

8

10

12

14

16

18

20

1991 1992 1993 1994 1995 1996 1997 1998

Year

Wages(billionsofdollars)

Office/Clerical

Industrial

Technical

Professional

Health Care

Source: National Association of Temporary and Staffing Services, Quarterly Staffing Surveycited in Brogan, 1999, Table 1.


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The THS industry places workers in a wide variety of occupations. The National

Association of Temporary and Staffing Services (NATSS), the primary industry

association representing THS agencies summarizes the main occupational niches of the

industry as follows (National Association of Temporary and Staffing Services, 1999a):

q Office/clerical: secretaries, general office clerks, receptionists, typists, data entrykeyers, and cashiers.

q Industrial: assembly, factory laborers, shipping and receiving, and manufacturingmaintenance.

q Technical: computer programmers, systems analysts, drafters, and engineers.

q Professional: accountants, paralegals, attorneys, sales professionals, andmanagement.

q Healthcare: staffing to nursing homes, hospitals, and outpatient clinics (excludeshome healthcare workers).

Consistent with traditional views of the temporary help industry, placements in

clerical occupations still comprise the largest percentage of THS agency workers (40.5

percent). But the industry is considerably more diversified than its stereotypical image

would suggest (Figure 3). The second largest occupational grouping of workers isworkers employed in industrial occupations (34.5 percent). Technical occupations (10.9

percent) and professional occupations (6.4 percent) follow these as the third and fourth

largest occupational groupings, respectively.


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Figure 3

Occupational Distribution of Workers Placed by

Temporary Help Agencies

Clerical

40%

Other

5%

Health Care

2%Marketing

1%

Professional

6%

Technical

11%

Industrial

35%

Source: National Association of Temporary and Staffing Services, Quarterly Staffing Surveycited in Brogan, 1999, Chart 8.

Professional Employer Organizations (PEOs)

Professional employer organizations (PEOs) are a second type of labor market

intermediary. As with temporary staffing services, PEOs participate in a triangular,

relationship involving the PEO and the business client as co-employers sharing

traditional employer responsibilities. PEOs assume responsibilities and risks for human

resources functions including labor law compliance, payroll, benefits provisions, and

employment taxes, while their clients are responsible for devising workplans and

directing workers.

PEOs differ from temporary staffing agencies in several important respects. First,

the co-employees of PEOs tend to be hired for an extended basis, typically for one year

or more. Second, rather than providing additional or replacement workers, PEOs take

responsibility for the human resource functions of their clients existing workforces.

Third, PEOs are usually responsible for the majority of a clients workforce, rather than

for selected occupations or for workers that may be contingently employed. Therefore,


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co-employment through a PEO, while being an alternative staffing arrangement, may not

be associated with contingent work.

PEOs are a relatively new form of labor market intermediary whose main purpose

is employee leasing. Like other segments of the staffing industry, the PEO sector is

expanding rapidly, growing by more than 30 percent in the last five years. According to

the National Association of Professional Employer Organizations (NAPEO),

approximately 2 million workers nationwide are now co-employed by PEOs. Yet along

with what apparently are strong growth prospects, the PEO segment of the industry is

facing competitive pressures. Industry observers have been predicting a shakeout in the

PEO segment as larger firms consolidate their operations through acquisitions and using

cost advantages to increase market share. The number of PEOs in the U.S. is declining, asure sign of industry consolidation (Willey, 1997). PEOs are also finding competition

from temporary help agencies that are offering PEO-type services to their clients in an

effort to meet existing and emerging demands for alternative staffing arrangements.


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SECTION II: STAFFING INDUSTRY GROWTH STRATEGIES

The rapid expansion of the staffing industry poses unique challenges to agencies

seeking to remain competitive and expand their businesses. The main challenges facing

agencies are to overcome seasonal fluctuations in staffing revenues and to defend profit

margins in a highly competitive industry. Agencies have adopted several approaches to

garnering greater market share. This section reviews these approaches and discusses

emerging strategies for expanding business opportunities.

Diversification of staffing services is an increasingly common strategy for

stabilizing revenues and securing new contracts. Many agencies are pursuing horizontal

integration by adding specialty services to their traditional staffing functions. Some ofthe largest agencies have formed networks with their divisions that specialize in

supplying clerical workers, light industrial staffing, legal staffing, accounting and

finance, and other staffing niches. This strategy is designed to enable agencies to service

the full range of client staffing needs through a single network of affiliated divisions.

