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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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1
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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2
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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6
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
Independentcontractors
On-callworkers
Temporaryhelp agencyworkers
Workersprovided bycontract firms
Workers intraditionalarrangements
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
Source: Data from the 1997 Current Population Survey reported by Sharon R. Cohany, 1998,Table 6.
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
Independentcontractors
On-callworkers
Temporaryhelp agencyworkers
Workersprovided bycontract firms
Workers intraditionalarrangements
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
Source: Data from the 1997 Current Population Survey reported by Sharon R. Cohany, 1998,Table 12.
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
Independentcontractors
On-callworkers
Temporaryhelp agencyworkers
Workersprovided bycontract firms
Workers intraditionalarrangements
White $603 $455 $324 $675 $524Black $399 $378 $332 $394 $428Hispanic origin $438 $321 $281 * $357
Source: Data from the 1997 Current Population Survey reported by Sharon R. Cohany, 1998,Table 12.
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