How does a staffing agency work? A company that needs talent hires the agency, the agency recruits and screens candidates, and the company picks who to bring on. For temporary and contract roles, the agency is the legal employer and pays the worker; for direct hire roles, the worker joins the client’s payroll. Either way, the employer pays the agency, not the job seeker.
Key takeaways
- Staffing agencies recruit, screen and place workers in temporary, contract, contract to hire and direct hire roles.
- The hiring company pays the agency. Honest agencies do not charge job seekers a fee, according to the FTC.
- For contract work, the client pays an hourly bill rate; the worker receives a pay rate; the difference (the markup) covers taxes, insurance, overhead and the agency’s margin.
- Contract workers are usually W2 employees of the agency, which runs payroll, withholds taxes and pays the employer share of payroll taxes.
- Whether an agency is worth it depends on how fast you need someone, how specialized the role is and how much hiring capacity you have in house.
What does a staffing agency actually do?
A staffing agency connects employers who need workers with people who want jobs. It handles the parts of hiring that take the most time: sourcing candidates, screening resumes, checking skills and references, and coordinating interviews.
For temporary and contract assignments, the agency also becomes the employer of record. The American Staffing Association explains that staffing agencies pay employees’ wages and benefits, withhold and pay employment taxes, and carry unemployment and workers’ compensation insurance, while clients supervise the work and provide a safe work site.
It is a big industry. ASA reports that nearly 2.2 million temporary and contract employees worked for U.S. staffing companies in an average week in 2024 (ASA statistics).
How does a staffing agency work, step by step?
The exact process varies by agency and role, but most placements follow these steps:
- The employer shares the need. The hiring manager explains the role, required skills, schedule, location, pay range and whether it is temporary, contract, contract to hire or direct hire.
- The agency and client agree on terms. This covers the bill rate or placement fee, payment terms, any guarantee and conversion fees.
- The agency sources candidates. Recruiters search their existing network and database, reach out to passive candidates and post the job.
- Candidates are screened. The agency reviews resumes, runs phone screens, checks technical skills and, when required, runs background checks, drug tests or reference checks.
- The agency presents a short list. Instead of hundreds of applicants, the hiring manager sees a handful of qualified candidates.
- The client interviews and selects. The employer makes the final hiring decision.
- Offer and onboarding. For contract roles, the agency makes the offer, completes new hire paperwork and puts the worker on its payroll. For direct hire roles, the client makes the offer and hires the person directly.
- Ongoing support. During the assignment, the agency handles timesheets, payroll and questions, and checks in with both the worker and the client.
Recruiter tip: The more detail you give the agency up front, the better the short list. Share the real reasons people succeed or struggle on your team, the must have skills versus the nice to haves, and the honest pay range.
Who pays the staffing agency?
The employer pays. Job seekers should not pay to be placed in a job. The FTC advises that honest placement firms do not typically charge a fee to job candidates; instead, the hiring company pays them to find qualified candidates. If a placement firm asks you for a fee, especially up front, the FTC says to walk away because you are probably dealing with a scam.
How the employer pays depends on the type of placement:
- Temporary and contract: an hourly bill rate for every hour the worker works.
- Contract to hire: the hourly bill rate during the contract, and often a conversion fee if the client hires the worker before an agreed period ends.
- Direct hire: a one time placement fee, usually a percentage of the new hire’s first year salary, typically paid after the person starts.
What is the difference between bill rate and pay rate?
These two numbers are the core of how contract staffing is priced:
- Pay rate is the hourly wage the worker earns.
- Bill rate is the hourly amount the agency charges the client.
- Markup is the difference, often expressed as a percentage of the pay rate.
The markup is not all profit. It covers the employer share of Social Security and Medicare, federal and state unemployment taxes, workers’ compensation insurance, any benefits the agency provides, recruiting and screening costs, payroll administration, overhead and the agency’s margin. The ASA code of ethics specifically commits member firms to satisfy those employer obligations, including the employer’s share of Social Security, unemployment insurance taxes and workers’ compensation.