Such a strategy also may protect agencies from seasonal or other fluctuations that may

affect the demand for workers in a particular industry segment.

An alternative strategy is one of specialization through the vertical integration

of staffing services. Vertical integration involves adding complementary services that

build on an agencys primary area of expertise. Specialization is common in information

technology (IT) and healthcare staffing. In IT, agencies such as Metamor Worldwide

have added new services to their core staffing practices. These include IT consulting,

project management, and search and placement services for IT professionals. Similarly,

in healthcare, staffing agencies are adding divisions that supply workers for home

healthcare and nursing, pharmacology, medical assistance, and other healthcare

occupations. Vertically integrated agencies are able to compete for large contracts that

call for the provision of workers for a wide range of occupations within the specialty

field.


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In addition to pursuing different strategies for securing market share, agencies

also organize their internal decision-making structures quite differently, perhaps

depending in part on the industry segments they service. There appears to be a tendency

for agencies specializing in light industrial staffing to adopt decentralized decision-

making processes allowing for considerable autonomy by local offices. In contrast,

agencies providing large numbers of professional workers and agencies selling services

to major U.S. corporations tend to have centralized decision-making structures, retaining

tight control over company policies at headquarters. Manpower provides a case in point.

Manpower designs and disseminates all assessment, training, and support materials for its

local branches and franchises. In addition, office employees at branches and franchises

are provided training at the companys Milwaukee headquarters, and customer invoicing

and payroll processing services are provided by the companys headquarters (Manpower,

1999).

Vender on Premises Services

Vender on Premises (VOP) services, also known as on-site management, is a

partnership-based approach to the provision of staffing services. Through VOP

programs, staffing agencies and their business clients enter into long-term relationships,

usually with the agency providing a wide range of staffing services. There essentially are

two types of VOP programs. National staffing agencies often enter into VOP

arrangements with major clients to staff work sites in multiple locations. Large,

nationwide accounts typically require a network of staffing offices to place workers in

various occupations and locations. Industry leaders are able to service this demand,

signing national contracts and turning to local branches or franchises to deliver the

services. For example, in cases where a client may require specialized staffing services,

such as financial or legal personnel, in addition to the general staffing provided by an

agency, agencies will turn over portions of the contract to their specialty divisions. On-

site company representatives will broker the relationship between the business client and

the divisions, seeking out new business from the client and matching the appropriate

division with the client need. The Director of On-Site Services of AccuStaff likened


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VOP programs to an a la carte menu in which specialized branches are brought in to

handle legal, accounting, information technology, and outplacement services (quoted in

SIReview, November/December 1997).

A second type of VOP arrangement involves single location staffing contracts.

Business clients receiving 50 or more workers from temporary help agencies are now

also expecting both national and small, independent agencies to provide the services of an

on-site agency representative to handle workforce and product-quality issues. For these

agencies, the provision of on-site management has become a routine cost of doing

business, a concession to clients that most agencies have been forced to make in the

highly competitive staffing industry.

Agencies favor VOP programs for several reasons. First, large accounts tend to

experience fewer cyclical fluctuations. These accounts are a way to stabilize revenue

streams and they serve as a buffer during periodic economic downturns. Second, these

programs are a way to capture long-term contracts from major clients. Three- to five-

year VOP contracts are typical and therefore are a boon to agencies accustomed to

competing to maintain shorter-term relationships. Third, business volume tends to

expand through these partnership arrangements. As staffing agencies become more

familiar with clients business operations, they are able to identify new areas for the

expansion of staffing services. Some agencies are now involved in many phases of

business planning with their clients and, in the process, are strengthening the ties between

vendors and clients.

For business clients, VOP programs offer a way to expand their human resources

capabilities, particularly with regard to flexible staffing, while reducing labor costs.

