Whether you’re considering working with a recruitment agency to find your next role, or if you’re a business looking to hire a new member of your team, you may be wondering how recruitment agencies make money.
After all, recruitment and hiring isn’t cheap: It costs time, money, effort, and company resources.
So what fees do recruitment agencies charge? How much do they charge? And who pays them? We’ll be answering all these questions and more…
Do Recruitment Agencies Charge a Fee?
Here in the UK, recruitment agencies charge a fee to the businesses they work with, and never to the individuals and candidates that they place into a job. The employers pay all recruiting costs, and it is illegal to charge candidates for recruitment services.
How much a business pays a recruitment agency will vary depending on the percentage fee that was agreed upon at the beginning of the partnership.
These fees are usually negotiable, and will depend on a variety of factors such as urgency to hire, the specific role that needs to be filled and the job industry.
But if you’re a job seeker looking for a new role, a recruiter should never ask you for any fee or payment as the business they find you a job with will pay them.
If you are a job seeker looking for a new role, you can read our blog here for a more complete overview of what it’s like to work with a recruitment agency and how they can support you through your job search.
How Much Does Recruitment Cost on Average?
The cost of recruitment depends on the type of recruitment and recruitment agency you use.
Typically, the fee that a recruitment agency charges is percentage based on the first year salary of the candidate placed. This can be anywhere between 15% and 40% depending on a wide variety of factors such as:
- The type of recruitment used (contingency, retained, etc.).
- How urgent the hiring needs are.
- The industry the business works in.
- The specific role they are hiring for.
- The quality of the agency that the business works with.
- The geographical location of the business.
- And the level and length of service the business needs from the agency.
So let’s say that you are a business that agrees to a 30% placement fee with a recruitment agency.
You hire a candidate for a role and pay them £60,000 for the first year of their employment. The fee that you would pay the recruitment agency would be 30%: £18,000.
The Different Types of Recruitment
The main forms of permanent recruitment that we’ll be looking at today are contingency based, exclusive, retained and managed service.
If your business is looking to hire a temporary, contract, or freelancer, the fee you pay would be slightly different.
Contingency Based Recruitment
Contingency based recruitment is the most common type of recruitment. With contingency recruitment, an agency is only paid when they successfully fill a position.
A business gives a job vacancy to one or multiple agencies. The agencies from that point on are in a race to find a candidate that is suitable for the position in the quickest amount of time and quicker than the competition.
Contingency Recruitment Fees
Contingency based recruitment fees can range anywhere between 10% and 40% of the first-year salary of the candidate that is placed: Reaching the higher thresholds for those urgent or difficult-to-fill positions where a business needs to have someone in as soon as possible.
Which means it’s always in the recruiter’s best interest to get the job seekers as high a salary as possible.
Problems with Contingency Based Recruitment
Because an agency is on a clock, they may not be able to dedicate the time they would to finding the best possible candidate for the role that they would like to: Although this does result in quicker hires than the majority of permanent recruitment options.
This is a variation of contingency based recruitment where the business offers the role to only one recruitment agency on an exclusive basis.
This can result in a stronger, but slower placement. When businesses only have one agency working with them, they won’t receive the same volume of candidates for a role.
However, this can also result in better quality candidates. As agencies can dedicate longer to finding the best possible candidate for a role, without the time pressure that comes from the competitive nature of contingency recruitment.
Exclusive Recruitment Fees
When a role is given to an agency on an exclusive basis, the agency will typically offer a higher level-of-service in return for the increased commitment from the business.
Exclusive recruitment typically costs a similar amount to contingency recruitment, but comes with the benefit of higher quality candidates.
Problems with Exclusive Recruitment
Exclusive recruitment can be slower than contingency based recruitment, as a business will only have one agency working on the role instead of multiple. This can mean a longer time-to-hire.
But this is also a bonus, because the agency will have longer to spend finding someone who is a better fit for the role, instead of sending the best candidate they can find in the quickest time.
And recruitment agencies typically offer a higher level or service to those who will work with them on an exclusive recruitment basis, with more time and resources dedicated to filling the role.
Retained recruitment is a different form of exclusive recruitment, where an agency pays the recruitment agency fees at various stages through the recruitment process, instead of just at the end.
One of the advantages of retained recruitment is it generally leads to better placements and better-quality candidates: Because recruiters are in less of a rush and less of a competition with other agencies. Meaning they can dedicate the time they need to, to find the very best candidates for a position.
And because the business has paid some money upfront, the agency knows the business is committed to the process and will spend more time, energy and resources finding the perfect candidate for the role.
Retained Recruitment Fees
Retained recruitment fees are different, and are usually paid in three parts.
- The business will pay a sum up-front, when the contract is signed.
- Another sum is paid upon submission of a shortlist of candidates.
- And a third sum is paid when the candidate is placed in the position, or starts their new job.
This spreads the cost over time, as well as guaranteeing a level of commitment and accountability for both parties.
