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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

Executive Summary

There is a widespread perception that employment in so-called flexible staffing arrangements, including various temporary, on-call, and contract jobs, is large and growing. Many regard such a development as troubling, pointing out that workers in these arrangements often receive low wages and few benefits. Firms, it is argued, are using these arrangements to increase workforce flexibility, and, by implication, are reducing their commitment to training workers and providing them with stable employment. Moreover, some firms allegedly use flexible staffing arrangements to circumvent employment and labor laws, raising concerns that existing laws are inadequate to protect the growing number in these arrangements.

Others, citing recent BLS statistics on "contingent" employment, counter that the phenomenon is small. Moreover, firms and workers often benefit from these arrangements. Firms often use these arrangements to increase their workforce flexibility, thereby helping them to reduce costs, remain competitive, and generate high employment growth. At the same time, workers in these arrangements may prefer flexible schedules to accommodate school or family responsibilities. Additionally, it is argued that firms increasingly use staffing companies to screen workers for permanent positions. To the extent that this practice results in better job matches, both workers and firms stand to benefit. Some even believe government should promote the use of staffing companies to place disadvantaged workers in jobs, and several states have begun referring unemployment insurance and welfare recipients to temporary agencies.

In this report, I endeavor to shed light on this debate by reviewing existing research on a wide range of flexible staffing arrangements: agency temporary, on-call, direct-hire temporary, leased, contract company, and independent contractor employment. Specifically, I discuss

1) the magnitude and trends of employment in these various arrangements; 2) the characteristics of workers in these arrangements; 3) the quality of these jobs in terms of wages, benefits, and job security; 4) the training of workers in flexible staffing arrangements; 5) why firms use, and in some cases are increasing their use of, various flexible staffing arrangements; 6) the coverage of workers in flexible staffing arrangements by employment programs and labor standards; and 7) recent initiatives by several states to place unemployment insurance and welfare recipients with temporary help agencies. I also point to the many gaps in our knowledge of flexible staffing arrangements and their implications for workers and firms.

Definitions

Agency temporaries, leased employees, contract company workers, and independent contractors usually are not regarded as employees of the organization for whom they are performing work. For the first three categories, there are no official definitions and the distinction between them is sometimes blurred. However, it is commonly understood that agency temporaries are the employees of a staffing company which places them, usually on a short-term basis, with a client firm, which usually directs their work. Leased employees are similar to agency temporaries, except that they are typically assigned to the client on a long-term basis. Contract company workers are employed by a company that contracts out their services to a client, but the contract company directs their work. Legally, independent contractors are self-employed and must direct their own work.

Direct-hire temporaries and on-call workers are employees of the organization for whom they are performing work. Direct-hire temporaries are hired on a short-term basis often to do seasonal work or to work on a specific project. On-call workers are hired only on an as needed basis. Thus, while their job may not be temporary, their hours of work typically vary.

I avoid the popular term "contingent" employment in this report. The term, coined by Audrey Freedman in 1985 to refer to conditional and transitory employment arrangements, has been used in various ways. To counter what it regarded as overly broad estimates of contingent employment by some researchers, the Bureau of Labor Statistics sought to more precisely measure the concept in special supplements to the CPS beginning in 1995. However, the concept of contingent employment measured by BLS is much narrower than that commonly used in the academic and policy literature. To avoid confusion, I use the term flexible staffing arrangements when referring collectively to the set of arrangements covered in this report.

The Number of Workers in Flexible Staffing Arrangements

The February 1995 Supplement to the Current Population Survey (CPS) represented the first attempt in government statistics to count the number of workers in a wide range of alternative or flexible staffing arrangements. This supplement on Contingent and Alternative Work Arrangements was repeated in 1997 and 1999. According to the CPS data, in 1997 1.0 percent of workers were agency temporaries, 1.6 percent were on-call or day laborers, 0.6 percent were contract company workers, and 6.7 percent were independent contractors. Many on-call and contract company workers are also hired on a temporary basis. Direct-hire temporaries who were not classified in another flexible staffing arrangement accounted for an additional 2.6 percent of employment. Together these five arrangements accounted for 12.5 percent of total employment in 1997.

