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Recruitment Agencies: What are you paying for?

Recruitment Agencies Pricing Models Temporary Permanent Retainer

If you’re reading this, you’ve probably already considering using recruitment agencies. For even in 2019, in a world of AI algorithms, hiring candidates remains hit and miss, risky and frankly very expensive.

First, there’s the advertising costs. Saturated job boards means recruiters and HR professionals have to spend more and more time and money with marketing teams accessing the best candidates. Who are becoming increasingly desensitised. According to CV Library, 90% of the time, it’s the talent that picks you, rather than the other way around. 

Then, you have to factor in the spiralling costs of making a bad hire. Estimates vary, but the figures seldom make pretty reading — laying off a new employee at the level of mid-management can cost a business more than £132,000, or three times their annual salary, say the REC

Of course, recruiting through agencies is no means of guaranteeing a happy hire. But, as shall be explained later in this article, in such cases a rebate may be available. 

Once you’ve decided to embark upon the agency pathway, you’ll want to know how much you will need to pay, and how much bang you’re getting for your buck.

The short answer is — it depends! In this article, I shall describe the different pricing models available, and explain the various factors that influence the cost of using recruitment agencies.

Temp or Perm?

The first question you need to ask yourself is: Do I want to hire staff on a temporary or permanent basis? Construction companies frequently require labourers or bricklayers for specific projects, and so often look to hire on a temporary basis. Conversely, office roles or more skilled logistics jobs, such as forklift drivers, are more likely to attract permanent candidates.

Temporary Recruitment

If you are paying agencies for temporary workers, the overall cost covers:

  • Hourly pay
  • National Insurance, holiday and sick pay
  • Agency margin

How much the agency charges is not, as is sometimes believe, a flat or ‘arbitrary’ fee. It is calculated methodically, depending on a range of factors, as will be explained later.

Temp to perm.

What if your temporary worker does such a good job that you want to keep him or her on as a permanent employee of your company? Good news! You can do this pretty easily and is a great way of saving money on future hires.

Since your temp is technically an employee of the recruitment agency, you will normally have to pay a ‘transfer fee’ to the agency in order to do this. 

The rules are a bit knotty, but under some circumstances, this fee can be avoided by:

  • Extending the worker’s assignment;
  • Waiting 8 weeks after the end of the worker’s initial assignment, or 14 weeks after it started, whichever is later.

Full regulations for transfer fees can be found here on GOV.UK.

Since transfer fees can be fairly opaque and variable, it is recommended to compare rates with a range of agencies before selecting candidates, even if you are only thinking of hiring on a temporary basis.

Permanent Recruitment

Whilst some agencies offer temp-to-perm contracts, most prefer to specialise in either one or the other. The nature of the role is actually quite different, from a business perspective: specialised temp agencies can have logistical nightmares sorting out candidates’ schedules, but do at least have the benefit of regular cashflow. Permanent agencies have to deal with lumpy cashflow, but tend to have more time to find the perfect candidate.

The most common type of permanent recruitment is known as contingency recruitment. The name is confusing, but the concept is easy enough to understand — you accept a candidate from an agency and pay upfront. Expect to pay at least 20% of the candidate’s first year salary, sometimes more depending on sector and location. 

Contingency recruitment places the emphasis on quick hiring — you want someone permanently, but since agencies are only paid a flat rate, there is little incentive for them to look around painstakingly for the best candidate. If they do, they will likely have missed the boat!

This is where ‘retained recruitment’ comes in. Essentially, payment is staggered only several stages:

  • Up front cost
  • When a shortlist is drawn up
  • When a candidate is chosen and placed.

This approach means you are more likely to find a higher-rated candidate, but agencies tend to charge up to 30% for the privilege. Therefore, it is worth conducting a rigorous cost / benefit analysis to ascertain whether you really need someone more than simply ‘good enough’!

IMPORTANT! If a candidate, temporary or permanent, leaves a company soon after being employed, there are no legal mechanisms in place to force an agency to refund even part of the fees. However, some agencies may offer a rebate under certain conditions — make sure you check the T&C’s properly before committing pen to paper.

Pricing factors:

Sector.

The old law of supply and demand operates here as elsewhere — the greater the skills shortages, the higher agencies will charge companies to source and place candidates. 

As might be expected, temporary and permanent roles in IT and technology are in high demand in the UK at the moment and this trend is not seeing any signs of abating.

As far as blue collar roles are concerned, there is a severe shortage of roles all across the board in the construction sector. See here for the construction jobs most highly in demand in 2019.

Location.

Linked to the above, agencies will command a higher price for difficult to access locations, or rural areas in which fewer agencies may choose to operate. 

In terms of attracting agencies, companies looking to hire in less accessible areas might like to consider temp-to-perm options, since this will encourage more agencies to work with you.

Seniority.

A big factor. Remember that agencies tend to charge on a percentage fees model, at least for permanent hires. This means that you will pay a percentage of your employee’s annual earnings for their first year, so the more senior the employee, the higher the agency fees. 

Since senior employees are more sought after, remember that the percentage will be higher too! A junior employee on £10,000 per year might attract agency fees of 10%, but this might double or even treble with some executive positions.

I hope this helps to shed some light on the mystery that is recruitment agency pricing. Just remember – check the T&Cs to avoid any hidden surprises.

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