The Small Biz Double-Dip: Temp Companies Got Cheap Government Money, Got Paid by Clients for the Same Workers
By Lydia DePillis, ProPublica
ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.
As millions of small businesses suffer to the point of going under, some in one industry have found a way to benefit: temp agencies.
Companies typically seek contracted temp workers because they don’t have to pay them benefits and can pick them up and let them go easily. For sudden needs brought on by COVID-19, such as conducting temperature checks and sanitizing workplaces, staffing companies can recruit, vet, hire and supply workers on a few days’ notice.
“It’s amazing, but our demand for services has just gone through the roof,” said Charles Tope, the CEO of Monterey, California-based Employnet, which works in industries ranging from health care to warehousing.
So it may come as a surprise that temp staffing companies like Employnet were among the biggest beneficiaries of small-business loans under the Paycheck Protection Program, which is designed to help hard-hit firms keep paying their employees. More than 11,000 such companies took in a total of between $3.6 billion and $7.9 billion, with about 4,600 of those getting more than $150,000 each. (So far overall, 4.9 million companies have received about $518 billion.)
And there was an oddity in the numbers: 174 claimed they saved 500 jobs each, the maximum under the law, at a rate seven times higher than the share of recipients overall that said they retained 500 jobs. Most temp companies don’t have that many people on their permanent office staff. The explanation? Many were counting workers contracted by other companies as saved jobs, according to lenders, industry experts and staffing companies themselves.
That means many temp companies were able to double dip, getting paid twice for the same worker, once by the client and then again by taxpayers. Employers were allowed to claim loan amounts of 2.5 times their average monthly payroll in 2019. The loans become grants if companies spent most of the money on salaries and the rest on other specified expenditures. Because temps are technically a staffing company’s employees even though they’re working for someone else, the staffing company can claim forgiveness for all the wages they’re paid.
The program is administered by the Small Business Administration, which in early July released data showing loans of more than $150,000 in five ranges. Employnet got a loan of between $5 million and $10 million, the highest bracket, while bringing on 3,500 new workers on client accounts, Tope said. For its part, Employnet claimed it used the cash to save 490 jobs. Tope did not respond to questions about why it needed the PPP assistance.
The temp staffing double dip appears to be legal. “Staffing agencies are considered common law employers of the temporary and contract workers they assign to clients under long-standing IRS guidance and court rulings,” said Edward Lenz, senior counsel for the American Staffing Association. “Hence, they are employers for PPP purposes, just as they are for purposes of the Affordable Care Act’s health insurance mandate and many other laws.”
But it raises a concern that government money did not help to preserve jobs that were going to be lost, since the temps were going to be employed anyway.
“What you don’t want to be doing is giving public money to companies that are doing what they were already going to do,” said David Weil, dean of the Heller School for Social Policy and Management at Brandeis University and former head of the Labor Department’s Wage and Hour Division.
Many temps don’t even know their employers got PPP loans. A worker employed by JM Staffing Solutions in New Brunswick, New Jersey, who asked for anonymity because she feared retaliation for speaking out, has been working full time throughout the pandemic at a laboratory putting labels on COVID tests. Although she said that workers are provided with adequate personal protective equipment, many had still gotten sick with the virus, and had not received sick leave as required by New Jersey law.
“We didn’t know anything about it, so maybe they’re keeping it to themselves,” said the worker, about the $2 million to $5 million JM Staffing had received. JM Staffing did not respond to a request for comment.
What’s more, the number of companies getting loans forgiven for temps that were still working may be larger than it appears. Because of anomalies in the data, some companies that don’t show up in the SBA’s database as having claimed the maximum 500 employees may still have their loans forgiven after paying temps who were still bringing in revenue.
The SBA shows Hicksville, New York-based Homecare Therapies LLC as taking a $5 million to $10 million loan and retaining just one job. Reached by email, however, President David Grossman said that’s not right. “We are only using it to pay our 400+ temps working for multiple clients,” he said.
The PPP was among the most generous of programs for businesses in the CARES Act. Loan programs for medium and large businesses spelled out in the bill generally were not forgivable. The program, which still has about $130 billion unspent, has helped float millions of businesses through an existentially threatening time, allowing them to keep workers employed even as workplaces shut down and customers dried up.
However, appraisals of the PPP by economists and policymakers have been mixed: While the program did inject hundreds of billions into the economy, it did not do so efficiently, often sending aid where it was less needed. The loans went through banks, which meant well-connected businesses had a far easier time getting their share.
