What's Hot in the Staffing Industry? We Know!

We are all supremely hopeful that COVID-19 lockdowns and economic disruptions are now in the rear-view mirror, given effective vaccines, and better understanding of the virus. However, questions remain, particularly surrounding emerging viral variants, and vaccine hesitancy. Amid these hopes and uncertainties, where is the staffing industry today?

The impact of COVID-19 on staffing enterprises varied widely, often dependent upon the underlying industry vertical. Staffing firms in the hospitality space were decimated, while those in logistics, healthcare, and bio-tech industries thrived. Other verticals – IT, clerical, light industrial – were a mixed bag, but often ended the crisis remarkably steady, buttressed by governmental programs like the Paycheck Protection Program (“PPP”) and Employee Retention Tax Credits (“ERTC”).

From the perspective of an accountant and consultant with significant experience in the staffing industry, here are my top three observations on today’s environment for the staffing industry:

#1 – Merger/acquisition discussions are increasingly commonplace – the M&A landscape is supercharged:

Many staffing firms are surprisingly flush with cash, particularly those who were in favorable industry verticals during COVID0-19. Cash infusions from governmental COVID-19 related programs (PPP debt forgiveness, tax credits, local grants, etc.) have further bolstered staffing firm balance sheets. Many have paid off existing debt and are now looking for suitable investment targets.

Conversely, governmental economic programs helped “paper over” problems of staffing firms that were not operating at peak efficiency before the pandemic. As the cash infusions from governmental programs end, these staffing firms are again forced to confront difficult, looming challenges. Potential exit strategies for these companies are becoming a frequent topic of discussion.

Are you a buyer, a seller, or somewhere in between? It is important to consider succession planning strategies with a trusted business advisor. Pre-positioning the company in the best light makes sense from both a buyer’s and a seller’s perspective. Proactive consideration of deal structure, income taxes, timing, and strategy all play vital roles in these discussions.

#2 – Back to the office (maybe!), and back to basics – state & local tax considerations:

While we were gone during COVID-19, some things changed! Staffing firms, like other businesses, figured out that internal employees could work remotely, from nearly anywhere. Meanwhile, the contract workforce was often spread over many geographic boundaries, as had always been the case.

An example: company headquarters are in California, while some of the sales team is now working from home in Arizona. Meanwhile, contract employees are physically working in a dozen states, and direct hire fees are being earned from placements in many others. Where is the company required to file income tax returns? What about payroll taxes? And let’s not forget about sales taxes and local business privilege taxes imposed on revenues collected.

The byzantine world of state and local tax compliance gets more complicated as time passes, and as governments offer varying guidance on COVID-19 related tax regulations, the state sourcing of revenues earned, and sales tax applicability. Failing to analyze state and local tax compliance matters can lead to unfortunate outcomes, either during governmental tax examinations, or during due diligence as part of M&A activity.

As complicated as state and local tax compliance may be, there are also great tax planning opportunities that can save staffing firms and their owners meaningful dollars. It is vital that your advisors are helping you to navigate these matters and are working with you to identify tax saving opportunities.

#3- “Change is inevitable in the staffing industry” – and dynamic times call for a team response

If there is one lesson to be learned from COVID-19, perhaps we might all agree that change is constant, and that business owners can’t know it all? Nobody could have foreseen the dramatic changes brought about by this pandemic, and the “new normal.” Owners need to focus on what they do best and can’t possibly “know it all.” Accordingly, executives are surrounding themselves with the best supporting cast possible to brainstorm:

• Insurance: What are the best practices for returning to work, and keeping the workforce safe? How do we minimize worker injuries, and limit claims in the COVID-19 era? Are there maneuvers that might be taken to significantly reduce premiums?

• Legal: What regulatory considerations are there in allowing internal employees to permanently work from home? What are the perils and possibilities of employee versus independent contractor arrangements? How should we best negotiate contract clauses with clients to protect the business from liabilities, claims, and uncertainty?

• Finance: How to best adjust our borrowing arrangements to provide maximum flexibility at minimum costs? Is a traditional banking relationship right, or is it time to explore specialty lenders? What is the best way to deploy excess funds that may be on hand, post COVID-19 (M&A, reinvestment in the company, distributions, self-financing, etc.)?

• Accounting: How do my operating results compare with peer companies? Am I taking advantage of all eligible tax credit programs? Am I in compliance with tax regulations, while maximizing the tax deductions that the staffing industry is eligible for? Is it time to outsource some accounting/finance functions? Am I getting timely and accurate reporting that enables nimble management of the business?

These are incredibly challenging and uncertain times for the staffing industry, with increasing regulatory concerns, pressures on revenue from difficulties in sourcing labor, and on profit margins from competition and increasing costs. At the same time, opportunities abound for thoughtful, proactive staffing firms that welcome change, and that are open to new ideas and processes. We can’t predict what the world will look like a year from now, but with the right counsel, staffing firms can be best equipped to navigate whatever is to come.