Recruitment Agency Fees & Temporary Contracts

Recruitment Agency Fees

We have all been in the situation where we have needed to use a recruitment agency. We have all be in the situation where things go wrong when they have pointed out particular terms and conditions of their terms of business, only to be stung by a bitter fee. Often, we regret the times that we have signed quickly and sent back to them because we are busy and don’t have time to read their two-page 6pt writing without our magnifying glass.
We have all been in the situation whereby we are negotiating a new contract with an agency for the provision of temporary workers, and you can’t work out the hourly rate and their margin and how they are working out the temporary recruitment agency fees. So how do you quickly grasp their terms of business knowing you’re not going to be stung further down the line?

Recruitment Agency Temporary Fees

To work out the margin of any temporary recruitment agency fees, you need to understand how their hourly charge for someone on national living or minimum wage is made up. You need to have two charge rates – one pre-pension 12 weeks and one post pension 12 weeks this is if the agency has pension enrolment responsibility. By 2018 they will all have to do it. This is a way of saving around 2-3p per hour, and when you consider the number of agency hours your business is being billed, then it soon adds up!

Temporary Fee Calculation

  • Start with the Hourly rate.
  • Add on the holiday pay (12.07% x hourly rate).
  • This gives you your true hourly rate for calculation ERNI calculations.
  • To work out ERNI, you need the following calculation:
    • Hourly rate including hourly holiday pay x 40 hours.
    • Minus the ERNI free rate (Currently at £157.00 per week).
    • Divide by 40 hours.
    • Times this by 13.8% (current ERNI rate).
    • This gives you the ERNI they will have to pay.
    • If you working week is an average of 35, then replace 40 with 35 etc.
  • Add on the pension amount (£pay + holiday x 1%)
  • Add on the apprenticeship levy
    • To get the accuracy of your apprenticeship levy, first, see if the recruitment agency is eligible for paying this. They will be if they are a successful business with a £3M payroll bill.
    • Look at the total predicted amount of hours you will be billed for the foreseeable 12 months.
    • Take your hourly rate and times this by the predicted hours for the year and times by 0.5%.
    • Add this figure to your hourly pay.
  • Finally, what is left is their margin.
  • SSP etc. is THEIR cost, and they rarely have people claiming it. IF you are a caring sharing employer, you may want to take this into consideration and pay it.  It is, however, part of running any business and they cannot pass all their costs onto you for this.

Point to Note on Temporary Recruitment Agency Margins

Hand holding a pen on top of papers with calculator on top
Temporary Fee Calculation

  1. Always ensure you have a negotiation period set in stone in your contract with the recruitment agency. If their contract doesn’t state it explicitly, write your own and get them to sign it.
  2. Have a notice period for terminating their service with the business.
  3. The ERNI threshold goes up and can go down each tax year. Take note of the parliamentary budgets and set clauses in your contracts with the recruitment agency for re-negotiation at these points.
  4. The rate of ERNI currently at 13.8% can go up and down, although has remained stable in recent years. Take note and if it does, renegotiate.
  5. The pension rate will depend on your recruitment agency’s enrolment date.
  6. Don’t forget, the pension auto-enrolment points will be increasing in time. Stay ahead and negotiate before time.
  7. Also, apprenticeship levy, see how the recruitment agency is spending it on your staff.
  8. Take note of any changes to the apprenticeship levy. Agencies will use this as a way to negotiate more money in their margin and potentially in their margin.

Although this blog will give you the basics, you must ensure you read through everything any recruitment agency gives you before signing.

What is a Reasonable Recruitment Agency Margin?

Good question and very much depends on the set up you have for the recruitment agency. If you are housing the agency, not charging them rent for onsite offices, electric etc, then it comes down to the service model you have with them. Working in the food industry they would be expected to induct them and get them to the door ready to work following your instructions on how you want them interviewed, tested and onboard for the business. Anything over £1.50 margins nowadays in the food industry on industrial margins is ridiculous. In previous businesses, I have worked to .35p margins for circa 200,000 hours annually. It very much depends on the situation, circumstances and volume you will be putting through the recruitment agency.