It should be noted that the number of agency temporaries counted in the CPS, which is a household survey, is about half that counted in the CES, which is an establishment survey. It is generally believed that the CPS understates temporary help employment, at least somewhat. In addition, there are no statistics on the number of leased employees. A question concerning leased employment was dropped from the February CPS Supplements because respondents were often confused about the meaning of the term. The BLS has an ongoing project to provide estimates on leased employment.

Trends

Very little is known about trends in flexible staffing arrangements. According to data from the Current Employment Statistics (CES), employment in the help supply services industry, which is comprised primarily of temporary help agency workers, has grown dramatically in the 1980s and 1990s. From 1982 to 1998, the share of non-farm payroll employment in help supply services increased from 0.5 percent in to 2.3 percent. Time series data on employment in the other flexible staffing arrangements simply do not exist.

On the grounds that many contract company workers are classified in business services, some researchers have cited the rapid growth in this sector as evidence of growth in this arrangement. The share of non-farm payroll employment in business services, which includes help supply services, increased from 3.0 percent to 6.8 percent between 1982 and 1998. While help supply services was the fastest growing industry within business services, all other components grew faster than aggregate employment over the period.

Results from several employer surveys provide indirect evidence that other types of flexible staffing arrangements have experienced significant growth in recent years.

Characteristics of Workers and Jobs

The distribution of demographic characteristics varies considerably across flexible staffing arrangements. Agency temporaries, on-call workers, and direct-hire temporaries are disproportionately female and young. A disproportionate number of agency temporaries are black or Hispanic and a large percentage of on-call workers are high school drop-outs. In contrast, independent contractors and contract company workers are disproportionately male, older, more educated, and, in the case of independent contractors, white.

The level of satisfaction with their work arrangement also varies considerably by arrangement. In the February 1997 CPS Supplement, 70 percent of agency temporaries and over half of on-call workers and direct-hire temporaries indicated that they would prefer a permanent arrangement or an arrangement with regularly scheduled hours. In contrast, only 10 percent of independent contractors expressed dissatisfaction with their arrangement.

Several interesting patterns are evident in the occupational and industrial distribution of employment within flexible staffing arrangements. While it is not surprising that a disproportionate number of agency temporaries work in administrative support occupations, a large share also work as operators and in the manufacturing sector. On-call workers and independent contractors are disproportionately represented in the construction industry and in services. A large share of contract company workers are found in services and precision production occupations. Over a quarter of direct-hire temporaries are in professional occupations, over half work in service industries, and over 30 percent are employed in the public sector.

The Quality of Flexible Staffing Jobs

Low wages are primarily a problem for agency temporaries, on-call workers, and direct- hire temporaries. Workers in these arrangements are much more likely to earn wages that are at or near the minimum wage and to earn significantly less than regular workers, even after controlling for worker and job characteristics. Moreover, workers in these three arrangements are much more likely to come from families living below or near the poverty line. In contrast, independent contractors and contract company workers do not earn lower wages, on average, than regular employees.

Lack of benefits, however, is a problem for workers in all flexible staffing arrangements. Workers in flexible staffing arrangements are much less likely than regular full-time workers to participate or to be eligible to participate in a health insurance or retirement plan offered by their employer, even after controlling for worker and job characteristics. Although some of these workers are covered by health insurance from another source or set up their own tax deferred retirement account, workers in all flexible staffing arrangements are much less likely than regular employees to have health insurance or to have a pension or retirement account.

Evidence also suggests that workers in most flexible staffing arrangements have less job security than those in regular full-time positions. In particular, agency temporaries, on-call workers, direct-hire temporaries, contract company workers, as well as regular part-time employees have less job stability in the sense that they are more likely to switch employers, become unemployed, or involuntarily drop out of the labor force within a one-year period. Independent contractors, however, do not have less job security, on average, than regular full- time workers.

Training

Related to concerns over wages, benefits, and job security is concern that, without strong attachments with firms, workers in flexible staffing arrangements will not receive training they need to keep abreast of technological developments and to secure good jobs in the future. At the time of this writing, however, there was very little evidence available on this issue. One on- going study should provide valuable evidence on the extent of training provided by temporary help agencies.

