Are staffing agencies worth the cost? Markup, bill rates, and the real math

The invoice hits your desk on a Tuesday. Forty hours, one warehouse associate, $1,200. You know what that worker takes home because you signed off on the pay rate yourself, and it is nowhere near $30 an hour. So you do the division, and you get a number that feels like somebody is taking you for a ride. That gap has a name. It is called the staffing agency markup, and before you decide whether it is worth paying, you deserve to see exactly what is inside it.

The three numbers on every staffing invoice

There are only three numbers that matter, and once you know them you can read any staffing invoice in the country.

• Pay rate. What the worker actually earns per hour.
• Bill rate. What the agency charges you per hour.
• Markup. The spread between the two, expressed as a percentage of the pay rate.

The formula is simple arithmetic: markup equals bill rate minus pay rate, divided by pay rate. A worker paid $20 an hour and billed at $30 an hour carries a 50% markup.

Here is the part almost nobody explains to the person writing the check. That 50% is not the agency’s profit. It is not close. Most of it is spent before the agency keeps a cent, and a meaningful share of it is money you would have spent anyway if that worker were on your own payroll.

A $20 per hour example, line by line

The American Staffing Association runs a Staffing Operations Benchmarking Survey that publishes the actual cost structure behind a bill rate. Applying those benchmarks to a $20 pay rate at a 50% markup, here is where every dollar of that $30 bill rate goes.

The ASA’s own published example runs the same way. On a $17 pay rate, an agency needs to bill roughly $25.76 just to cover mandated labor costs and operating expenses and still land on the industry’s average net profit of 3.3%, which works out to about 85 cents an hour. Those numbers are published in full with the underlying rates: FICA at 7.65%, FUTA at 0.60%, SUTA at 4.00%, workers’ compensation at 1.99%, and general and administrative expenses at 18.70%.

One honest caveat, because you will catch it eventually if we do not say it now. That 1.99% workers’ compensation figure is a blended national average across every kind of work. If you run a warehouse, a fabrication shop, or a job site, your class codes are considerably more expensive than that, which pushes the real markup on your roles higher than the example above. Any agency that quotes you a single flat markup across clerical and skilled trades is either guessing or hiding something.

How staffing agency markup actually works

Strip the $10 spread apart and it lands in four buckets.

Legally mandated labor costs

Payroll taxes and workers’ compensation come to about $2.85 an hour on a $20 wage. You would pay every dollar of this on a direct employee too. It is not an agency fee. It is the government’s cut of employing a human being, and it does not disappear when you bring hiring in-house.

Recruiting, screening, and the ones who do not work out

Background checks, E-Verify, drug screening, and skill testing cost money on every candidate, including the ones who fail the screen and never set foot in your building. When an agency quotes you a rate, that rate is carrying the cost of the four people who did not make it for every one who did.

Payroll, invoicing, and unemployment claims

Somebody processes the timecards, funds payroll weekly, files the quarterly returns, and defends the unemployment claims when an assignment ends. On a temp arrangement that somebody is the agency, not your controller. LG also provides free payroll services to qualifying staffing partners, which pulls a real line item off your side of the ledger rather than adding one.

Replacement risk

This is the one finance people undervalue. When a direct hire washes out in week two, you eat the entire cost of that hire and start over. When an agency placement washes out, the agency eats it. Given that turnover costs run 16% to 20% of annual pay for hourly and midrange roles, that transfer of risk is worth real money.

How a guarantee changes the risk equation

A markup without a guarantee is just a higher price. A markup with a guarantee is insurance, and insurance is something a finance team already knows how to value.

On LG’s temporary placements, if an employee is terminated for any reason inside the first 30 days, the client is billed only for the days that worker was actually on the floor. On direct hire placements, the hire is guaranteed for 45 days, with a reduced replacement fee of 50% through day 120. Put a number on that. If a placement fails on day nine, you have paid for nine days of labor instead of absorbing a full recruiting cycle.

That is the trade. You pay a premium per hour, and in exchange the cost of a bad hire stops being yours.

Agency vs. in-house: the honest annual comparison

Take one seat, $20 an hour, 2,080 hours. According to SHRM’s 2025 benchmarking data, the average cost per hire for a non-executive role is $5,475. Here is how a year looks either way.

Read that honestly. If you fill that seat once and the person stays all year, hiring in-house is roughly $9,400 cheaper. We are not going to pretend otherwise.

Now fill it twice, which is closer to reality in warehouse and light industrial work. The gap narrows to about $3,900. Fill it three times and in-house costs more than the agency does, and that is before you count benefits, paid time off, unemployment claims, or the production you lost while the seat sat empty. The breakeven is not a philosophy question. It is your turnover rate.

When a staffing agency is not worth it

Four situations where you should keep your money.

