Why should a recruitment agency use a contractor management company?

Recruitment agencies around the world generally prefer not to have contractors on their payroll directly. Most commonly they will request a contractor to use a third party for payment - whether that be a management company or their own limited company. For recruiters there are a number of benefits in using contractor management companies, but there are occasions when an agency and contractor might prefer to be payrolled directly. We will run through the main factors influencing the decision as well as outline the most common scenarios showcasing the benefits of both options.

Net retention (the amount of money received after tax, social security and all fees) holds the greatest influence. All the parties involved - contractor, recruiter and client benefit from ensuring the highest possible retention for the contractor. The contractor is often the one who wants to utilise an umbrella company and this is almost always down to increasing their take home pay. Contractor Management Companies are structured for one simple purpose, to make sure that contractors get the best possibel retention. They might offer sophisticated financial structures such as salary packaging or dual taxation agreements. They can get generous expense dispensations from the tax authorities. Because of the volume of contractors being paid through their umbrella, they can negotiate cheaper rates for common contractor services like insurance, healthcare, car leasing, equipment purchase, professional memberships, etc. Recruitment companies generally are unable to offer the same benefits and retention rates.

Risk is often a factor in a recruitment agency pushing its contractors towards management companies. If the agency directly payrolls the contractor they also assume responsibility for their tax compliance. This can be an unwanted headache with the way tax authorities target contractor earnings - in some cases with retrospective legislation. To minimise the risk recruitment agencies will usually only offer extremely conservative payroll solutions with no expense reimbursements or salary packaging. Naturally this is unappealing to the contractor. Management companies take on any risk relating to tax compliance and indemnify the recruitment agency and client for any claims which may arise. By using them the recruitment agency is saving itself from any potential headaches. Most importantly if the agency isn't established in the work location - for example a UK recruiter placing contractors into Algeria - they aren't able to pay locally and must use a management company.

Cost can play a role. Because management companies operate at great scale, they are able to charge less than a recruitment agency to run a payroll. However with increasingly automated processing systems agencies are now able to deliver a payroll service quite cheaply. This is not much of a factor if the recruitment agency is large and has dedicated resources to run payroll. Smaller agencies will want to avoid this effort and push contractors towards a third party payment solution.

Time is not really a factor. Whilst it is normally quicker to get paid by a recruitment agency using an umbrella company should only add a maximum of 24 hours to the process (more if international transfers are involved). This additional processing time is typically offset by the increased earnings.

In summary recruitment agencies use contractor management companies to give their contractors the highest net returns as well as alleviating the risk and effort of payment.