An employment agency works by recruiting, screening, and placing workers with client companies that need staff, with the client paying the agency’s fees and the job seeker paying nothing. Depending on the arrangement, the agency may stay on as the worker’s official employer — handling payroll, taxes, and insurance — or simply hand the new hire over to the client on day one. How does an employment agency work in practice? The answer depends almost entirely on which hiring model the agency and its client have chosen.
The Three Main Hiring Models
Temporary Staffing
In a temporary staffing arrangement, the agency is the official employer of record. It recruits the worker and places them at a client’s site, but it stays responsible for payroll, tax withholding, workers’ compensation insurance, and unemployment insurance contributions.1U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act The worker performs day-to-day tasks under the client’s supervision, but the back-office employment obligations sit with the agency. Assignments can run anywhere from a single day to a year or more.
Temp-to-Hire
A temp-to-hire arrangement is a trial period, usually 30, 60, or 90 days, during which the company and the worker size each other up. While the trial runs, the worker stays on the agency’s payroll. If both sides are satisfied at the end, the worker moves onto the client’s payroll as a permanent employee, and the client typically pays the agency a conversion fee to finalize the transfer.
Direct Hire
With direct hire, sometimes called permanent placement, the agency recruits and screens candidates but the person joins the client company as a full-time employee from day one. The agency’s involvement ends once the placement is made and the fee is paid. Placement fees generally run 15 to 25 percent of the new employee’s first-year salary, with 20 percent the most common rate. This model is typical for mid-level and senior roles where a bad hire would be especially costly.
Retained vs. Contingency Search
Within direct hire, agencies work under one of two payment structures. In a contingency search, the agency collects a fee only after a candidate is successfully placed. There is no upfront cost, and the client can run several agencies at once. In a retained search, the client pays a retainer upfront and works exclusively with one agency. The total fee is usually split into three installments tied to time or search milestones. Retained searches are more common for executive and senior-level roles where confidentiality and deeper vetting matter.
Who Pays and How Much
In nearly every professional setting, the client company pays for staffing services. The job seeker pays nothing. Many states specifically prohibit or restrict agencies from charging fees to applicants, though the rules vary. If an agency asks you to pay a fee upfront as a job seeker, treat that as a serious red flag and investigate before going further.
For temporary placements, the agency’s revenue comes from the spread between the bill rate (what the client pays per hour) and the pay rate (what the worker receives per hour). This markup is usually 25 to 40 percent of the worker’s pay rate for standard roles and can climb higher for specialized, high-risk, or hard-to-fill positions. The markup covers employer-side Social Security and Medicare taxes, workers’ compensation premiums, unemployment insurance, administrative costs, and the agency’s margin.
When a client wants to convert a temp into a permanent employee before the contract ends, the agency charges a conversion fee, sometimes called a buyout fee. Conversion fees commonly run 8 to 15 percent of the worker’s projected annual salary, or a flat amount, depending on the contract. Most staffing agreements include a clause requiring this fee if the client hires the worker directly rather than going through the agency.
What the Process Looks Like for a Job Seeker
Screening and Intake
Before an agency puts you in front of a client, it does its own vetting. Expect to submit a current resume, provide professional references, and sit for a screening interview with a recruiter. The recruiter uses that meeting to understand your skills, availability, and the kind of environment that suits you. Agencies invest in this step because high turnover damages their reputation with clients, so they want matches that stick.
Employment Documentation
Two forms are required before you can start working. Form I-9 verifies your identity and legal authorization to work in the United States. You must present original documents — a passport, or a driver’s license paired with a Social Security card, for example — within three business days of your start date. Submitting fraudulent documents is a federal crime and can carry prison time, along with separate civil penalties under federal immigration law.2U.S. Citizenship and Immigration Services. Penalties for Prohibited Practices3GovInfo. 8 U.S. Code 1324c – Penalties for Document Fraud
You will also complete Form W-4 so the agency can withhold the right amount of federal income tax from each paycheck.4Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate Getting the W-4 right from the start avoids surprises at tax time and delays with your first check.