1. Your headcount is stable and your turnover is low. If a seat turns over once every three years, you are paying an agency premium for insurance against an event that is not happening. Hire directly.
2. You already have a real recruiting function. A staffed internal talent team with a working pipeline and a decent applicant flow will beat an agency on cost for high-volume, repeatable roles. Agencies earn their keep when your team is stretched, not when it is strong.
3. The role is genuinely niche and you are the expert. If you are hiring a specialist whose skills only three people in your company can evaluate, an outside recruiter is guessing and you are paying for the guess.
4. You need the person for years, not months. The longer the assignment, the more total markup you pay against a fixed one-time recruiting cost. For a long-horizon salaried role, direct hire or temp-to-hire conversion almost always wins on math.

This is also why temp-to-hire exists. It is a test drive. You would not buy a truck without driving it, and conversion after a defined period lets you buy the risk transfer for the window when you actually need it, then stop paying for it. Our temporary staffing overview walks through how that works.

What to ask before you sign

1. Ask for the markup by role, not a blended average. Clerical and skilled trades carry different workers’ compensation class codes. One number across both is a red flag.
2. Ask what happens on day nine. Get the guarantee window and the replacement terms in writing, and confirm what you owe if a placement fails inside it.
3. Ask what is bundled. Payroll processing, workers’ compensation management, and benefits administration have real dollar values. If they are included, subtract them from the markup before you judge it.
4. Run your own turnover number. Take your fills per seat per year times $5,475 and compare it against the annual markup. That single calculation answers the question better than any sales conversation.

What this costs you if you skip the math

A Salt Lake City distribution operation with 120 employees ran an eight-person seasonal crew through an agency for two years without once auditing the markup by class code. They were being billed at a single blended rate that assumed clerical risk on jobs that involved powered equipment. The overage came to roughly $1.15 an hour across eight people, which is about $19,000 a year walking out the door quietly. Nobody was cheating them. Nobody was checking, either. Meanwhile the companies that skip the comparison in the other direction absorb full recruiting cycles at $5,475 apiece on seats that turn three times a year, then wonder where the labor budget went.

What it looks like when the math works

It looks like a line item you can defend in a budget meeting in under two minutes. You know your fills per seat, you know your markup by class code, you know exactly which roles you run through an agency and which ones you hire yourself, and you can say why for each one. The crew shows up Monday at full strength. Your controller is not chasing unemployment claims, and your workers’ compensation exposure is actively managed rather than absorbed. In 2026, with margins where they are, that clarity is worth as much as the savings.

Frequently asked questions

What is a typical staffing agency markup?

For temporary placements, markups generally run 30% to 75% of the pay rate, with light industrial and warehouse roles commonly landing in the 40% to 55% range. Permanent placements are usually structured as a percentage of first-year salary instead. The wide band exists because workers’ compensation class codes, state unemployment rates, and local wage pressure vary enormously. A markup on a clerical temp in Provo and a markup on a welder in Roy should not be the same number.

Is the markup the staffing agency’s profit?

No. According to the American Staffing Association’s benchmarking data, the industry’s average net profit is 3.3% of the bill rate. On a $30 bill rate, that is about 99 cents an hour. The rest of the markup covers legally mandated payroll taxes and workers’ compensation, recruiting and screening costs, payroll administration, and general overhead.

How do you calculate staffing agency markup?

Subtract the pay rate from the bill rate, then divide by the pay rate. If a worker earns $20 an hour and you are billed $30, the markup is ($30 minus $20) divided by $20, which equals 50%. Note that markup and gross margin are different figures. That same spread is a 33% gross margin on the bill rate.

Is a staffing agency cheaper than hiring directly?

It depends entirely on your turnover. For a seat filled once a year that stays filled, direct hiring is typically cheaper by several thousand dollars annually. Once you are filling the same seat two or three times a year, the recruiting cost stacks up and the agency becomes competitive or cheaper, because you are only paying for hours actually worked and the replacement cost sits with the agency.

What should a staffing agency markup include?

At minimum: employer payroll taxes, workers’ compensation coverage, unemployment insurance, recruiting and screening, and payroll processing. Some agencies also bundle benefits administration, workers’ compensation mitigation consulting, and payroll services for the client’s own employees. Ask for the inclusions in writing, because two agencies quoting the same markup may offer very different values.

Do staffing agencies charge a fee to hire a temp permanently?

Most do, either as a flat conversion fee, a percentage of first-year salary, or a buyout that decreases the longer the worker has been on assignment. Some agencies waive the fee entirely after a set number of hours worked. Confirm the conversion terms before the assignment starts, not after you have decided you want to keep someone.

Know what you are paying for

You should not have to reverse-engineer an invoice to find out where your money goes. Bring us your pay rates, your class codes, and your turnover numbers, and we will build the comparison with you, including the roles where we tell you to hire in-house instead. LG Resources has placed more than 20,000 employees across Utah over the past decade, and we would rather be right about your staffing mix than sell you hours you do not need.