# How Staffing Agencies Make Money

> Bill rate, pay rate, markup and margin, and what a single placement actually has to cover. The two most confused numbers in the industry are markup and margin, and they are not the same figure.

Author: Kariaa Research
Published: 2026-08-06
Category: Industries
Reading time: 11 min read
Canonical URL: https://www.kariaa.com/reports/how-staffing-agencies-make-money

---

import { FlowSteps, CompareColumns, RankedList, Takeaways, FAQ } from "@/lib/report-charts";

A client is billed 28 dollars an hour. The worker is paid 20. The difference looks like an
eight dollar profit, and it is not. Most of it is already committed before anyone has been
paid anything.

The economics of staffing are simple in structure and widely misunderstood in detail, by
clients evaluating an agency and by people starting one. What follows is the arithmetic.

## The definitions, precisely

**Pay rate is what the worker receives per hour.** It is the number the candidate cares
about and the only one they usually see.

**Bill rate is what the client is invoiced per hour.** It is the number the client cares
about and the only one they usually see.

**The spread is the difference between them.** It is not profit. It is the pool from which
employment costs, overhead and profit are all paid, in that order.

**Markup is the spread expressed as a percentage of the pay rate.** Bill rate divided by
pay rate, minus one. A 20 dollar pay rate billed at 28 is a 40 percent markup.

**Gross margin is the spread expressed as a percentage of the bill rate.** Spread divided
by bill rate. That same placement is a 28.6 percent gross margin.

**Those last two describe the identical transaction and differ by roughly twelve points.**
Confusing them is the single most common error in staffing conversations, and it runs in a
predictable direction: markup sounds larger, so it appears in sales conversations, while
margin is what the business is actually run on.

<CompareColumns
  left={{
    title: "Markup",
    items: [
      { label: "Spread as a share of PAY rate", value: "" },
      { label: "(Bill / Pay) - 1", value: "" },
      { label: "$20 pay, $28 bill", value: "40%" },
      { label: "Always the larger number" },
      { label: "Used when quoting clients" },
    ],
  }}
  right={{
    title: "Gross margin",
    items: [
      { label: "Spread as a share of BILL rate", value: "" },
      { label: "Spread / Bill", value: "" },
      { label: "$20 pay, $28 bill", value: "28.6%" },
      { label: "Always the smaller number" },
      { label: "Used when running the business" },
    ],
  }}
  caption="The same placement, two figures, roughly twelve points apart"
/>

## What the spread actually pays for

The spread is spent before it is earned, and the first call on it is not negotiable.

**Employer burden is the mandatory cost of employing someone, and on a temporary placement
the agency is the employer of record.** That means the agency carries the employer share
of payroll taxes, unemployment insurance at its own experience rating, and workers'
compensation premiums priced to the job classification. Warehouse and construction
classifications carry materially higher comp rates than clerical ones, which is why an
identical markup produces very different economics across sectors.

Burden commonly consumes a large share of the spread on its own, before any agency cost
has been paid. Whatever remains covers recruiting effort, the recruiter's own
compensation, back-office and payroll processing, insurance, bad debt and unbilled time,
and only then profit.

<FlowSteps
  steps={[
    { label: "Pay rate", sub: "What the worker gets" },
    { label: "Plus employer burden", sub: "Taxes, UI, workers' comp" },
    { label: "Plus agency cost", sub: "Recruiting, back office" },
    { label: "Plus profit", sub: "What is left" },
    { label: "Equals bill rate", sub: "What the client pays" },
  ]}
  note="Burden is set by classification and experience rating, not by negotiation, which is why the same markup means different things in clerical and in construction."
  caption="How a bill rate is built"
/>

**The practical consequence is that a markup which looks generous can be unprofitable.** A
light-industrial placement at a modest markup, in a high workers' compensation
classification, with an elevated unemployment experience rating, can clear very little.
The same markup on clerical work is a comfortable business. Markup alone does not describe
whether a placement makes money.

## Direct hire is a different business

Everything above describes temporary and contract staffing, where the agency employs the
worker and bills hourly.

Direct hire, sometimes called permanent placement, works differently. The agency does not
employ anyone. It introduces a candidate the client hires directly, and charges a
one-time fee, conventionally a percentage of first-year salary. There is no burden, no
payroll to fund, and no ongoing revenue.

The two models have opposite cash and risk profiles. Temporary staffing produces recurring
revenue but requires funding payroll before the client's invoice is paid, which makes
working capital the binding constraint on growth. Direct hire has almost no working
capital requirement and no recurring revenue, and it carries replacement-guarantee risk
instead: a placement that leaves inside the guarantee window is refunded or replaced, and
the recruiting cost is spent twice.

