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U.S. Department of Labor Futurework
  Trends and Challenges for Work in the 21st Century
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Flexible Staffing Arrangements

A Report on Temporary Help, On-Call, Direct-Hire Temporary, Leased, Contract Company, and Independent Contractor Employment in the United States

Susan N. Houseman
August 1999

8.2 Savings on Wages and Benefits

As noted above, except for independent contractors and contract company workers, workers in flexible staffing arrangements earn lower wages than those in regular full-time positions, even after controlling for worker and job characteristics. Moreover, controlling for worker and job characteristics, workers in all flexible staffing arrangements are much less likely than regular full-time workers to receive health and pension benefits from their employer.

Many have hypothesized that employers use various flexible staffing arrangements in order to reduce wage and fringe benefits costs of their workforce and that this practice has become more important with the growth of fringe benefits costs. To reduce wage costs, a company may find it easier to hire low-paid workers in flexible staffing arrangements than to reduce wages of its existing regular workforce, particularly if the employer is unionized. Moreover, restrictions in ERISA and non-discrimination clauses in the IRS tax code make it legally difficult to restrict fringe benefits to certain groups of workers. For example, under ERISA, employers must cover 70 percent of their non-highly compensated workforce in any pension plan they offer in order for that plan to receive favorable tax treatment. However, employers may circumvent ERISA, which applies only to employees working 1000 hours per year or more, by hiring on-call or temporary workers. In addition, ERISA restrictions do not apply to independent contractors, who are self-employed, and to agency temporaries and contract company workers, who are deemed another company's employees.

Although the IRS has cracked down on the misclassification of employees as independent contractors and Congress passed legislation to limit companies' ability to avoid pension obligations by "leasing" its workers from another company, some evidence suggests that the use of flexible staffing arrangements to lower wage and benefits costs is still an important motivation for using many types of flexible staffing arrangements. For instance, in her survey of 21 large companies, Christensen (1995) found that 52 percent using direct-hire temporaries, 48 percent using agency temporaries, and 43 percent using independent contractors did so, in part, to cut direct labor costs, while 38 percent using direct-hire temporaries, 19 percent using agency temporaries, and 29 percent using independent contractors did so, in part, to reduce health care costs. Kalleberg, Reynolds, and Marsden (1999) report that 16 percent of businesses in their survey say that avoiding fringe benefits costs is a very important reason they use agency temporaries or contract company workers and another 22 percent say this factor is moderately important. In contrast, only 12 percent in a Conference Board survey stated that they used "contingent" workers to control benefit costs (The Conference Board 1995). Similarly, less than 12 percent of employers in the Upjohn Institute survey stated they used various flexible staffing arrangements to save on wage and benefits costs (Table 7).

Although few employers in the Upjohn Institute survey stated that savings on wage and benefits costs were important in their use of flexible staffing arrangements, they nevertheless indicated that they often save on hourly wage and benefit costs by using these arrangements. Savings on benefits costs appeared to be particularly important. Among employers using agency temporaries, only 19 percent stated that the billed hourly rate is higher than the hourly wage and benefit cost of regular workers in similar positions and 38 percent indicated that it is lower. A negligible percent of employers reported that the hourly wage and benefit cost of direct-hire temporaries and on-call workers is higher than that of regular workers in similar positions, while 59 percent of those using direct-hire temporaries and 73 percent using on-call workers indicated that it is lower. In addition, while employers in the Upjohn Institute survey typically offered paid vacation and holidays, paid sick leave, pension benefits, and health insurance benefits to their regular full-time workers, such benefits were much less frequently extended to their regular part-time workforce and rarely provided to direct-hire temporaries and on-call workers (Houseman 1997).

Statistical analysis of the Upjohn survey data also showed that employers who offered both pension and health insurance to their regular, full-time workforce were more likely to use agency temporaries, direct-hire temporaries, and on-call workers and/or to use them more intensively than were employers providing less generous benefits. Similarly, Mangum, Mayall, and Nelson (1985) found that the higher the level of fringe benefits, the more likely the firm was to use agency temporaries or on-call workers. These findings provide indirect evidence that employers are motivated to use flexible staffing arrangements to avoid benefit costs.

Nollen and Axel (1996) make the important point that firms may not be saving on labor costs by using flexible staffing arrangements even if the wages and benefits of these workers is less than those of regular employees. They performed detailed cost benefit analyses for several firms on their use of "contingent" workers and found in some cases the higher costs associated with turnover, training, and lower productivity of contingent workers outweighed the savings from lower wage and benefit costs. Thus, while firms may be motivated to use flexible staffing arrangements in order to save on wage and benefit costs, Nollen and Axel's work suggests that firms sometimes incur higher overall labor costs by using these arrangements.

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