Background Checks
Most agencies run a background check, and sometimes a drug screening, before clearing you for an assignment. These are typically handled by a third-party consumer reporting company. Under the Fair Credit Reporting Act, the agency must give you a written disclosure — in a standalone document — that a background check may be obtained, and you must authorize it in writing before it is run.5Office of the Law Revision Counsel. 15 U.S. Code 1681b – Permissible Purposes of Consumer Reports
If something in the report causes the agency to reconsider, federal law requires a two-step notice process. First, before a final decision, the agency must send you a pre-adverse action notice with a copy of the report and a summary of your rights so you can dispute errors. If the agency then decides not to move forward, it must send a final adverse action notice identifying the reporting company, stating that the reporting company did not make the hiring decision, and telling you that you can request a free copy of the report within 60 days and dispute any inaccuracies.6Federal Trade Commission. Using Consumer Reports: What Employers Need to Know
Placement, Timesheets, and Pay
Once your paperwork is done, the agency sends your profile to matching client opportunities. If a client is interested, the agency sets up a formal interview between you and the hiring manager, then relays feedback and negotiates the pay rate, start date, and assignment length.
After you accept and start working, you track your hours each week through a web portal or a paper timesheet signed by a client supervisor. Those records drive your pay and your overtime eligibility, so accuracy matters. Once the client approves the hours, the agency runs payroll and pays you by direct deposit or pay card, and it handles the tax filings — Social Security, Medicare, and income tax withholding — on your behalf.
Your Rights as an Agency Worker
Wages and Overtime
If you work through a staffing agency, you get the same basic wage protections as any other employee. The Fair Labor Standards Act requires your employer — the agency — to pay you for every hour you work, whether or not the client has paid the agency’s invoice.7Employer.gov. Pay for All Hours Worked The agency cannot legally withhold or delay your wages because of a billing dispute.
Overtime applies too. Under federal law, non-exempt workers must receive at least one and a half times their regular pay rate for any hours over 40 in a single workweek.8Office of the Law Revision Counsel. 29 U.S. Code 206 – Minimum Wage The agency has to calculate and pay overtime correctly, even when the extra hours were worked at the client’s direction. Violations can trigger back-pay awards, penalties, and Department of Labor lawsuits.1U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act
Joint Employer Liability
Under the FLSA, both the agency and the client company can be joint employers, meaning they share legal responsibility for wage and hour compliance. The Department of Labor uses a four-factor test that looks at whether the client hires or fires the worker, controls the work schedule or conditions, sets the rate and method of pay, and maintains employment records.9Federal Register. Joint Employer Status Under the Fair Labor Standards Act No single factor decides it. What matters is how much control the client actually exercises. For workers, joint employer status adds a layer of protection: if the agency can’t pay, the client may also be on the hook.
Workplace Safety
Agencies and client companies are joint employers for workplace safety too, and OSHA has been explicit that both must work together on health and safety requirements, and that both can be cited for violations.10Occupational Safety and Health Administration. Protecting Temporary Workers In practice, the agency provides general safety training and confirms that the host employer has met its safety obligations. The host handles site-specific training on the actual equipment, processes, and hazards the worker will encounter, because it knows its own facility.11Occupational Safety and Health Administration. Safety and Health Training – Temporary Worker Initiative Bulletin No. 4 All training must be completed before the assignment starts and delivered in a language the worker understands. If a temporary worker is injured, the host employer that supervises them records the injury on its OSHA 300 Log, and the two employers coordinate so it is recorded only once.12Occupational Safety and Health Administration. 29 CFR 1904.31 – Covered Employees
Health Insurance and Retirement
Staffing agencies large enough to qualify as Applicable Large Employers under the Affordable Care Act — those averaging at least 50 full-time employees, counting full-time equivalents, in the prior year — must offer affordable health coverage that meets minimum value standards to their full-time workers, or face a penalty if a full-time employee gets a marketplace premium tax credit.13Internal Revenue Service. Employer Shared Responsibility Provisions
For retirement plans, federal law lets employers exclude part-time employees who work fewer than 1,000 hours a year.14U.S. Department of Labor. FAQs About Retirement Plans and ERISA Many temp assignments don’t reach that threshold. If you have worked steadily through the same agency for a long stretch, ask whether you have accrued enough hours to qualify for any health or retirement benefits it offers.
Licensing and Bonding
Most states require employment agencies to hold a license, and many also require a surety bond. Bond amounts vary by state and agency type, from a few thousand dollars up to much larger amounts for specialized agencies such as those placing entertainers or models. Annual licensing fees vary too. These requirements protect workers: if an agency fails to pay wages or breaks state labor laws, the bond is a financial backstop workers can claim against. Before signing on with any agency, you can check with your state’s department of labor to confirm it holds a current license.