How Does A Temporary Staffing Agency Work?

A plain English guide for businesses thinking about using a temp agency for the first time

If you have ever looked at a temp agency charge rate and thought “that seems a lot for one person” then you are not alone. It is one of the most common reactions we hear and it is completely understandable when you see a figure like £19.50 per hour on an invoice and know that the worker going home at the end of the shift is being paid £13.00. The obvious question is: where is the other £6.50 going?

The short answer is that it is not profit.  Not even close but because most people have never had to sit on the employer side of a payroll before, the various costs that sit between what a worker earns and what it actually costs to employ them tend to be invisible. This post is here to change that & by the end of it you will understand exactly how a temporary staffing agency works, what you are actually paying for and why for a great many businesses, using an agency is one of the most sensible commercial decisions they can make.

THE AGENCY ENGAGES THE WORKERS, NOT YOU

The first thing to understand is the legal structure. When you take on a temporary worker through a staffing agency, that worker is engaged by the agency & not by your business. The agency has a contract for services with that individual, it puts them through its own payroll each week and it takes on all the legal responsibilities that come with being an employer.

Your business has a separate arrangement with the agency, known as a term of business. In simple terms, you are purchasing labour as a service in the same way you might hire a van or bring in a contractor to fix your roof. The worker turns up, does the job and goes home. You pay a single hourly charge rate to the agency and the agency takes care of everything else behind the scenes.

This distinction matters more than it might seem and we will come back to it when we talk about the real benefits.

SO WHERE DOES THE DIFFERENCE BETWEEN THE AGENCY CHARGE RATE AND THE HOURLY PAY RATE ACTUALLY GO?

Let us go back to that example above, the worker takes home pay based on £13.00 per hour. The agency invoices you at £19.50 per hour. The gap is £6.50 so here is a breakdown of where that money goes.

Employer’s National Insurance is the first and often largest chunk. As the legal employer, the agency pays employer’s NI on top of every pound of wages. At the current rate, this alone can account for somewhere around £1.50 to £1.90 per hour depending on the wage level.

Holiday Pay’s next. Every worker is legally entitled to 5.6 weeks of paid holiday per year. Even on a short-term temporary contract, that entitlement accrues from day one. The agency factors this into the charge rate because it has to pay it out, whether the worker takes their holidays during an assignment or receives it on top of their hourly rate (known as rolled up) This typically adds around £1.50 to £1.90 per hour depending on the final pay rate for the intended job role.

Pension Contributions under auto-enrolment are the third statutory cost. Once a worker meets the eligibility criteria, the agency must enrol them into a workplace pension and make employer contributions. This adds a further amount to every hour worked.

The Apprenticeship Levy is a lesser known cost that catches many people out. If the agency’s total wage bill exceeds £3 million per year, it must pay a levy of 0.5% on everything above that threshold. That cost gets factored into the rates charged to clients.

Add those four statutory costs together and you are already looking at somewhere in the region of £4.00 to £5.00 per hour before the agency has made a single penny. The remaining margin which is typically around £2.00 per hour on a standard assignment, covers the agency’s own running costs, staff wages, compliance, insurance, software advertising to attract candidates and yes a modest profit to keep the lights on and the business viable.

THE IMPORTANT BIT HERE IS THIS : if you employed that same person directly at £13.00 per hour, you would still have to pay employer’s NI, pension, and holiday pay on top. Those costs do not disappear just because there is no agency involved. Using an agency is not £6.50 per hour more expensive than employing someone directly. It is closer to £2.00 per hour more expensive and for that extra £2.00 you get a great deal more than just a body through the door.

YOU ONLY PAY FOR THE HOURS THAT ARE ACTUALLY WORKED.

Temporary staffing works on a timesheet basis. At the end of each working week, the worker or client submits a timesheet showing the hours they have completed. The agency invoices you for exactly those hours and nothing more. If the worker does 34 hours, you pay for 34 hours. If they do 40 then you pay for 40. There are no retainers, no minimum commitments and no rounding up.

This is a significant advantage over permanent employment, where you are paying a salary 52 weeks a year regardless of how much productive work is actually taking place. With temporary staff, the cost is directly tied to the output, which makes budgeting and forecasting considerably more straightforward.

FLEXIBILITY THAT GENUINELY WORKS IN YOUR FAVOUR.

