Temp Agency Business Overview

A temp agency provides temporary workers to businesses that need additional staff for limited periods. These agencies handle the entire employment process, from recruiting and screening candidates to managing payroll, benefits, workers’ compensation insurance, and tax documentation.

When a business works with a temp agency, it avoids many administrative and legal responsibilities since the agency acts as the employer of record. This arrangement allows the client business to adjust its workforce based on changing demands while the agency manages all employment responsibilities.

Related: Checklist To Start A Business

How Do Temp Agencies Make Money?

Temp agencies generate income by charging businesses to provide qualified temporary workers. The agency serves as the employer of record while workers perform duties at client locations.

The most common ways temp agencies generate income include:

• Temporary Staffing Fees: The primary income source is marking up the hourly wage paid to temporary workers. This typically represents the largest portion of agency revenue because temporary placements form the core function of these businesses. Agencies charge clients 40-75% above the worker’s base hourly rate to cover payroll, taxes, insurance, and agency operations.
• Direct Hire Placement Fees: Agencies collect a one-time fee when placing candidates in permanent positions with client companies. The fee usually equals a percentage of the candidate’s first-year salary.
• Contract-to-Hire Fees: Agencies receive both hourly markup during the contract period and a reduced placement fee if the client hires the worker permanently.
• Payroll Services: Agencies can handle payroll administration for a client’s existing staff.
• Specialized Skills Placement: Agencies place highly skilled professionals like nurses, IT specialists, or engineers at premium markup rates.
• Training and Assessment: Agencies offer skill evaluations, background screening, and job readiness training for candidates, charging either the workers or client companies.

Industry Statistics

Temp agencies operate under NAICS code 561320 – Temporary Help Services. These businesses provide workers to supplement client companies’ workforces on a temporary basis.

Here are some statistics that show what’s happening in the temp agency industry:

Temp Agency Industry Size & Growth: The temp agency industry generated $225.6 billion in revenue last year. Over the past five years, the industry experienced a decline in revenue, averaging 0.8% annually. However, the industry is expected to grow over the next five years as businesses increase their use of temporary workers for flexibility and cost management (IBISWorld).

Number of Temp Agencies: There are 45,349 temp agencies operating across the country. The industry includes both large international firms and small local agencies. Manpowergroup Inc. holds the largest market share, generating $3.97 billion in revenue with a profit margin of 2.3%. The industry has seen steady growth in the number of businesses, with a 1.2% average annual increase over the past five years (IBISWorld).

Temp Agency Profit Margin: The average profit margin for temp agencies ranges between 3% and 10%. This margin accounts for the difference between the staffing rates charged to clients and the costs of wages, benefits, insurance, and operating expenses.

Costs To Start a Temp Agency

Starting a temp agency could cost between $25,000 and $150,000, depending on the size and location of the business. This estimate includes office setup, staffing software, insurance coverage, and initial operating expenses.

Here are some of the main costs to consider when starting a temp agency:

Office Space: A temp agency office location requires a deposit plus the first and last month’s rent. If renovations are needed to create interview spaces and reception areas, these improvements add to initial costs. Setting up a professional office space could range from $5,000-$25,000.

Software and Technology: The business needs an applicant tracking system, payroll processing software, and computers. Most staffing software platforms charge setup fees and monthly subscriptions. Initial technology investment could range from $8,000-$20,000.

Insurance Coverage: A temp agency must carry general liability insurance, professional liability coverage, and workers’ compensation insurance for temporary employees. Insurance startup costs could range from $5,000-$15,000.

Licensing and Bonds: Employment agencies often need state-specific licenses and surety bonds to operate legally. These requirements vary by location but could cost between $2,000-$10,000.

These estimates provide a general idea of startup costs, but actual expenses vary based on location and business scale.