Clients report average cost savings of 9 percent from their VOP contracts (SI Review,November/December 1997). In many respects, VOP programs are an indication that

staffing agencies are expanding and formalizing their roles as human resources

consultants to business clients. Whereas many agencies initially provided on-site

management in an ad hoc fashion, largely responding to clients demands for assistance in

managing their swelling temporary workforces, VOP programs are now a core


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component of staffing agency strategy. National leaders have branded their VOP

programs with trade names such as Vendor in Partnership (Metamor, formerly

Corestaff), Master Vendor Partnering (Norrell), and Interim On-Premises (Interim

Inc.). As these program names suggest, agencies are attempting to develop high-profile

VOP programs that can be used to increase market share, perhaps at the expense of

smaller, locally owned and operated agencies.

VOP contracts are an increasingly popular method of arranging workplace

contingent staffing. The use of VOP contracts doubled annually between 1992 and 1994

and grew an additional 50 percent in 1995 and 1996 (SI Review, November/December

1997). Revenues from VOP arrangements have increased from $500 million in 1992 to

an estimated $6.5 billion in 1997, or approximately 12 percent of staffing industry grossrevenues. The average on-site contract covering 50 to 75 workers will bring in revenues

of approximately $1.5 million.

The increase in VOP services is part of a general trend in higher-volume staffing

contracts that is related to efforts on the part of businesses to reduce the number of

suppliers with which they are contracting. The designation of a primary staffing vendor

responsible for most staffing services is an increasingly common practice among the

large clients of the staffing industry. Olsten Corp., for example, reports that through its

Partnership Program, the agency acts as a master vendor responsible for the recruitment,

training and ongoing management of large groups of employees at a single site or at

multiple sites. Other clients have outsourced entire functions whereby people, processes

and technology are all managed by Olsten (Olsten, 1999: 5).

Business clients put most large VOP contracts up for competitive bid. The size of

these contracts restricts potential bidders to only the largest agencies who dominate themarket for VOP programs, gaining an additional competitive edge over smaller firms.

The industry advisers, Staffing Industry Analysts, estimate that large agencies handle

roughly 85 to 90 percent of the VOP sites in the U.S. (SI Review, November/December

1997). Most large, national staffing agencies report that their VOP services are highly

profitable and growing rapidly. At the same time, these agencies also report that they are


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being more selective about which long-term VOP contracts they agree to service. In the

early 1990s it was not uncommon for large agencies to cut profit margins to capture a

VOP contract with a major client. However, reluctant to continue incurring the costs of

VOP programs for smaller orders (50 to 100 workers per day), leading agencies are

attempting to increase the staffing threshold at which a VOP program will be instituted.

Whether business clients have come to expect such services from their vendors and

would decline to renew contracts without on-site management, remains to be seen. The

competitive nature of the staffing industry suggests that agencies will find it difficult to

withdraw services currently being provided. Surely agencies would like to negotiate

larger contracts with business clients and suggestions that some VOP programs may be

scaled back may just be part of these negotiations.

While large agencies control the vast majority of VOP contracts, for small,

independent agencies there also may be a market in providing on-site services for

smaller-order contracts, although this would certainly negatively impact the profit

margins of such agencies. In interviews with Chicago area staffing agencies, managers

reported that on-site arrangements were an integral part of agency-client relations, even

for small staffing firms (Peck and Theodore, 1998). The workforce threshold necessary

for the placement of an on-site at a business clients facility varied, but most agencies

sought to assign about 75 workers per day at a work site before a on-site supervisor was

hired. While the costs associated with VOP programs are significant for smaller

agencies, the provision of these services was viewed as necessary if independent agencies

are to retain market share. However, it is possible that business clients will begin to

demand on-site representatives from agencies placing fewer than 50 workers each day at

a work site. Large agencies will probably decline to pursue such contracts, preferring to

solidify their hold on larger-volume orders. Small agencies will be left to compete for

this business. Some portion of the costs associated with on-sites may be passed on to the

client, although it is likely that such requests would cut into agency profit margins. This

may lead to some subcontracting with specialty or niche staffing agencies, or non-

temporary employment contractors, although business clients may limit the extent to


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which subcontracting can occur on the grounds that the quality of subcontractors may be

lower than that of the primary vendors.

Expansion Strategies

The staffing industry is growing rapidly, in part propelled by agencies pursuit of

market share. The largest agencies follow three expansion strategies, often

simultaneously. This section examines these three strategies: (i) the opening of branches,

franchises, and licensed agencies; (ii) mergers and acquisitions; and (iii) internal growth.

