Managing risk in a staffing agency

Staffing, as with every industry, has its own unique risks that owners and managers must manage. These range from customer credit to contracts and agreements, which must be controlled to avoid potential penalties.

Credit

With recourse factoring, the type of factoring most payroll factors — including TemPay — provide, the staffing firm assumes the risk and losses for unpaid invoices. Staffing firms must ensure that their customers are creditworthy and able to pay their invoices in a timely fashion.

Improper credit management can result in penalties, affecting a staffing firm’s cash flow and damaging customer rapport.

To prevent credit problems, a staffing firm’s factor should provide Dun & Bradstreet credit reports and 24/7 credit monitoring to ensure it is doing business with creditworthy customers.

Cash flow

Cash flow is a major issue for staffing firms, which must pay temporary employees and vendors weekly while waiting 30, 45, 60 or even 90 days for client payment.

It is especially important to mitigate this risk at a staffing agency when starting a business or preparing for a period of growth, as firms can easily find themselves in a situation in which they need money they don’t have.

To solve this problem, many staffing firms choose payroll factoring, in which they sell accounts receivable invoices to the factor for a fee and receive cash up front to pay employees, vendors and other obligations. In addition, staffing firms should establish clear payment terms with their clients, be proactive about payment and create a cash flow plan that outlines weekly and monthly cash flow, which determines the firm’s cash flow trends and allows it to plan accordingly.

Workers’ comp

One of the largest staffing firm expenses is workers’ compensation, which protects the firm in the event of an employee injury by providing wages and medical benefits in exchange for the right to sue for negligence.

In most states, temporary employees are employees of the staffing firm, not of the client, so the staffing firm is responsible for injuries and disability costs, which vary depending on the industry and its specific risks. Most staffing firms receive workers’ comp insurance through an insurance company; however, some states, such as Ohio, handle it at the state level. To determine state rules and regulations, visit workerscompensation.com.

Staffing firms that are unable to receive workers’ comp directly can go through a professional employer of record, a third party that manages human resources aspects such as workers’ comp and payroll for employers.

Without workers’ comp coverage, staffing firms are at risk in the event of an employee injury and could face penalties from their state for failure to maintain coverage. To reduce work-related injuries and minimize premiums, staffing firms should screen employees through drug testing, background checks and prior injury history and should ensure that employees are properly trained and provided with the necessary safety equipment.

Contracts and agreements

Documentation is key, and contracts and agreements are a legal requirement for business that should protect both the firm and its employees.

In client contracts, staffing firms should include payment details and due dates, as well as a confidentiality clause in which the firm agrees not to disclose trade practices that temporary employees may learn on the job. The contract should also include a reciprocating confidentiality clause in which the client agrees not to disclose the firm’s trade practices.

A contingency clause is also necessary, as it ensures that the client won’t hire the firm’s temporary employees within a certain time period unless the client pays an additional fee.

For in-house employees, noncompete agreements prevent employees from both starting a competing business and from working for a competitor within a certain time and/or geographic area. These agreements can be complicated, as enforcement depends on specific court interpretation, so they should be as narrow as possible. Before implementing such agreements, firms should consult legal counsel to ensure the agreement will hold up in court.