URL: http://www.entrepreneur.com/magazine/entrepreneur/2004/july/71334.html

The temporary staffing sector continues to generate gains in a jobless recovery. Since last April, U.S. staffing agencies have filled at least 162,200 new temporary positions, according to the Bureau of Labor Statistics.

It's a sign of the times. "Companies are still wary of taking on new [full-time] workers," says Sophia Koropeckyj, director of West Chester, Pennsylvania, economic research firm Economy.com, which predicts the U.S. economy will produce 1.6 million new jobs in 2004.

Following the downturn of the early 1990s, companies were quick to transition temps into permanent positions. It's a management decision that seems downright quaint in today's age of outsourcing, where companies manage hiring decisions aggressively amid increasing health-care and retirement costs.

But could "temp-to-perm" make a big comeback? As a new generation of entrepreneurial companies achieves stable cash and work flows, some will weigh the pros and cons of hiring the skilled temps already working for them. Professional Staffing Group, a Boston staffing firm that places 700 temps per week, is already seeing an average of eight to 10 temp-to-perm placements per month in various industries; and that number is growing. "In December, the number [of temp-to-perm placements] got north of 20," says founder and president Aaron Green, 35. "It was quite a pickup."

Do the Math

In the past year, Greg Diamond, founder and managing partner of 4-year-old Clovis, a staffing firm in Gaithersburg, Maryland, has done more than find temps for other companies; he's transitioned 10 IT and accounting temps into long-term positions within his own company.

Diamond, 35, uses a formula to decide whether it's more cost-effective to hire a temp. First, he looks at the temp's hourly rate and multiplies it by two to calculate the relative cost of employment. Then he calculates FICA and state taxes, and looks at the future workload. In some jobs, he finds a point of diminishing returns. "A [temp] at $70 an hour is costing $140,000 a year. I could hire that person for less than $140,000, most likely," Diamond says. "[If] you start to see those dollars rack up, and you have a good fit and long-term assignments for the person, then you want to transition them as soon as possible."

But be careful how you navigate the transition process, says Rogge Dunn, labor and employment partner with law firm Clouse Dunn Hirsch LLP in Dallas. Going temp-to-perm increases head count, which could affect compliance with employment laws. Also, if the employee has been classified as a temp for more than six months¡a status referred to as "perma-temping"-he or she may have the right to retroactive benefits, including 401(k), bonuses and health coverage-back to Day One with the company.

"There's a risk they could count their time of service toward seniority and other [benefits]," says Dunn, adding that companies can get around such issues by asking the temp to take a few weeks off before starting as a regular employee. This could, however, create morale problems that outweigh the financial savings.

Employers typically pay the staffing agency a separation fee of 15 to 25 percent based on the temp's length of service and hourly rate. On the other end, they also have to negotiate a pay and benefits package with the employee-someone who will either expect to earn more or, in select positions, could be faced with earning a lower salary in exchange for a better benefits package. "The temporary employee usually earns [about] 25 percent less than they might earn in that position on a direct, full-time basis," Green says. Look at the going market rate for the position, and ask the staffing firm what salary the temp is seeking. This offers a starting point for negotiation.

Due Diligence

Create a formal hiring procedure that includes a background and credit check, and have the temp interview formally for the job. It doesn't hurt to ask staff members for input, either. "Check with other employees to make sure they want that person there," says Arlene Vernon, founder of HRx Inc., a management consulting and training firm in Eden Prairie, Minnesota. "They may be seeing things you don't."

Help the temp adjust to becoming a full-time employee after hiring. A bit of PR, like a welcome party, can help make the change official and encourage positive mind-sets toward the employee. Says Vernon, "Do something that says 'We really want you to be a part of this organization.'"

Whether temp-to-perm will ever come back as a core employment strategy remains to be seen. But there are benefits for companies that use it strategically. "A small company that has turnover [of full-time employees] sends a really bad message," says Diamond, who expects to up Clovis' 2003 sales of $1.6 million to $3 million this year. "A temp-to-perm scenario can keep the culture very positive."

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Chris Pentilla is a freelance journalist in the Chapel Hill, North Carolina, area. She can be contacted at .