‘You cannot hire by the hour’

As part of our international series we bring you an interview with Edmundo Escobar, president of staffing firm Rolling Personnel and a founding member of Asociación Mexicana de Empresas de Capital Humano, Mexico’s staffing association. He tells Senior Research Analyst Sona Sharma about the evolution of staffing; bill and pay rates; the reasons behind the formation of the association; the black market; and more.

Q: Please tell us a bit about your company, Rolling Personnel. How was it started?

Escobar: We have been in the business for 16 to 17 years. We do a lot of permanent placement. We do temporary placement too, but it’s not our main business. In fact, for the whole country, temporary placement is not the main business.

There was a decree in the late ’70s by the Mexican government that gave a lot of benefits to companies established along the [U.S.-Mexico] border. Those companies would pay low income tax if they promoted investment from foreigners and if they generated jobs. We started by working in that business and we had clients like Sony, Honeywell. We established plants for them. They were manufacturing products along the border for the U.S. market. So that was our business originally. In the mid-’90s all this business started to go to China. In 1995 we started the operations of Rolling, which is a staffing company. We stopped the low-end manufacturing business, working with line employees, and went with working with professionals in all areas. Today, we work a lot with the advertising industry. We have designers, strategy guys, group planning and surveys, mathematicians. We have a lower workers’ comp rate and [the people we work with] are professionals and they are well paid.

Can you define staffing as it is used in Mexico?

We were known as an outsourcing industry. We started using different names because we don’t want to be considered as mainly outsourcers. If we use the modern names, then we say we do direct hire or perm placement for a lot of companies. The employees are on our payroll, but they are working permanently at the client site. I have clients that have employees for over 15 years with me. So they are on my payroll, but they are working for a client.

We have all variations within staffing — [workers] could work on a temporary basis or long-term. A client may hire workers for 11 months, for example, and in the low season let them go. We rehire mainly everybody in the new season. I have some clients that let the workers go in December and January. And 90 to 95 percent of the employees that were let go come back to us and we rehire them for the client.

Sometimes, the reason companies come to us is that there are no training contracts in the law in Mexico. So the employer creates a project and we hire them for a project. That project is then the training. And if they like some of the employees, they hire them directly. We do a lot of recruiting for our clients because it’s also part of the job.

So, staffing in a broad way for us would be placing an employee with a client, assuming the legal responsibility, the worker being an employee of the staffing company and remaining on the staffing company payroll. That’s the general concept. We have temps who cover temporary [or seasonal] assignments. … We also do permanent placement, where we place them for a longer term that goes over a year. In Rolling, 70 percent of our business is placing for over a year. Our idea in business is for them to work permanently for this client. They will be on our payroll and we will be legally responsible for them.

What happens when an employee is not with a client? Are you still paying the employee?

No. The contract that we negotiate with the client ends but we take care of severance payments. Severance packages are mandatory by law in Mexico. Sometimes instead of paying the employee severance, we provide them a similar job in another company. We don’t always manage to place them in another place. For example, in October 2008, when the economic crisis started, two of our clients told us that they are closing down. We had to let go of over 1,500 employees in one single month. We didn’t have the capability to absorb them so we had to pay severance payment for more than 1,200 employees. That was a big burden for our company. The minimum severance payment is a three-month salary, plus you also pay seniority premiums. When an employee has been working with us for several years, then severance becomes expensive.

There are two ways to bill this severance to the client. Sometimes you estimate what rotation you are going to have with one client and you estimate your expenses and you bill it upfront. Or another way is that you agree with your client that whenever there is a termination, you are going to bill them the fee of the termination negotiation. You can terminate them early, but there are some statutory limitations to that.

What is the pay and bill rate structure in Mexico?

That is very interesting. My clients in the U.S. want to pay me on an hourly basis as they do in the U.S. Nevertheless, you cannot hire by the hour in Mexico. You have to hire by the day. So we assume the responsibility and the differences for the U.S. clients. Also, maximum time that workers work in Mexico is 48 hours a week with overtime of 9 hours a week. So normally we agree to have them work for 9.7 hours, Monday through Friday.

Some U.S. clients come to us and they want some chemical engineers, architects for 50 hours or 500 hours. They give me the hourly rate [they want the workers to make] and I make the conversion, check my margins and tell them the rate. And I assume the responsibility. For example, a company came in and said they wanted … 20 engineers and they want them to earn X amount. I tell them that with benefits the cost of having each engineer is, for example, $4,000 a month. Then I tell them my markup. Average markup that we charge for an employee would be around 12 percent to 16 percent on the total cost of the employee.