The government designed and moved quickly on the PPP because many small businesses have less access to capital than medium and large businesses. But temp staffing companies, even small ones, are anomalous: They have access to financing through factoring companies, which advance the cash for payroll until the client pays its bills. Factors have lost business lately, since staffing companies are flush with cash from the SBA.
“It’s free money,” said Larry Holstein, who runs a staffing-focused factoring company called TemPay.
He broke down how the math works for a staffing company. Say a firm bills its client $15 an hour and pays the temp $10 an hour, including contributions for health insurance and retirement accounts. Its costs for the employee (such as taxes) are $2 an hour before other expenses, like rent. So the margin is $3.
But with the PPP, the company gets an extra $10 to fill the hole of the temp worker’s salary. So now the profits before overhead rise to $13 an hour per temp.
Not all temp staffing companies are thriving, especially those that serve the retail and hospitality industries. According to the Bureau of Labor Statistics, employment in the staffing industry plunged nearly 30% in April, wiping out 840,000 jobs (though many of those were part time).
Given the economic fallout, the American Staffing Association argued for more help, paying $80,000 in the second quarter to the high-powered lobbying firm Squire Patton Boggs to press its case. As discussions were underway for industry-specific bailouts in the CARES Act, the staffing association asked for $35 billion.
“We need to be treated like the airlines and have our own recognition and carve-out,” said Patton Boggs’ Jack Kingston, a former member of Congress from Georgia, on a webinar with association members in early April. (The lobbyists also relayed their dismay with Congress’ action to grant $600 per week in extra unemployment insurance, fretting that it would prevent workers from coming back to their jobs.)
The ASA then argued that while staffing companies should be able to use temps to calculate their loan amount, they should not be penalized if they fail to retain those temps. “Staffing firms have no control over the size of their temporary workforces — reductions in temporary workers are solely determined by clients,” wrote ASA’s general counsel Stephen Dwyer in a comment on the PPP regulation. “Accordingly, we request that, solely for purposes of loan forgiveness, staffing firms be allowed to exclude the temporary workers they assign to clients in calculating reductions in their headcount or wages.”
Staffing companies could pass the money on to temps who were not placed with clients, which would fulfill the aim of the program. And some appear to have done so, including Herb Dew, who runs Greenville, South Carolina-based Human Technologies Inc., whose revenue fell 75%. His model is keeping longer-term “temps,” so he used his $5 million to $10 million PPP check to bridge their salaries until the factories where most of them work reopened. “Our priorities were retention of employees, benefits continuation and then managing unemployment claims for employees so we didn’t lose them,” Dew said.
But Dew’s company is likely an outlier, experts said.
“I have had conversations about the possibility of staffing firms maintaining temp staff on their payrolls but am not aware of any circumstances where that has actually been the case,” said Fiona Coombe, director of legal and regulatory research at the research firm Staffing Industry Analysts.
Labor organizers also find it implausible that staffing agencies are keeping temps on payroll even with no jobs for them to do.
“In hundreds of personal contacts, interviews and surveys with temp workers focused on coronavirus, I’ve never heard of a temp getting paid to not work,” said Dave DeSario, the director of the nonprofit advocacy group Temp Worker Justice. “I figured if the staffing industry had any defense, it would be that the PPP was used to pay internal staff. But those numbers are so small compared to temps that these loan amounts make no sense.”
The SBA’s rules also favored temp agencies in another way. For most industries, companies qualified for the PPP loans by having fewer than 500 employees. But since most staffing agencies have far more than 500 temps on payroll at any given time, they benefited from the SBA’s alternative standard: Having a tangible net worth of less than $15 million and making less than $5 million in net income. Since staffing companies usually have little in the way of fixed assets or intellectual property, a company with thousands of temps can still be worth not very much on paper. The result: Some very large temp businesses appear to have made the cut.
Monroe Staffing Services and Key Resources Inc. both got loans for between $5 million and $10 million. They’re both subsidiaries of Staffing 360 Solutions, a Nasdaq-traded company that brought in $260 million in revenue in 2019 across the U.S. and the United Kingdom. Its head of U.S. staffing, Paul Polito, did not respond to a request for comment.
At least seven franchisees of ManpowerGroup, the third-largest staffing company in the world, received multimillion dollar loans. A spokeswoman for ManpowerGroup, Emma Almond, said that the franchisees are independently owned and operated and thus eligible to apply for the loans, and that “any funds received by franchises remain with that local entity.”
However, Manpower is not on the SBA’s list of franchises eligible for small business aid, and Almond did not respond to an inquiry as to why, nor did the franchisees respond to questions about their loans.
Filed under:
