How the Recruiting “Game” Works


Check out this question:

I see you have written about recruiting in the past. I was recently offered a job for $45 an hour as an ASP.NET developer. As I have never contracted before, I am not sure if the recruiter is taking advantage of me. Are they treating me fare or is this a raw deal?

The short answer: I can’t tell you if the rate is fare, or even if it is fair. 🙂 What I can do is tell you how the recruiting business works and you can run the numbers yourself. I can also give you an idea of what the current rates are here in Nashville.

Business 101

All businesses are in business to make money. Whether a company sells meals, insurance plans, widgets or even warm bodies (perhaps knowledgeable workers is a better word here?), they have to make money to stay in business. The amount they make is generally calculated in percentages and called a profit margin. This is true of the recruiting firm as much as it is of the company you are contracting or consulting at.

Allow me a little aside. When I say contracting in this post, I mean you are there to code, do business requirements, etc. As a contractor, your position is not to advise the business as much as sit down and get to work. When I say consulting, it is a subset of contracting where part of the contractor’s value is being able to advise the business to improve their business and not simply code new software. There is a very grey area and contractors, hired as contractors, can often add value by consulting. In general, if you are just starting your career, you are what I would call a contractor and not a consultant.

Back to the point, all businesses have to have more money coming in (income) than going out (expenses) in order to survive. Employees and contractors are their primary expenses, percentage wise, but they also have bad debts (companies that stopped paying for contracting services, etc) as well as utility expenses and rent. If more is coming in that out, they are making a profit. If less, they are probably out of business (although short periods in the red will not kill most companies).

Recruiting 101

The recruiting company has two basic roles. There is an account manager, who is responsible for getting the contract (or working with the business that needs work done) and a recruiter, who deals with the talent. The account manager is the one that gets the company to agree to pay X dollars an hour for talent at a certain level and the recruiter finds the talent.

The way the money works is the recruiting company gets X dollars and pays you Y dollars out of that X. The number of dollars you are paid is determined by your deal with the company. The deal is based on a percentage the company feels it needs to make to make a profit plus anything else they can negotiate. Your rate is determined by a bunch of factors, some of which are easily quantifiable (Joe is W2, so we have to pay a portion of his FICA) and others are not (Joe has a reputation of not finishing contracts, we have lots of contractors at the business, etc.).

What is a fair rate? This is a hard subject to put an exact number on. I can name some examples of unfair rates, however.

  • It is unfair for a recruiting company to charge $100 and hour and pay you $20
  • It is unfair for a subcontracting company to take $20 per hour and then tell you it is a 10-99 contract

I will hit these later.

How the Money Works

Let’s take an example. Do not take these numbers as gospel, however, as different companies have different overhead, etc. These are just a guideline of how the money works and nothing more.

Tech Talent LLC gets a contract with Sudoku Inc. at $75 an hour. They then try to get talent. There are three basic ways they structure the deal:

  • Corp-to-Corp: A company subcontracts the position or the contractor is incorporated and has liability insurance
  • 1099: Contractor is not considered an employee, but is normally covered by their liability insurance
  • W2: Contractor is, for tax purposes, considered an hourly employee of the recruiting firm

There are also other items that can be negotiated like retention bonus (complete full contract), vacation, sick days, holidays, benefits, 401K, etc. Not every recruiting company will be able to offer all of the varieties of possible extras, so these items are negotiated on a case by case basis.

Let’s look at some sample numbers:

paid to recruiting firm                                           $75.00
taken off the top for expenses   (10%)       $7.50     $67.50   – sample corp to corp rate
Liability adjustment (2%)                           $1.50     $66.00  – sample 1099 rate
W2 expenses (10%)                                  $7.50     $58.50  – sample W2 rate
Vacation (2 weeks per annum)                   $4.00     $54.50  – sample W2 rate with vacation
Paid Holidays                                           $2.00     $52.50  – sample W2 rate with vacation and holidays

These sample rates are actually fairly accurate for some companies and represent an okay level of “fairness”. The markup on W2, in this example, is 28% ($75 is 128% of $58.50). While I did not completely plan it out, 28% is the “minimum” acceptable rate for at least one of the major recruiting firms I know. I have seen companies with lower overhead that have even dropped down in the 15-20% markup range. I have even had one contract where the recruiting firm lost money on my deal every time I worked overtime (it was in the original contract and it was a government contract, so they had to honor overtime)*.

* The reason they agreed is I was available quickly and they were up for vendor status (only 3 vendors are allowed to bid on their contracts). Better to lose money on one contract than lose all of the business.

What else can alter this rate?

  • The recruiting company offers insurance: lower rate
  • The recruiting company offers insurance that is partially paid by the recruiting company: lower rate
  • The recruiting company has a 401K: lower rate
  • The recruiting company offers 401K matching of some sort: lower rate
  • The contractor has a great reputation: higher rate
  • The recruiting company has numerous contractors at a single location and is in danger of losing them if they don’t fill this position: : higher rate
  • The contractor is offered a bonus for completing the contract: : higher rate
  • The contractor gets paid overtime at a higher rate: lower rate
  • The contractor has guaranteed bench time: lower rate

The bottom line is the recruiter will determine the deal based on money coming in, the expenses going out and the profit they wish to make. Any time you ask for something, expect the reduction in rate to equal the amount per hour it cost the recruiting company, plus a bit more. A bit more? Now that sounds unfair? Perhaps it is, but the reality is certain extra payments get paid out before they are accrued. As an example, if you take a contract in December (unusual, but it can happen), chances are the recruiting company will have to pay you at least 16 hours (Christmas and New Years) in the first few weeks, which puts them in the red. To recoup these situations, they take a bit more than the “fair” exchange for the risk they are taking on.