Why Firms Use Flexible Staffing Arrangements

Several surveys of employers on their use of flexible staffing arrangements have been conducted. These surveys have identified key reasons why firms use flexible staffing arrangements and why they may have been increasing their use of these arrangements in recent years.

Firms have traditionally used all types of flexible staffing arrangements to accommodate fluctuations in their workload or to fill in for absences or vacancies in their regular staff. Some evidence also suggests that firms are increasing their use of temporary help and other staffing arrangements in order to increase their workforce flexibility. Arguably, firms have come under greater competitive pressure to reduce labor costs and, in response, have increasingly adopted a "just-in-time" workforce staffing strategy. Instead of overstaffing to accommodate employee absences or fluctuations in product demand, firms use agency temporaries, direct-hire temporaries, on-call workers, contract company workers, and independent contractors to meet changes in their day-to-day staffing needs.

Evidence also suggests that some firms use flexible staffing strategies to reduce wage and particularly benefit costs. Flexible staffing arrangements may be used to segment the workforce, enabling companies to offer expensive benefits to certain groups of workers but not to others. The increase in benefit costs may be one factor motivating firms to increase their use of flexible staffing arrangements.

Firms also use flexible staffing arrangements, particularly temporary help agencies, to screen workers for regular positions. Evidence indicates that screening workers is an important factor motivating some firms to increase their use of temporary help workers. Staffing agencies may have a comparative advantage in screening certain types of workers. In addition, firms may save on record keeping costs if they choose not to hire a particular worker, because the staffing agency is the employer during the period of probation. Companies may also reduce their exposure to lawsuits from dismissed employees if they instead screen workers through an employment intermediary.

Finally, employers use flexible staffing arrangements to access workers with special skills. As technology has become more complex, it is believed that firms will increasingly tap workers outside their regular workforce for their specialized knowledge.

Coverage of Workers in Flexible Staffing Arrangements by Labor Standards

Most statutes establishing benefits or standards for workers were written with the traditional employee—a full-time, permanent worker—in mind. The large and growing number in flexible staffing arrangements, however, has sparked concern that existing law is inadequate to protect these workers. A related concern is that, although businesses have many legitimate reasons for using flexible staffing arrangements, legal loopholes provide an added incentive to use these arrangements to circumvent employment and labor laws.

Whether and how workers in flexible arrangements are covered by various labor standards turns on whether they are defined as covered employees and exactly who their employer is under a particular law. For instance, independent contractors are legally self- employed; because they are not employees they are not covered by unemployment insurance, workers' compensation, ERISA, anti-discrimination laws, and other employment and labor laws. There is considerable evidence that many employers misclassify employees as independent contractors, although the IRS has sought to crack down on such misclassification in recent years. Moreover, the criteria used to determine independent contractor status are confusing and differ from statute to statute. In the absence of a single clear standard, disputes over independent contractor status are often resolved by the courts, which have ruled in conflicting ways. The Commission on the Future of Worker-Management Relations recommended simplifying and standardizing the definition of an employee in employment, labor, and related tax law to reduce confusion and stem the abuse of misclassifying workers as independent contractors.

In addition, companies allegedly have sought to circumvent employment and labor laws by hiring workers through employment intermediaries, such as temporary help agencies, contract companies, and leasing agencies. The Congress, some states, and the courts have sought to stem such abuses by making the client company the legal employer or a "joint employer" in certain circumstances. However, considerable ambiguity concerning businesses' legal obligations to workers when they are hired through employment intermediaries remains. Responding to this ambiguity, the Commission on the Future of Worker-Management Relations also recommended that a standardized definition of employer be adopted.

The use of flexible staffing arrangements also has created some problems with the enforcement of employment and labor laws. For instance, in the area of workers' compensation, reportedly many companies, especially in the construction industry, misclassify workers as independent contractors until they become injured and many temporary help and leasing agencies misclassify workers to obtain lower rates. A related problem is that some staffing agencies allegedly set up operations with a minimal number of employees for a period of time to establish low workers' compensation and unemployment insurance rates and then move large numbers of temporary or leased employees into such an operation. When the rate increases, the "company" is closed and workers are moved into another such operation.

The growing number of agency temporaries also raises important questions about the adequacy of unemployment insurance for these workers. Many temporary agency workers do not qualify to receive unemployment insurance because they have not met minimum earnings or hours thresholds. They may also be disqualified for failing to report to the temporary help agency when an assignment ends or for refusing a new assignment. Temporary help agencies are understandably concerned about stemming abuse by those who work only long enough to qualify for unemployment insurance and then file for benefits. Others, however, counter that stringent benefits requirements will trap temporary agency workers into low paying, unstable jobs.

Placing Disadvantaged Workers with Temporary Help Agencies

Some states have begun using temporary help agencies to place UI recipients, welfare recipients, and other disadvantaged workers in jobs. Whether this practice is a desirable strategy for government agencies to pursue depends on whether disadvantaged workers are more likely to find good, stable jobs by using temporary help agencies than they are by using alternative services. The research needed to answer this question--which ideally would involve conducting a random assignment controlled experiment--has not been done.

Conclusion

The circumstances facing workers in flexible staffing arrangements vary substantially by type of arrangement. Agency temporaries, on-call workers, and direct-hire temporaries are disproportionately young and female; they tend to be unhappy with their work arrangement and want a permanent job with regularly scheduled hours; and they are likely to earn low wages and come from poor families. Along with contract company workers, they experience less job stability compared to regular, full-time workers. Consistent with this finding, the major reason firms give for using these types of arrangements is to accommodate fluctuations in their workload or absences in their regular staff. In addition, firms appear to be increasing their use of these types of arrangements, in part, to increase their workforce flexibility. A trend towards a "just-in-time" workforce raises concerns about the future job stability and training of workers. It also raises policy issues about the adequacy of unemployment insurance coverage for these workers under current state laws.

Another reason that firms appear to be increasing their use of these workers, particularly agency temporaries, is to screen workers for regular jobs. This motivation for using agency temporaries carries quite different implications for workers and for policy. Policy makers are less likely to be concerned with poor compensation associated with temporary jobs if they are avenues for securing good, permanent positions. Similarly, the use of temporary help agencies to help place disadvantaged workers becomes more attractive if these positions help workers find permanent jobs. The extent to which workers, particularly disadvantaged workers, are able to secure stable employment through temporary jobs is not known and needs to be studied.

In contrast to agency temporaries, on-call workers, and direct-hire temporaries, independent contractors are disproportionately older, male, white, and more educated. They tend to be quite happy with their employment arrangement and do not, on average, earn lower wages or experience less job stability than regular full-time employees.

One issue that cuts across all flexible staffing arrangements, including independent contractors, is lack of health insurance and pension coverage. Workers in flexible staffing arrangements who are employees are much less likely to be eligible participate in an employer sponsored health insurance or retirement plan compared to regular full-time employees. Workers in all flexible staffing arrangements are also much less likely than regular full-time employees to have health insurance or a retirement plan from any source. Survey evidence suggests that savings on benefit costs is one important reason firms use flexible staffing arrangements. ERISA and anti-discrimination clauses in the IRS tax code make it difficult for firms to offer benefits to a subset of their full-time workforce. Firms may side-step these regulations by hiring more temporary and part-time (including on-call) workers directly or by hiring independent contractors, agency temporaries, and contract company workers, who are either self-employed or employees of another firm.

While some steps have been taken to curb obvious abuses involving misclassification of employees as independent contractors and use of leased employees to avoid pension benefits, there remains considerable confusion over when a worker may be legitimately classified as an independent contractor and over the responsibilities client firms have as "joint employers" of leased employees, agency temporaries, and contract company workers. These issues affect not only benefits for workers in flexible arrangements, but also their coverage under a host of other employment programs and labor standards, including workers' compensation, unemployment insurance, various anti-discrimination laws, The Family and Medical Leave Act, the Workers' Adjustment and Retraining Act, the Fair Labor Standards Act, and the National Labor Relations Act.

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