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It is Time to Take a Hard Look at Payrolling

Jack Welch quote about teams

Companies have many excellent reasons why they use a flexible workforce to supplement their full time staff.  Like any purchase, organizations want to get the best price possible for these services and one of the ways they try to save money is by sourcing the people themselves and then “payrolling” them through a third party, for a small fee.  The rationale is that the fee paid to the agency is reduced and thus the company saves money.

A detailed analysis of the facts shows that (a) companies do NOT save money, in fact they actually pay more.  PLUS (b) those organisations introduce increased corporate risk !

Here is a look at the real costs of payrolling:

  1. The average payrolled resource will actually be paid above market value, because there is no competitive process.

  2. By the time a payrolling fee is added, the amount paid by the organisation is higher than they would have paid the agency to do the work for them.  Eagle’s internal analysis would suggest that on average the difference is greater than 10%!

  3. The increased rate paid to the individual causes a market issue over time because they expect that increased rate for all of their future work.  So overall market rates get edged up artificially and companies end up paying EVEN more for these resources into the future.

  4. There is also a hidden cost for the internal company resources who will have spent their efforts in finding this person, instead of focusing on their company’s core business.

In addition to dollar considerations there are corporate risk issues:

  1. The independent resource is not as independent as one sourced through a third party.  They have a relationship to the organisation’s hiring manager, they won their role without competition thus creating a potential conflict of interest with the organisation’s hiring manager.  This can make it more difficult to handle potential performance issues.

  2. Employer/employee relationships are a tricky area when talking about independent contractors or worse still “sole proprietors” who operate as independents. Many government departments, both federal and provincial, led by CRA are very interested in this area. Payrolling erodes the independence factor and thus increases risk to the hiring company.

  3. Recent practices by some third parties of charging the payrolling fee to the individuals causes an even greater risk.  Positioned as an easy “money saving” scheme to the client, it can end up being a minefield as evidenced by a recent $384 million class action lawsuit launched against one large Canadian company and their third party provider!  It is worth noting that it is illegal in Canada to charge an individual a fee for work, so if an independent contractor is not really independent, then in addition to scrutiny on remittances you might have a big legal problem.

Companies can benefit most by engaging credible suppliers to compete on every resource requirement.  This approach means that companies can focus on their actual costs, not on other factors such as what their supplier might make.  According to Statistics Canada, the average bottom line in the staffing industry in Canada is 3 to 5% of revenues.  So chances are, your staffing supplier is NOT making out like a bandit!  Let the market forces work, and everyone benefits!

So the best choice for organizations, for both price AND risk management, is the competitive market.