While the goal of these strategies is the same increasing company revenues emphasis

on one or another strategy may provide additional insights into how agencies are

positioning themselves in this highly competitive industry. For example, Olsten Corpand Kelly Services have sought horizontal integration (offering a complete mix of

staffing functions) through the acquisition of agencies specializing in industry niches

such as financial and legal personnel. Metamor Worldwide, one of the leaders in staffing

for information technology, has pursued vertical integration (staffing the complete range

of IT occupations including temporary staffing, consulting, and executive search as well

as adding software and hardware services and other products) through acquisition of

domestic and international IT specialty firms. And Manpower and Labor Ready rely on

internal growth strategies and have been successful in opening offices in new markets,

using their brand identification and nationwide contacts to attract clients.

Branches, Franchises, and Licensed Agencies

As the market for contingent staffing services continues to grow, agencies are

entering new locales by opening branches, franchises, and licensed agencies. Branches

are agencies owned and operated by a parent staffing agency. Local managers operating

within the overall corporate guidelines set by the parent agency are responsible for day-

to-day operations. Profits flow back to the corporate parent. Franchises are

independently owned agencies that have the right to market their services and supply

workers within a defined geographic area. Like branches, franchises operate under the

brand name of the parent staffing agency. For the use of the corporations name,


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advertising, and services, the corporate parent receives a portion of the profits generated

by franchises. The owners of the franchise control remaining profits. Licensed

Representative Operations differ from franchises in that agency operators do not have an

ownership interest in the agency. In the case of Olsten Corp, licensed representatives are

responsible for the office operating expenses (including rent, utilities, and office staff

salaries) and the corporation is responsible for workers wages, payroll taxes, and payroll

insurance. Olsten Corp. also provides franchises with accounts receivable financing and

billing and payroll processing systems. In return, the corporate parent receives volume-

based royalty fees.

The particular strategy followed by a given agency appears to depend on the

corporate philosophy of the agency as well as on consideration of the bottom line. ForOlsten, licensing has been a more profitable method of expansion than franchising, so in

the future the company will primarily follow this route of expansion (Olsten, 1999).

Conversely, Interim Services found that company-owned branches yielded high profits

than either licensed or franchised agencies. Manpowers strategy has been to standardize

operations at all of its offices. This strategy requires tighter control over agency

operations, so it is likely that Manpower will establish new branch agencies under the

watchful eye of company headquarters. Labor Ready has indicated that it prefers a more

decentralized decision-making structure and has found franchises to be a profitable

means of expansion.

Mergers and Acquisitions

In addition to its rapid growth, the staffing industry is undergoing a period of

consolidation as industry leaders are merging or acquiring other staffing agencies.

Among the major national players, the drive to acquire additional staffing-agency

functions and offices is fueled by the need to penetrate new markets (both geographical

and occupational/industrial), the desire to retain market share, and the hope of satisfying

shareholder expectations. Merger and acquisition activity has, over the past several

years, been greatest in information technology, accounting and finance, placement and

search services, and health care staffing (Wilson, 1999), each of these being emerging


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niches for the staffing industry. This pattern of mergers and acquisitions reflects the push

on the part of business clients to contract with primary suppliers (master vendors) of

staffing services and has been one of the main forces behind industry consolidation

(Packwood, 1998). As large suppliers of contingent workers are called upon to provide a

greater range of workers, staffing professional positions as well as entry-level

occupations, these agencies have had to greatly expand their offerings. Mergers and

acquisitions are the quickest routes to diversification.

In 1998 the most active buyers of other staffing firms were Interim Services,

Personnel Group of America, and StaffMark Inc. (De Bellas & Co., 1999a). Historically

it has been the publicly held firms like these that have been responsible for 75 percent of

the merger and acquisition activity in the industry. No doubt this is partly due to thesheer size and vast resources of these agencies. But shareholder expectations also spur

agencies expansion plans. Over the past several years, the staffing firms that have been

most active in acquiring other firms have been rewarded with strong gains in stock prices

(Staffing Industry Report, January 12, 1999).