What is fair? What ultimately is fair is what you feel is fair and what the recruiting company thinks is fair. If they can get you for $60 an hour and another person for $50 an hour, guess who does not have a job. This is not completely true, as once you develop your reputation, they may want you in there and be willing to pay more (generally not $10 an hour more, and certainly not $10 an hour or more based on our original sample numbers.

You are not supposed to find out what the recruiting company is being paid, but I have found you do from time to time. Here is my feelings on that. If you find out the company is billing you out at $85 and hour and paying you $35, then you have two choices: quit or stay.  I think a recruiting company (note I am not talking a full time consulting company where you are a full time employee with bench time) that takes the lion’s share of the pool is screwing you.

What should you do if they are screwing you? This is your choice. The only options, right now, are leave or stick it out. Of the two, stick it out is generally smarter, lest you get a reputation of leaving in the middle of contracts. How bad leaving a contract is depends on your skillset, general reputation, etc. If you are new to programming, it could be a really bad career move to walk before a contract is over. Just remember when you signed the contract you agreed to be screwed. Chock it up to experience and move on. You probably want to mark down that company as someone you don’t want to work with again.

This is not 100% accurate, as you have to consider your reputation. If you have a reputation of leaving contracts, you will find it harder to get work. You have to consider that in the mix.

Some Variations on the Story (Recruiters Screwing Contractors)

let me ramble a bit (the story does lead back into how recruiters ARE screwing contractors). If you want to skip the back story and get to the “variation”, skip the parts that are italicized.

About two months ago, I got a call from a recruiter that wanted to beat me up over the phone. I, of course, hung up on him. The details of the story are located in the blog entry 7 Things Recruiters Do That Irritate Me. Here is the short version:

Phone rings – Ignore
Phone rings – Ignore
Phone rings – Ignore
Phone rings – Ignore
Phone rings – Ignore
Phone rings – Ignore

When my phone was dialed the seventh time in a row, I thought “It is a Michigan number, maybe it is Dale and he needs help”. Here is the basic gist of the conversation:

Recruiter: Hello Gregory Beamer
Me: Is my house on fire?
Recruiter: I do not understand your query.
Me: If my house is not on fire, you have no reason to call me seven times in a row.
Recruiter: I have a very important job you must listen to.
Me: Send me an email.
Recruiter: No, you must listen now.
Me: I am hanging up now (click)

I then got three emails (one each for Dice, Monster and Career Builder) in my inbox. Now to “the variation”. The position was advertised at $35 an hour 1099 in his email. I recognized the company and compared reqs to other reqs out there to be sure. I then called a recruiter friend and asked what the rate was for the particular position. The answer was “I would say $55-60. You could easily get the $60 with your reputation”.

What is happening here?

There are a group of companies out there who do not have what we would traditionally call account reps. Instead they call every company that has a position on the Internet job boards asking if they can represent the position. If it is a real company, they want to be the recruiting company. If it is a recruiting company, they want to subcontract.

Here is where they screw you. The company that got the req is going to be paid $75. They pay this company $67.50. This company then advertises the position at $35. Here is the breakdown.

Paid from company                            $75.00
Amount paid to original company       $  7.50
Amount paid to contractor (1099)       $35.00
Amount for subcontracting company   $32.50

What this amounts to is highway robbery. The company that did the least amount of work gets almost half the profit. I am all for capitalism, so i don’t see a need for a law, but this is ridiculous. i know of contractors that will not even talk to anyone with the last name of Patel, as it is primarily the East Indian companies that are attempting to subcontract in this manner. I also know recruiting firms that will not deal with these guys, as they don’t want their own reputation soiled by being the top company on the list in these types of deals.

Back to “Fair”

The person asking about a “fair” rate was probably being offered something I would consider fair. I can only answer for Nashville.

The majority of contracts here are in the $40 – $45 range now. They are primarily mid-level skillset. Last year, it was possible to get $50 for the same mid-level type of job, but the “economic downturn” has hit. I have personally been able to keep in the $55 to $60 range. Anything in these ranges is probably fair, but there is nothing wrong with attempting to negotiate a better deal.

Final Notes

I have quite a few friends that are recruiters. And, in the past, I have only had one deal that I felt I was completely screwed over on (my first) and I finished that contract and did not renew when I was asked if I wanted to go for another stint (I moved on for close to double the money). I have been around long enough I can generally smell a rat and $40 1099 when the prevailing rate is $40 W2 is a sign something is probably up. When the position is senior enough to warrant $60 and they are offering $35, it is either a clueless company or someone is trying to make a huge amount of money off of me.

The first question of fair or not is how you feel about the rate. If you feel good, then it is a good rate. if you don’t, you can either negotiate the rate or refuse the position. The second question is what the market is paying. If the rate is good for you, but much lower than market, you should at least question. It could well be a company that cannot afford the normal rates.

Peace and Grace,
Greg

Twitter: @gbworld

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