One of the most valuable aspects of using a temp agency is the flexibility it gives you over your workforce. If your production volumes drop, a contract is delayed or you simply do not need the extra hands anymore, you can end a temporary placement at short notice, typically within 24 hours. There is no redundancy process, no notice period to work through and no settlement agreement to negotiate. You just let the agency know and the arrangement ends.

The same applies if a worker is simply not working out. Perhaps the attitude is not right or the standard of work is not what you need or there is a personality clash with the team. You can ask for a replacement and a good agency will have someone else on site, usually within 24 hours. You do not have to manage a performance improvement plan or follow a disciplinary procedure. The agency handles all of that, because the worker is their employee & not yours.

It is a level of flexibility that permanent contracts just do not allow and for businesses operating in sectors where demand can change quickly, such as warehousing, logistics, engineering and manufacturing, it can be genuinely transformative.

THE AGENCY CARRIES THE EMPLOYMENT LIABILITIES

This is the part that often surprises people the most because the agency is the legal employer, it carries the employer’s liability for a temporary worker. That includes statutory sick pay. If a temporary worker calls in sick, the agency pays their SSP entitlement, not you. You simply do not pay for the hours that are not worked and the agency sorts out everything else.

The agency is responsible for ensuring that its workers are legally entitled to work in the UK, that they hold any licences or certifications required for the role and that all the relevant employment checks have been carried out. A reputable agency will handle right to work verification, reference checks, skills assessments and in some cases DBS checks as a matter of course. You can take on a worker with confidence, knowing that the compliance groundwork has already been done.

INVOICING AND PAYMENT TERMS THAT HELP YOUR CASH FLOW.

Most temporary staffing agencies invoice their clients on a weekly basis, based on the timesheets submitted and approved for that week. Depending on the outcome of a credit check when you set up your account, you will typically be offered payment terms of 30 days, though some businesses are extended longer terms as the relationship develops.

This matters for cash flow. The agency pays its workers weekly, often before you have even paid your invoice. It is effectively fronting the wage costs on your behalf and carrying that working capital gap itself. For businesses that are growing quickly or managing tight cash flow cycles, this can be a real practical benefit.

All charges are quoted and invoiced exclusive of VAT, which is reclaimable if you are VAT registered. The single hourly charge rate covers everything: wages, NI, pension, holiday pay, levy, and the agency’s margin. There are no hidden extras, no admin fees bolted on, and no surprises.

THE 13 WEEK TEMP 2 PERM RULE AKA TRY BEFORE YOU BUY

Here is perhaps the most underappreciated benefit of the whole arrangement. If a temporary worker turns out to be excellent, if they fit in with your team, pick up the work quickly and you start thinking about whether you want to keep them, you can offer them a permanent position after 13 weeks without paying the agency a single penny in transfer or introduction fees.

You have in effect 13 weeks to see the person in action, assess how they perform under pressure, understand how they get on with the rest of your workforce and make an informed decision about whether they are right for a permanent role.

Compare that to the traditional permanent recruitment process, you read a CV, conduct one or two interviews lasting an hour each and then commit to employing someone for the long term based on very limited information. The temp route lets you take your time and get it right.

SO IS USING A TEMP AGENCY WORTH IT ?

For the right situation, absolutely. The extra cost compared to direct employment is modest, somewhere in the region of £2.00 per hour depending on the role and for that you get a fully compliant, worker with no fixed commitment, no employment risk, no sick pay liability, full flexibility to scale up or down and the genuine possibility of converting a brilliant temp into a permanent hire without paying a recruitment fee.

It is not the right solution for every business in every situation. If you have a stable, predictable workforce and no fluctuation in demand, a permanent payroll may well be more cost effective in the long run however if you are operating in an environment where demand shifts, where you need to cover peaks, fill gaps at short notice or simply want to grow your headcount without the risk that comes with permanent commitments, a good temporary staffing agency can be an extremely useful partner.

If you have any questions about how our rates are made up, or if you would like to talk through whether temporary staffing is the right fit for your business, we are always happy to have that conversation. No obligation, no hard sell. Just a straightforward chat between people who understand what it takes to run a business and keep the right people in the right places.

Call SolviT Recruitment on 01455 818999 or email info@wecansolvit.com