There are signs that these trends may be changing. In the first quarter 1999, 40

percent of buyers were private firms (De Bellas & Co., 1999b; Wilson, 1999). In

addition, for the first time, most agencies stock prices closed lower in 1998 than in the

previous year (Staffing Industry Report, January 12, 1999). To some extent this may be a

lull following a period of heavy activity and industry consolidation. There are other

figures that support the view that the staffing industry has become more consolidated.

Thirteen agencies were involved in more than 30 percent of the merger and acquisitions

transactions in 1998 (De Bellas & Co., 1998). The top 10 buyers saw their combined

market capitalization increase from $4.5 billion to $5.6 billion during the year, although

first quarter 1999 witnessed a slight decrease to $5.5 billion (De Bellas & Co., 1999a).

For whatever reason, the number of mergers and acquisitions in the first half of 1999 is

down substantially from last year, perhaps indicating that following a period of

considerable consolidation through mergers and acquisitions, agencies are now focusing

on internal growth strategies (Staffing Industry Report, April 13, 1999).


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Internal Growth

All staffing agencies have plans for internal growth through the expansion of

existing contracts and the acquisition of new ones. Agencies employ large cadres of sales

representatives to solicit new business from prospective clients. Many agencies, even

some of the leaders in the industry, favor internal growth strategies rather than mergers

and acquisitions. Manpower, for example, has no acquisition strategy. Instead, it

expands mainly through internal growth. Labor Ready also emphasizes internal growth

and the opening of offices in new geographic markets. Smaller agencies also rely on

internal growth, nurturing relationships with existing clients and attracting new ones

though a combination of low prices and client-focused service.

Factor Fund Investment for the Staffing Industry

Growth in the staffing industry, whether through franchising, acquisitions, or

internal expansion, requires access to financial capital. While banks remain an important

source of these funds, dozens of credit institutions have formed to meet the staffing

industrys needs for so-called factor funds. Growth-oriented staffing agencies rely on

external factor funds as an important source of short-term credit to cover payroll, taxes,

and other operating expenses.

The availability of factor funds for the staffing industry facilitates its expansion

by enabling agencies to pursue increasing-volume orders and expanding the numbers of

workers that are on their payrolls. TemPay, one of the many credit institutions

specializing in this form of capital lending, advertises their services as follows:

In a nutshell, heres what we do:

$ We pay your temporary employees$ We invoice your customers$ We pay your taxes$ We help manage your receivables

and all for one low, fixed fee!


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Tricom Funding, another credit institution specializing in factor funding for the

staffing industry, explains the cash flow problem faced by staffing agencies and how they

can help:

Paying employees weekly and invoicing clients monthly creates a cash flowproblem. Most of us are aware of the roadblocks encountered in going to a bankto borrow for the payroll and taxes of your temporary employees. One of thebiggest is that banks generally lend a specific amount of money, and as soon asyou borrow it, you have to begin paying it back . This doesnt happen withTricom Funding. We provide a continuous weekly supply of money to meet yourpayroll and pay the taxes for your growing temporary staffing business.

v 90 Day Charge Backv No Cash Reserve Requiredv Unlimited Funding

As an added benefit, staffing agencies may pass the terms of credit advantages

gained from factor funding onto their clients as a way of lowering bids on larger

contracts. In addition to fee per worker and VOP services, access to credit is one of the

ways in which agencies out-maneuver their competitors.

Staffing Industry Trends by Market Segment

The growth and diversification of the staffing industry is challenging traditional

notions of temporary employment. In addition to clerical positions in office settings, the

industry has moved rapidly into other segments, supplying workers in high-wage and

low-wage occupations. This section provides brief overviews of the healthcare,

information technology, and finance and accounting segments of the staffing industry

highlighting industry trends and the dominant players that are shaping industry practice.

Healthcare Staffing

Healthcare staffing agencies supply workers to hospitals, outpatient clinics, and

nursing homes and provide home healthcare workers for in-home patient care. These

agencies provide staffing for a variety of occupations including nursing, medical

assistants, physical and occupational therapists, and claims administrators.


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Like other segments of the staffing industry, healthcare staffing is growing

rapidly. The most successful agencies report annual growth rates in excess of 25 percent.