Does this markup change depending on commercial or professional workers?

I don’t see a difference in the markup that we charge based on skill. What makes a difference is the number of employees and the amount of payroll that we pay. Maybe when you hire fewer than 100 employees, [the markup] goes up to 18 percent. When you go above 100 but less than 300, it lowers by 1 percent to 2.5 percent. 300 to 600 workers, it lowers by maybe 2 percent. The volume makes a difference.

You are one of the founding members of Asociación Mexicana de Empresas de Capital Humano, or AMECH, which is the Mexican staffing association. What was the driving force behind the formation of this association?

I started AMECH with three other members about six to seven years ago. I was looking to differentiate our company from other companies who are in the black market. What differentiates AMECH members from other companies is that we have our compliance certificate and quality certificate that we created.

Could you explain what you mean by black market?

The main problem for the industry [in Mexico] is the black market. There are companies that do not fulfill their full legal obligations, such as paying social security taxes. Let me explain what I mean by that. There is a legal provision in the federal labor law … that says that workforce should not be part of commerce. That was interpreted by some unions that staffing or outsourcing companies should not exist. Nevertheless we have been in business for several years. The provision in the labor law has not been a problem. It is mandatory that when you hire, you cannot consider [the workers] a service provider if you direct them or give them specific instructions. Because then they immediately become employees. No matter what name you give them.

Nevertheless, lawyers have been very creative, and I am a lawyer myself. They wanted to avoid paying social security tax, which in Mexico includes medical, pension, maternity leave and workers comp as well as housing. All that social security comes to about 36 percent to 37 percent of the salary you pay to an employee on the low end. The percentage becomes lower as the salaries go up because for each type of coverage there is a cap. … There are also some states that have taxes on wages, which [range from] 1.8 percent to over 3 percent of overall payment to the employees. So, in total, that makes [the tax burden] close to 40 percent.

There are these cooperatives and other legal entities where they say [the workers] are partners to avoid considering them as employees. This way they are avoiding paying the social security benefits. So that’s the black market. They are saving 30 percent to 40 percent of the cost. That’s the way the black market has been working in the country for ages.

So the impetus to form AMECH was to separate yourself from the black market?

We created this federation to differentiate [the members] from other companies and to demonstrate that we are doing the right thing. We created a certification and we had PricewaterhouseCoopers audit member companies every 18 months to ensure they are in compliance with some set standards. Quality standards, which have nine issues, include things such as legal standing of the staffing company, is it registered as a recruiter before ministry of labor, organizational structure, fulfillment of labor, fiscal and social security obligations, that labor laws are fulfilled and taxes are fulfilled and social security benefits, including housing are paid.

Then there is a review of how the company’s payroll is processed. We also review how everybody deals with their clients, how transparent they are — how much is the margin, and how much are they paying their workers. We are very transparent [with our clients].

How many staffing companies are members of AMECH?

We have at least 600 staffing companies in the country — maybe about 100 are fulfilling the law. Only 16 of us have agreed to abide by our quality standards. The 16 companies include the big four — Manpower, Adecco, Kelly and Randstad.

To what degree is the Mexican staffing market dominated by big companies?

Manpower is the market leader, followed by Adecco, Kelly and Randstad. [These four companies combined have the majority of the market.]

Do you foresee a lot of other foreign staffing companies entering the Mexican market?

There is definitely need for staffing for those who are bilingual. There has also been some government effort in which they opened nursing schools and they were training nurses bilingually. This is because the U.S. market in the health areas needs more people. So there is a lot of business to do here.

But our worst competitor is the black market. The government is trying to help in some ways. But what they are doing is that they are prosecuting already controlled corporations, which I don’t think is the best way to reduce the black market. There are a lot of companies that do some sort of outsourcing or staffing. A lot of big corporations also have their own personnel management companies, which are directly owned. This is mainly done because there is a profit sharing disposition in the labor law. Over the net profit of the company, there is a 10 percent of profit sharing with the employees. Even though you have low wages, this increases your cost. At Rolling, 95 percent of our clients are foreign companies doing business in Mexico. They don’t want to have the responsibility of profit-sharing and all the red tape, which is very big.