Will you be providing the PPE for the recruitment agency workers? If you work in the food, chemical, nuclear and oil sectors, then chances are you will need to comply with HSE regulations.  Ensure the PPE provided is CE certified and bought from a reputable organisation. Also, you as a business will be able to negotiate a reduced cost for your staff’s PPE alongside your agency worker PPE, meaning they cannot use this as a tool to increase your margins. IF you don’t provide PPE then you need to revisit the margin and your health and safety policy on this.

Service Level Agreements

Always use a service level agreement and write it yourself, this way you have no surprises when it comes to signing it and know exactly what is in there. Base it on KPIs and monitor these on a monthly basis with the recruitment agency. KPIs such as % fulfilment at the start of shift % fulfilment 2 hours into the shift, sickness, attrition, attrition accountable for (i.e. taking out those where there is no work for them to do so have been let go as the agency cannot be held responsible for these workers), % fulfilment on time etc. Usual HR Metrics will help keep the agency on its toes and perform well. Consider doing Temporary Worker exit interviews anonymously and engagement surveys anonymously and don’t forget to include questions about human trafficking and modern slavery on the engagement questionnaires.

What Should the Recruitment Agency be Doing for this Margin?

In my experience, an agency rep should check in more than 10 new people per day in situ on-site. The agency rep should show them to the line. From here, the staff are your responsibility. However, you could negotiate a model whereby the agency rep trains them for the first hour on the line. This is a more expensive model.  Furthermore, you must be aware there is usually only one rep,  making it difficult for them to be in four places at once!

Woman observing two women talking
Recruitment Negotiations

The higher number of staff needed to manage the account, the greater the margin they will require. They should ensure they are on your time and attendance systems, present you with the correct paperwork legally to be on your site and proof of NI and eligibility to work in the UK.  Your Managers should sign off the hours daily.  Your timesheet should be with the recruitment agency on a Monday for them to process in time to pay on a Friday.

Payment Terms

Yes, you can negotiate how often you pay their bill too! Get it written into the contract and if they ask you for more stringent terms – ask them why.

Due Diligence

If you use agencies A LOT and have a high dependency on them, do your due-diligence checks. Check with their other contracts how they do, go to other sites and see them in operation, don’t just do one contract do a few. Ask people on the shop floor how they are treated by their recruitment agency, what checks they took them through.
Credit check them. If they are not stable financially, then they probably will try and mess around with the pay of your workforce.
Trial them with a few and build up the momentum with more if they get it right.

PAYE or Ltd Company?

Some agencies use temporary workers who are classed as a limited company. This typically happens in non-GLAA regulated sectors such as construction, engineering, chemical, oil and gas. However, the GLAA’s remit is closing in on rogue agencies. Such agencies ‘claim’ to pay people on a PAYE basis, however, don’t, and are pocketing the difference. The best way to check is audit payslips from your temporary workforce. If you find they aren’t paying them the way they either legally should or the way the contract is set up, report them to the GLAA if you’re in the relevant regulated industries they operate in and take the evidence and then find another recruitment agency. If they don’t ensure you have it written in your contract they must treat the workers as PAYE not self-employed, otherwise, you have no legal standpoint to challenge.

Recruitment Agency Temporary Fees: Final Notes

Account Managers of temporary agencies work incredibly hard to maintain good staff for any business and are key to ensuring your business runs smoothly. They shouldn’t be treated like animals to be shouted at when things go wrong on a morning at the start of shifts. Account Managers work incredibly long hours and just like everyone else, people let them down too. They can’t always predict what people are going to do and neither can you. Shouting at them is degrading them for the hard work they put into your business. Why would you recommend anyone to work there if you have managers who are aggressive towards you? Work out the issues together and if they aren’t performing at the desired performance level, then have a meeting and address the issues formally documenting it. Shouting gets no-one nowhere and destroys business reputations.

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