Why state the obvious? Because many agencies bill freelance and temporary labor to their clients at fully-loaded contract rates, rather than on a pass-through basis, net of any mark-up.
This is simply not an appropriate practice, unless the client is fully aware and understands the cost differential between a full-time employee and an independent resource.
There are no issues with using freelancers and temps to flex agency staffing to meet fluctuating work levels, backfill for an employee on an extended absence or to access someone with a specific skill set. This is a common and acceptable practice which makes good sense. However, it is also an area often marked by a lack of transparency and, dependent upon agency/client agreement language, the application of unauthorized mark-ups by agency financial teams.
In many, if not most instances, agencies do not inform their clients as to which service team members are freelancers or temps. Our experiences show rather than being identified as freelancers, they are often assigned agency job titles and classified as full-time employees in time tracking reports and fee reconciliations.
Unfortunately, what tends to happen, particularly with direct-labor-based remuneration agreements, is that these individuals are routinely billed out at negotiated contract rates, just the same as the agency’s full-time employees would be.
Without performing comprehensive contract compliance and financial management audits or diligently validating adherence to agreement language already in place, this practice is typically left unabated. Our viewpoint is that unless specifically authorized by a client, billings for freelance and temporary employees should reflect the actual net cost invoiced to the agency. Even if costs are billed at net, agencies are still being compensated for the additional time incurred by full-time employees to procure, educate and supervise these non-employees.
Further support for this position is that agencies simply do not incur the same costs for freelancers and temps as they do for full-time employees. For example,
- Freelancers do not participate in agency benefit plans such as health insurance, profit sharing or 401K matching. Nor are they paid for holidays, personal comp or vacation time.
- Agencies seldomly provide onsite workspace at their offices.
- Agencies bear no cost in training and or career development.
Net, net, freelancers and temps are third-party suppliers. Inferences that charging freelance at full contract rates is an “Industry Standard” or should be considered “fair” is simply not supportable.
This is a profitable endeavor for agencies, one that can yield extraordinary margins. Consider a scenario where an agency pays a freelancer $100 per hour for their services, then charges that time at a contract rate of $150 per hour. This practice would net the agency a 50% mark-up!
Over the years, we have not had a single client who knowingly allowed subcontractors, of any type, to be charged in this manner. Contract language often dictates and or clients usually expect that these charges are being billed on a pass-through basis. At times, we have seen instances where an allowance has been granted for a modest mark-up on freelance cost (e.g. 10% to 15%) to offset the administrative cost of engaging such individuals or for processing them through their payroll system to cover costs such as FICA. Beyond this, agencies really don’t have a basis for applying fully-loaded rates.
For advertisers, this is a worthwhile conversation to have with their agency partners to determine current practices and to reinforce expectations on a go-forward basis.