Hypothetical example: how a bill rate breaks down
The numbers below are a made up illustration to show the math. Real markups vary widely by role, location, benefits, contract length and agency.
| Item | Hypothetical amount |
|---|---|
| Worker’s pay rate | $40.00 per hour |
| Markup (50% of pay rate, for illustration only) | $20.00 per hour |
| Bill rate charged to the client | $60.00 per hour |
| What the markup must cover | Employer payroll taxes, unemployment insurance, workers’ compensation, any benefits, recruiting, payroll, overhead and margin |
| Client cost for a 40 hour week | $2,400 |
| Worker’s gross pay for a 40 hour week | $1,600 |
What is the difference between temp, contract to hire and direct hire?
| Factor | Temporary or contract | Contract to hire | Direct hire |
|---|---|---|---|
| Who employs the worker | The agency | The agency, then the client after conversion | The client from day one |
| How the client pays | Hourly bill rate | Hourly bill rate, plus a possible conversion fee | One time placement fee |
| Typical length | Days to months, or the length of a project | A trial period, then permanent | Permanent |
| Best for | Projects, peaks, leave coverage, specialists | Testing fit before a permanent offer | Core and long term roles |
| Benefits | Through the agency, if offered | Agency during contract, then client | Client’s benefits package |
Contract to hire can work well for both sides. The ASA reports that one third of temporary and contract employees were offered permanent positions by clients where they worked on assignment, and two thirds of those accepted. For a closer look at temporary staffing specifically, see our explainer on what a temp agency is.
How do staffing agency workers get paid?
When you work a temporary or contract assignment through an agency, you are usually a W2 employee of the agency, not the client. That means:
- You submit your hours to the agency, often through an online timesheet the client manager approves.
- The agency pays you on its regular payroll schedule and withholds federal and state income tax, Social Security and Medicare.
- The agency pays the employer share of payroll taxes, unemployment insurance and workers’ compensation.
- You receive a Form W-2 from the agency at the end of the year.
- Any benefits, such as health insurance or paid time off, come from the agency, and vary from firm to firm.
The ASA code of ethics also asks member firms to explain your wage rate, benefits, hours and other assignment conditions before the assignment starts, so you know your pay before you start. If you are looking for your next engineering or IT role, you can browse our open jobs.
Are staffing agencies worth it?
For many employers, yes, especially when speed or specialization matters. An agency with a strong network can often present qualified candidates faster than an internal team starting from a job ad. It also takes payroll, compliance and administrative work off your plate for contract roles.
The tradeoff is cost. You pay a markup or placement fee, and a poor agency that sends unscreened resumes wastes your time. We cover both sides in our post on the pros and cons of staffing agencies.
For job seekers, a good agency can open doors to roles that are never posted publicly and give you honest feedback on your resume and interviews. It costs you nothing, since the employer pays.
What questions should you ask a staffing agency?
- Do you specialize in our industry and the roles we hire for?
- How do you find and screen candidates, and what technical assessments do you use?
- How quickly can you typically present candidates for a role like this?
- How are your bill rates or placement fees structured, and what do they include?
- What happens if a placement does not work out? Is there a guarantee?
- What are your conversion terms for contract to hire?
- Are your contractors W2 employees, and what benefits do you offer them?
Our guides on how to choose a staffing agency and tips for working with engineering staffing agencies go deeper on vetting a partner.
Frequently asked questions
Do staffing agencies take a cut of your paycheck?
Not in the way many people think. The agency bills the client a higher hourly rate than your pay rate, and the difference covers employer taxes, insurance and the agency’s costs and margin. The markup does not come out of your agreed pay rate; your paycheck shows the usual deductions, like tax withholding and any benefits you elect.
Are employment agencies good for finding a permanent job?
They can be. Many agencies do direct hire placements, and contract to hire roles are a common path to a permanent offer. Ask the recruiter upfront whether the role is temporary, contract to hire or direct hire.
Should I ever pay a staffing agency to find me a job?
No. The FTC says honest placement firms do not typically charge job candidates, because the hiring company pays them. A request for an upfront fee is a major red flag.
Can I work with more than one staffing agency at a time?
Yes, but keep track of which agency submitted you to which company. Being submitted to the same job by two agencies can create confusion for the employer.
What is a typical staffing agency markup?
It varies too much to give one number. Markups depend on the role, location, benefits, contract length and the agency’s services. Ask any agency to explain what its bill rate includes.
Looking for engineering, IT or supply chain talent? Our recruiters handle contract, contract to hire and direct hire placements. Learn more about our engineering staffing agency services or request talent for your team.