Continued growth is expected in the healthcare segment, in large part because of

emerging pressures to cut costs following recent changes in medical cost-reimbursement

systems, particularly those associated with managed care (SI Review, May/June 1998;

Staffing Industry Report, December 15, 1998). Managed care is leading healthcare

providers to reduce staff costs, often through layoffs, making contingent staffing

arrangements increasingly attractive. In addition, many healthcare services that used to

be directly provided by hospitals and staffed through hospital hiring systems are now

located at outside healthcare providers such as outpatient clinics. In the past, hospitals

relied on pools of on-call nurses and other medical staff to fill periodic vacancies. Butwith tight labor markets, new avenues for full-time work have proven more appealing to

workers previously employed on an as-needed basis, depleting hospital-maintained

contingent staffing pools. Staffing agencies have been an attractive way for these

providers to find personnel.

The ongoing reorganization of the healthcare industry is also prompting

administrators to redefine the job responsibilities of nurses and other front-line medical

personnel. Nurses and others have resisted these changes citing decreases in patient care.

Staffing agencies have moved in to provide medical personnel to assume the duties

previously carried out by a wide range of healthcare professionals.

The largest healthcare staffing agencies in terms of 1998 revenues are: Therapists

Unlimited, Cross Country Staffing, CompHealth Inc., Healthcare Staffing Solutions, and

TravCorps Clinical Staffing Solutions. Total 1998 sales of each of these agencies is in

excess of $100 million (Staffing Industry Report, December 15, 1998).

The healthcare segment of the staffing industry is experiencing a period of

consolidation as industry leaders aggressively pursue merger and acquisitions strategies.

Many segment leaders are moving toward greater vertical integration, combining nursing,

therapy, pharmacology, physician staffing, and other healthcare services through a single


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point of contact. Other large agencies have left the healthcare segment of the industry.

During the past several years, some national agencies, notably Interim Services and

Westaff, have sold-off their medical staffing services to concentrate on their core

temporary help business. Other industry leaders maintain healthcare services under

independent organizations. Still others have gone out of business.

The main reason that some staffing firms are shedding their health care divisions

is that agencies are finding that remaining current on changing healthcare regulations

requires considerable staff time and expertise.

Some leaders in the health care segment report that they are not responding to

worker shortages by increasing their profit margins in an effort to discourage newcompetitors from entering this industry segment (SI Review, May/June 1998).

Information Technology

Information technology (IT) is the largest professional staffing niche in the U.S.

Staffing agencies services IT supply workers involved in the design and maintenance of

computer systems such as programmers, systems integrators, and LAN administrators.

Agencies in this high-growth, high-margin segment of the staffing industry have

been the target of numerous mergers and acquisitions. The appeal of this staffing

segment is easy to see. In the past, fluctuations in IT staffing have been less closely

linked to the economic cycle than other niches, so agencies look to IT staffing as a way to

buffer seasonal fluctuations as well as the effects of potential economic downturns. In

addition, assignments tend to be of longer duration than those in other staffing segments,

providing a measure of stability in an otherwise volatile industry.

Staffing agencies specializing in IT are diversifying their services by moving into

consulting, merging temporary staffing, consulting, and executive search functions, and

providing these services through a single point of client contact. Search and placement

services will likely be expanded in the future as part of vertical integration strategies. At


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this time, however, agencies have been reluctant to offer permanent placement services

because of the extremely tight labor market in this niche (SI Review, March/April 1997).

In response to worker shortages, many IT specialists recruit workers worldwide.

In addition, some leaders in the IT staffing segment are supplying workers to U.S.

business clients through overseas facilities. For example, Metamor Worldwide operates

three technology development centers in India providing low-cost personnel to their

North American clients. In addition to lowering the total wage bill, this staffing

arrangement creates a virtual second shift for its North American clients enabling rapid

completion of projects and off-peak use of clients technology resources (Metamor,

1999). Metamor also employs separate work teams located in the U.S. and India to

complete larger projects with short deadlines.

According to SI Review (March/April 1997), the top six IT staffing firms based on

1996 and 1997 estimated gross revenues are: Keane Inc. ($461 million); Accustaff Inc.

($398 million); Manpower Inc. ($390 million); Analysts International Corp. ($389

million); Computer Task Group Inc. ($364 million); and Metamor Worldwide, formerly

Corestaff, ($307 million).

