Contract Placement Beats a Direct-Hire Every Time

Once upon a time, there was recruiter named Karen. One day, she learned how a contract placement could beat a direct-hire placement every time. This is her story.

A Direct-Hire Recruiter Receives a New Request

Karen is an independent direct-hire recruiter. She specializes in sourcing and placing technical programmers earning $100,000 and up per year. Her fee is 20% of the new hire’s annual salary, so each deal is worth about $20,000.

Because she works alone, Karen gets to keep the full commission. She’s good. Karen makes 10 to 15 placements a year, giving her annual gross revenues of $200,000 to $300,000.

Business has been excellent lately but, today, Karen has a problem. Her best client just asked her to find them a contractor for a six-month project and possible six-month extension. The problem? Karen has only ever worked direct-hire. She hasn’t a clue how to handle a contract placement.

For starters, Karen has no idea how to convert a $100,000 annual wage into an equivalent hourly billing rate. How much should she pay the contractor? How much should she add on to cover her fee?

A Helpful Rule of Thumb

Karen searches the web for an answer. She finds it in a simple algorithm called the “Divide-by-1000 Rule of Thumb.” Apparently, all things being equal, all she has to do is divide the comparable annual direct-hire salary by 1000 to arrive at an hourly billing rate for a contract placement.

Karen checks online salary surveys and billing rate surveys for equivalent skill sets and experience and finds that this rule of thumb is pretty reliable.

So, if a direct-hire employee earns an annual salary of $100,000 for this position, a contractor with the same skill-set and experience will need a fully burdened bill rate of at least $100 per hour to net the same gross pay.

The Divide-by-1000 Rule of Thumb is good news for Karen. She has always tried to negotiate the highest possible salary for her direct-hire candidates. After all, the higher the salary, the higher her commission. It is a win-win situation because Karen’s goals and those of her candidates are perfectly aligned.

Contract Placement Billing Rates

Setting the billing rate is relatively simple. The client already knows that Karen’s fee for direct-hire placements is 20% of the annual wage. So, Karen adds 20% to the agreed-upon pay rate of $100 per hour and the client agrees to a billing rate of $120 per hour.

This is more good news for Karen. You see, her commission as a percentage of the annual salary is based on the unburdened labor rate. Her commission as a percentage of the equivalent hourly pay rate is a percentage of the higher, fully burdened, labor rate — that is, gross wage plus payroll taxes and employee benefits, which an independent contractor must pay out of their gross revenues.

Karen understands that since a contract placement doesn’t bill for vacation, holiday, sick, or downtime, she can count on only about 1,700 hours per year in billable time. At $100 per hour, Karen’s contract placement should earn $170,000 in gross revenues over the course of one year and Karen’s commission, at 20% on top of that amount, should total $34,000 a year.

If Karen could keep just ten $100-per-hour contract professionals on the job, her annual placement fees would total $340,000. On the other hand, ten direct-hire placements with annual salaries of $100,000 would generate just $200,000 in annual placement fees.

In addition to potentially making more money with contract placements, they are also easier and faster than direct-hire placements. For one thing, the interview process is generally faster and simpler. And no one really pays much attention to the contract professional’s fit with the corporate culture. On-boarding is a snap. The placement is there to do a job and then move on when the job is done.

Oh, and Karen just realized another advantage of contract placements. There is no pesky 90-day money-back guarantee like there is with direct-hire placements. Karen is beginning to see there are definite advantages to working with contract placements.

Oops, Another Problem: Co-employment Risks

Just when Karen thinks the deal is done, the client makes a surprising request. In order to mitigate co-employment risks, the client wants Karen to ensure that the contractor she is placing with them has W-2 employment status.

Apparently, one of the client’s independent contractors recently filed an unemployment claim against the company, triggering an IRS audit. Another independent contractor failed to pay income taxes on money they received from the client. The IRS has already reclassified that contractor as an employee of the client and is now going after the client for back taxes, penalties and interest.

Needless to say, the client is adamant: No more independent contractors unless they can be fully vetted as a legitimate business. Otherwise, they must be employed by an established employer of record.

Karen Finds Solo Workforce: The Perfect Solution

Undeterred, Karen searches the web for employers of record and finds one she really likes. It’s called Solo Workforce and, from what she reads, Solo Workforce has the most powerful employer-of-record platform in the country. Solo Workforce also provides the nation’s strongest mitigation of co-employment risks.

Karen especially likes the fact that Solo Workforce is free to the recruiter. She was impressed to learn that Solo Workforce deducts the payroll burden and overhead expenses from the contractor’s gross revenues.

What Makes Solo Workforce so Exceptional?

Karen isn’t surprised to see that Solo Workforce provides:

  • Commercial liability insurance
  • workers compensation
  • unemployment insurance
  • contract administration
  • timely invoicing
  • assertive collections
  • tax withholding
  • payroll processing

But it is the extras she sees that qualify Solo Workforce as a premium employer of record, including these:

Tax-free Expense Reimbursements

Solo Workforce consultants can write off the same business expenses as a self-employed professional. They can even write off up to $15,000 in out-of-pocket medical expenses. This isn’t a benefit she has seen with other companies.

Incredible 401(k) Plan

Solo Workforce consultants can load their 401(k) up to the full IRS contribution limits faster and with lower declared gross wage than a self-employed person — up to $53,000 ($59,000 if over age 50) in 2016. Ordinary employers of record — if they even offer a 401(k) at all — offer no employer match and limit voluntary contributions to the IRS maximum of just $18,000 ($24,000 if over age 50).

Maximum Per Diem

Solo Workforce consultants can write off the IRS maximum tax-free per diem while on remote assignments. Unincorporated independent contractors and those who use an ordinary employer of record cannot claim tax-free per diem.

Karen recognizes that these extras will add thousands of dollars in tax savings to her contract professionals compared to a basic employer of record, giving her an edge when recruiting.

Executive-Level Employee Benefits

Karen’s research discovers yet another key feature of Solo Workforce; not really a financial advantage but important nonetheless. Solo Workforce offers the most comprehensive employee benefits package available — comparable, in fact, to the executive-level benefits that her clients offer to their own employees.

Karen fully appreciates that executive-level benefits can be a powerful selling point when talking to highly skilled candidates about working with her as a contract professional.

Right about now, Karen is beginning to see how referring contract professionals to Solo Workforce will create loyal customers from both the contract professionals she places with client companies and the client companies that engage them — both of which will want to return to her again and again for help in procuring contract engagements.

A Trusted Strategic Partner

Karen likes that Solo Workforce will be operating silently behind the scenes. As her designated agent, Solo Workforce issues co-branded invoices and marketing materials. This will help facilitate and protect the trusted relationships she has worked so hard to develop with her valued clients. All Karen has to do is make a contract placement anywhere in the United States and Solo Workforce will take care of everything else, discreetly and securely.

Welcome Aboard!

At this point, Karen picks up the phone and announces to her client that her contract placement will be employed by Solo Workforce. Next, she goes online to to make the first of many contract-placement referrals to the most powerful contract-placement employer of record in the United States.

In yet another brilliant move, Karen decides to join Solo Workforce herself. This way, she can enjoy the same tax-advantaged, premium employer-of-record services she will offer to her own contract placements.

From this moment on, Karen affirms, she is officially in the contract-placement business and Solo Workforce is her exclusive employer of record.