Problems with Retained Recruitment
Because retained recruitment is a form of exclusive recruitment, it isn’t always as fast as contingency based recruitment where you’re working with multiple agencies. This is balanced however, with the fact that you typically hire better quality candidates, because of the additional investment in time, effort and resources from the recruitment agency.
Managed Service Partner (MSP) Recruitment
If you know you need to make a number of hires over a given time period, the next year for example, it can be more cost-effective to hire a recruitment agency to join your internal team as a Managed Service Partner.
This form of recruitment is where a business pays an agency for some of their recruitment consultants to join the business and act as an extension of their own recruitment team.
The business will pay to have the recruitment agencies consultants for an agreed upon amount of time, for 6 months for example.
This gives you unlimited use of a recruitment consultant’s time and effort during the period you have agreed with the recruitment agency, as well as access to their network and database of candidates.
Managed Service Partner Recruitment Fee
The fee for Managed Service Recruitment can be either a fixed fee over the period that the recruiters are placed within your recruitment team, or a contingency based feed model.
So for the 3 months, or 6 months, that you work with the recruitment agency, you can pay X amount per month.
Or you can pay a smaller amount per month, and pay X amount for each candidate placed.
Fees for a Managed Service Partnership are negotiable, and most agencies will work with you to find a pricing model that works best for all parties.
Problems With Managed Service Partner Recruitment
Managed Service Partnerships are only really worth it for a business if they are looking to hire extensively within a time period. So it may not be appropriate for a lot of businesses.
And working with a Managed Service Partner requires a great degree of organisation. Your business needs to be ready to hit the ground running with integrating your recruitment partner into your business, and with hiring.
Temporary/ Contract / Freelance Recruitment
Contract typically works in two different ways. Could be as a freelancer where they are paid by their own limited company.
One of the benefits of hiring a contract or freelance employee, is you can typically find people who can start sooner. So if you urgently need someone, even to fill a gap while you look for a permanent employee,
It’s also much less of a commitment to you as a business. If it’s not working out for you or you no longer need them, then they will be gone sooner.
Career contractors are usually able to hit the ground running and make an impact straight away. This is because they’re used to going into different businesses and adapting to different ways of working quickly.
And they also typically have more experience than permanent candidates doing a similar position.
Temporary/ Contract/ Freelance Recruitment Fee
Temporary, contract, and freelance recruitment is slightly different from the rest, in that the temporary worker is paid by the agency. The costs of this are then recouped by the agency as they charge the business for the employees wages and their recruitment fee on top.
Typically the contractor is employed by an umbrella company or by their own limited company. And then the recruitment agency will invoice you. Whilst you can work with a recruiter to agree to charge a % mark-up or margin, generally speaking you give the recruiter a budget for the day rate, and ask them to find someone within the budget that includes the recruitment fees.
There may be a requirement for the candidate to charge expenses such as software, equipment and travel that is usually discussed before the contract begins.
Another way you can hire a contractor instead of using a day-rate, is you can charge them for the duration of a single project, instead of a period of time. This requires a clear scope of work, with clear deliverables, and deadlines.
There are different ways to work with recruitment agencies when it comes to how much recruitment costs. But cost isn’t the only thing to consider. We’ve put together a list of the advantages and disadvantages of working with a recruitment agency, to decide whether it’s right for you and your business.
Can you avoid recruitment agency costs?
If you’re looking to work with a recruitment agency, there’s no escaping the costs unfortunately. However, you can negotiate a lower fee with the recruitment agency. Although this obviously relies on the recruitment agency accepting your proposal.
However, the lower the fee you pay to a recruitment agency, the less of a priority your role will likely be to them.
Of course you can avoid a recruitment fee entirely and choose to hire internally, without the use of a recruitment partner. Although this can end up costing your business more money, resources, and time in the long run.
Which is to say nothing of the increased risk of making a bad hire, and how much this costs…
Do recruitment agencies charge candidates?
No, recruitment agencies should never charge candidates any money.
Here in the UK, agencies are paid by the employer, generally on successful placement of a candidate into a role.
It is illegal for an agency to ask you for any payment in helping you find a job. If an agency does, then you should absolutely avoid working with that agency.
Will an agency offer a rebate or replacement if the candidate quits?
A rebate is where some or all of the placement fee that was paid to the recruitment agency is returned to the business, due to the candidate they placed in the business leaving soon after being employed.
This rebate can be the whole placement fee, or a percentage based on how long the candidate remains in the job.
This differs from agency-to-agency, and can depend on the contract you negotiate at the start of the partnership.
Additionally, some agencies offer a free-of-charge replacement for candidates that leave within a specific time frame.
If you’re looking for your next job in IT, and we’ve eased your fears on how recruitment agencies make money, you can see what we can do for you here.
But if you’re ready to start negotiating your new recruitment costs, have a look here at how we work to support the businesses we work with, and how we can work with you moving forward.