Accounting and Finance

Accounting and finance is the second largest professional staffing niche behind

IT. Like other professional staffing segments, the labor market for accounting and

finance personnel is very tight. Nevertheless, this segment of the staffing industry has

experienced strong growth with gross revenues up by 50 percent in 1996 and by 30

percent in 1998 (Staffing Industry Report, October 12, 1998). Hourly billing rates are

high compared to traditional staffing industry segments, ranging from $20-30 for general

accounting/finance professionals, to $50-60 for special project work, and $80-100 or

more for chief financial officers (Staffing Industry Report, October 12, 1998).

However, greater growth is being recorded in permanent placement activities than

in temporary staffing. Many agencies as well as their business clients are reporting


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shortages of candidates to fill both temporary and permanent placements. Staffing

Industry Analysts reports that a strong middle ground is emerging that the

accounting/finance players are labeling contract services which is not quite

temporary and not permanent placement (Staffing Industry Report, October 12, 1998).

The strategy involves moving high-level professionals, such as chief financial officers

and controllers, onto fixed-term contracts. Through contract services, high-level

personnel remain contracted with an agency for the term of a project, thereby reducing

the likelihood that the agency will find itself short-staffed on a key project. Staffing

agencies hope to attract professionals to contingent work as a career choice, much in the

same way that IT agencies have sought to recruit workers.

Staffing agencies in accounting and finance are finding themselves in competitionwith Big Six accounting firms. Not surprisingly, agencies are competing largely on the

basis of price and flexibility. Some of the accounting firms are responding by offering

contingent staffing as part of their services to clients (StaffingIndustryReport, May 12

1998). This may profitable to traditional accounting firms that have strong name

recognition and the trust of clients who may be slow to turn key accounts over to staffing

agencies.


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SECTION III: THE INFLUENCE OF PUBLIC POLICY ON

CONTINGENT STAFFING ARRANGEMENTS

The staffing industry continues to grow by navigating the complex array of laws,

court decisions, and administrative rulings at the state and federal levels. To understand

how the staffing industry and their business clients take advantage of employment laws,

one must first understand that there is no single law that governs contingent staffing

arrangements. Quite literally, laws governing the agency-business client relationship fall

under the jurisdiction of all 50 states, several federal agencies, and the courts. Moreover,

employment laws are generally inconsistent in how they distribute responsibilities for

taxes and other statutory requirements between the staffing agencies and their business

clients. Staffing agencies and their business clients may structure relationships to take

advantage of a particular area of employment law. However, such relationships may

compromise their interests in relation to other areas of employment law. The nature of

U.S. employment laws forces the staffing industry to make tradeoffs between maximizing

advantages in one area of law and limiting liabilities in others.

The main purpose of most U.S. employment law is to hold employers legally and

financially responsible for their employees.

3

However, the rise of contingent staffingarrangements has rendered many areas of employment law ineffectual in safeguarding the

rights of workers. In some cases, legislatures and the courts have attempted to adapt

employment laws to the changing and multiplying forms of non-standard work

arrangements. In the end, however, the vast majority of employment laws help the

industry provide its main service to clients who use temporary labor the opportunity to

save on labor costs and a shield to protect the business clients from employment-related

liabilities in the process creating instability and uncertainty for workers.

3 The National Labor Relations Act, American Disabilities Act, Family Medical Leave Act, Federal FairLabor Standards Act, Civil Rights Act, and Occupational Health and Safety Act, state unemploymentinsurance and workers compensation laws, and tax rules concerning employer-provided health and pensionbenefit programs, and federal employment taxes all govern the employer-employee relationship.


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Workers Compensation and the Agency-Client Relationship

The legal foundation supporting the staffing industry consists of a combination of

federal employment tax laws, and state unemployment insurance contribution and

workers compensation laws. In all 50 states, these laws typically sanction staffing

agencies as the primary employer of temporary workers, thereby absolving their business

clients of most legal and tax liabilities associated with the employment of contingent

workers (Lenz, 1998). Without this status as the primary employer of contingent

workers, staffing agencies would have little reason to exist. But to fully satisfy the needs

of their business clients, the staffing industry mus

Documents

Contingent Work and Staffing Industry - N. Theodore