## The numbers an agency is actually run on

<RankedList
  items={[
    {
      label: "Gross margin percentage",
      value: "Per placement",
      note: "Spread as a share of bill rate. The figure the business is run on, and the one that has to clear burden before it means anything.",
    },
    {
      label: "Fill rate",
      value: "Orders filled / received",
      note: "The share of client orders actually filled. A low fill rate means recruiting capacity or reach is the constraint, and it also quietly damages the client relationship that produced the order.",
    },
    {
      label: "Time to fill",
      value: "Order to start",
      note: "In high-volume staffing the first agency to present a qualified candidate frequently wins the order outright, because clients working multiple agencies stop looking once someone starts.",
    },
    {
      label: "Redeployment rate",
      value: "Assignment to assignment",
      note: "The share of workers moved straight onto a next assignment. The highest-leverage number in temporary staffing, because a redeployed worker carries no new recruiting cost at all.",
    },
    {
      label: "Assignment completion",
      value: "Finished / started",
      note: "Workers who complete the assignment as booked. Early ends mean the recruiting cost is spent again and the client sees the failure directly.",
    },
    {
      label: "Days sales outstanding",
      value: "Invoice to cash",
      note: "Payroll is funded weekly and clients often pay in thirty to sixty days. Growth consumes cash rather than producing it, which is why staffing firms fail while profitable.",
    },
  ]}
  caption="Operating metrics, roughly in the order they determine whether the business works"
/>

## Why growth is where agencies fail

The counterintuitive fact about temporary staffing is that **expansion consumes cash, and
a fast-growing agency can be profitable on paper and insolvent in practice.**

The mechanism is a timing mismatch. The agency pays its workers weekly and invoices its
clients on terms of thirty days or more. Every additional placement therefore widens the
gap between money going out and money coming in, and the faster the agency grows the wider
it gets. A large new client, which reads as unambiguously good news, is a substantial
funding requirement arriving with a delay attached.

This is why payroll funding and invoice factoring are so common in the sector, and why
days sales outstanding sits alongside gross margin as a number that decides whether the
business survives. It is also why agencies are wary of clients whose payment behavior is
poor regardless of the margin on offer: the margin is theoretical until the invoice clears.

## What this means if you are buying from an agency

Three things are worth knowing on the client side.

**Ask for the bill rate and the markup together.** A markup quoted without the underlying
pay rate is uninformative, and pay rate is what determines who the agency can actually
attract for the role. An agency winning on a low markup by paying below market will
struggle to fill, and the unfilled order costs more than the markup saved.

**Understand that classification drives the number.** If your work sits in a high workers'
compensation class, a markup that looks high compared to an office role may be a normal
margin. Comparing markups across sectors compares nothing.

**Fill rate is the number to ask about.** An agency that quotes attractively and fills
sixty percent of orders is more expensive than one that quotes higher and fills ninety, and
that difference does not appear on any invoice.

Kariaa runs [a recruiting service](/recruiting) on the done-for-you side, so the same
economics apply to us. What we do differently sits in the screening: candidates complete
one verified profile of eight fields ending with work authorization, and every requirement
set at intake is marked passed or failed individually with the evidence and a confidence
level attached, plus an advisory fraud read. The shortlist arrives as a sortable,
exportable table rather than a stack of resumes, which is a claim about the handover
rather than about the rate.

<Takeaways
  items={[
    "Pay rate is what the worker receives, bill rate is what the client is invoiced, and the spread between them is not profit. It is the pool that pays employment costs, overhead and profit in that order.",
    "Markup is the spread over the pay rate. Gross margin is the spread over the bill rate. The same placement at $20 pay and $28 bill is a 40 percent markup and a 28.6 percent margin.",
    "Employer burden takes the first cut: payroll taxes, unemployment at the agency's experience rating, and workers' compensation priced by job classification.",
    "Because burden is classification-driven, an identical markup is a good business in clerical work and can be unprofitable in light industrial.",
    "Direct hire is a different model with opposite risk: no burden and no working capital, but replacement-guarantee exposure and no recurring revenue.",
    "Growth consumes cash. Weekly payroll against thirty-day terms is why profitable staffing firms run out of money, and why days sales outstanding matters as much as margin.",
  ]}
/>

<FAQ
  items={[
    {
      question: "How do staffing agencies make money?",
      answer: "On temporary and contract placements they bill the client an hourly rate higher than the rate paid to the worker. The difference, called the spread, first covers employer burden such as payroll taxes, unemployment insurance and workers' compensation, then agency overhead and recruiting cost, and only what remains is profit. On direct hire placements they charge the client a one-time fee, conventionally a percentage of first-year salary.",
    },
    {
      question: "What is the difference between markup and gross margin in staffing?",
      answer: "They describe the same transaction from different denominators. Markup is the spread as a percentage of the pay rate, calculated as bill rate divided by pay rate minus one. Gross margin is the spread as a percentage of the bill rate. A worker paid 20 dollars an hour and billed at 28 represents a 40 percent markup and a 28.6 percent gross margin.",
    },
    {
      question: "What is a typical staffing agency markup?",
      answer: "It varies far too much by job classification to quote a single figure usefully, because workers' compensation rates and unemployment experience ratings differ sharply between clerical, light industrial, construction and clinical work. A markup that is comfortable on office work can be unprofitable in a high workers' compensation class. Ask for the pay rate alongside the markup, since markup without it describes nothing.",
    },
    {
      question: "Why do staffing agencies fail while they are growing?",
      answer: "Because temporary staffing pays workers weekly while invoicing clients on thirty-day or longer terms. Every additional placement widens the gap between cash going out and cash coming in, so growth is a funding requirement rather than a source of cash. This is why payroll funding and invoice factoring are common and why days sales outstanding sits alongside gross margin as a survival metric.",
    },
    {
      question: "What should I ask a staffing agency before signing?",
      answer: "The bill rate and the markup together with the underlying pay rate, since pay rate determines who they can actually attract. Their fill rate, because an agency that quotes low and fills sixty percent of orders costs more than one that quotes higher and fills ninety. And how the role is classified for workers' compensation, since that drives the burden inside the rate.",
    },
  ]}
/>

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*Written by the team at **Kariaa**. Learn more at [www.kariaa.com](https://www.kariaa.com).*