Getting a job through a temp agency might seem like you are being ripped off because the temp agency takes part of the money that the company is paying for your services. However, because of the way the contract is set up, the money isn't really taken from your pay, but rather is a fee that the company pays the temp agency.
After settling on an hourly rate that the company is willing to pay the employee, the temp agency adds a markup to this amount. The markup ranges anywhere from 25 percent to 100 percent, depending on the agency and how much demand there is for the employee. For example, if a company agrees with the temp agency that the employee will be paid $12 per hour and there is a 45 percent markup, the temp agency will pay $12 times 1.45, or $17.40 per hour.
Purpose of Markup
The markup is the main way for the temp agency to earn money. However, even before then, part of the markup is used for paying the employer's portion of the Social Security and Medicare taxes, worker's compensation insurance and unemployment insurance. The remainder of the markup goes toward paying for the temp agency's ongoing office costs and the salaries of the people who work at the temp agency and screen potential employees.
Comparison to Direct Pay
In many cases, employees would not be earning a higher hourly rate if they worked directly for the company instead of for the temp agency. This is because the money that the company is paying the temp agency as a markup would instead go into advertising the position, evaluating candidates, hiring the employee, paying taxes and insurance and managing the employee's payroll long-term. However, the one perk the employee would get when working directly for the company is access to benefits, which temp agencies usually do not provide.
Employees who work through a temp agency will have standard paycheck withholding, just like with any other job. For example, all employees have money deducted from their paychecks for federal Social Security and Medicare. If employees would like, they can also have federal and state income tax withheld from their paychecks through the temp agency so they are less likely to owe income tax when they file next year. These are not temp agency fees, but government withholding.