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Staffing Companies: How to Profit from Obamacare’s Job Outsourcing

By Jim Fink on July 23, 2012

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In my never-ending quest to turn the sour lemons of Obamacare into sweet lemonade for Investing Daily readers, I think I’ve hit pay dirt. Specifically, there is a great investment opportunity in staffing companies (more on this later). In my previous article entitled Medicaid Nation, I focused exclusively on healthcare stocks and highlighted those I felt would benefit greatly from increased bureaucracy and a shift from state-of-the-art healthcare to basic care. But Obamacare is so huge and transformative, its effects will be felt far beyond just the healthcare sector; its tentacles of government control and penal taxes will permeate and affect the entire U.S. economy. 

Although the individual mandate is an onerous penal tax on the average Joe, there is no multiplier effect. The tax will simply reduce each consumer’s spending (as all taxes do). The part of Obamacare that is much more damaging is the employer mandate because it is a penal tax with a devastating multiplier effect. Not only will it force business owners to reduce their corporate investment, but it will kill job growth as well, which will have the secondary effect of reducing the spending of all of the people whom the mandate renders unemployed rather than earning a paycheck.

Why Obamacare Destroys Jobs and is the True Outsourcer

When you tax employment creation, you end up with less employment. It’s that simple and tragic, especially when one realizes that the U.S. unemployment rate is painfully high at 8.2% even before the employer mandate takes effect in 2014. The hardest hit will be the unskilled workers who can least afford any more misfortune. According to a March 2012 House of Representatives report (page 9):

One-third of uninsured workers (about five million workers) earn less than $3 above the minimum wage. These workers are at significant risk of losing their jobs or being forced into part-time work because of [Obamacare]. The reason: employers are not able to reduce workers’ wages in order to provide the required health insurance. Workers impacted by this provision will be disproportionately young, female, and minorities.

According to the Heritage Foundation – a Washington think tank – Obamacare’s employer mandate will increase the cost of employing a single minimum-wage employee by $3,588 per year. The employer burden is even greater for minimum-wage employees with a family; in that case, the extra cost will be $11,026 per year.

You might think that one way around this problem would be for employers to offer unskilled workers cheaper health insurance with higher deductibles. Think again. Obamacare has a non-discrimination provision that says that if an employer offers health insurance, all full-time employees must be offered the same “minimum essential benefits” and at a cost that is no higher than 9.5% of the employee’s household income.  Bottom line: there is no escape for employers of full-time workers.

The only solution is for employers to eliminate full-time employment positions for unskilled workers earning near minimum wage. Since businesses need unskilled workers for certain functions, employers will only offer temporary and part-time positions to these poor workers because temporary and part-time jobs are exempted from Obamacare’s employer mandate provisions. As the House of Representatives report states on page 10:

The employer mandate tax penalty defines a “full-time” employee as someone who works at least 30 hours per week. Part-time employees count toward the 50-person penalty threshold, but businesses do not owe tax penalties on part-time workers (defined as those who average less than 30 hours per week).

For example, a company with 40 full-time workers and 500 part-time workers would only pay a penalty on 10 workers (the 40 full-time workers minus the 30 workers who are statutorily exempt from the penalty). The economic effect of this provision is clear: businesses will have a significant incentive to replace full-time labor with part-time labor to avoid the tax penalty.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor and now a Senior Fellow at the Manhattan Institute, came to a similar conclusion:

If an employer offers insurance, but an employee qualifies for subsidies under the new health care exchanges because the insurance premium exceeds 9.5 percent of his income, his employer must pay $3,000 per worker. This combination of penalties gives businesses a powerful incentive to downsize, replace full-time employees with part-timers, and contract out work to other firms or individuals.

Businesses can reduce costs by hiring part-time workers instead of full-time workers. A firm with 85,000 full-time work­ers and 7,000 part-time workers that does not offer health insurance would pay a tax of $170 million. By keeping the number of hours worked the same, and gradually reducing full-time workers and increasing part-time workers, until the firm reaches 17,000 full-time workers and 92,000 part-time workers, the tax is reduced to $34 million. If the firm abandons full-time workers altogether, admittedly an unlikely option, but useful for illustration, the tax is reduced to zero.

Some businesses could minimize cost by increasing part-time hourly workers, reducing the number of full-time workers, and dropping employer-provided health insurance. Even if businesses choose to offer health insurance to their full-time employees, the Act gives them an incentive to employ more part-time hourly workers than full-time workers in an effort to maximize tax benefits. If Congress leaves these incen­tives in place, the reduction in full-time employment would be costly to the economy.

With unemployment above 8 percent, it is worth examining the effects of penalties on employment under the new health care law. America cannot afford these negative effects on employment.

Not only will full-time jobs be replaced with part-time jobs, but the absolute number of jobs of any kind will go down. According to the nonpartisan Congressional Budget Office (CBO), Obamacare will result in a total loss of 800,000 jobs by 2021.

Is this job-killing law something Americans really want at a time when the U.S. poverty rate has reached its highest level since President Lyndon Johnson’s administration in 1965?

Out-of-Touch Careerist Politicians are to Blame

President Obama has criticized Mitt Romney for outsourcing jobs to foreign countries when he was in charge of private equity firm Bain Capital. This politically-motivated accusation has been completely discredited by independent analysts. Ironically, the real outsourcer of jobs is Obamacare itself.

Why did Obama and the Democrats push through such a job-killing piece of legislation? It’s hard to imagine why, other than the fact that most of the Democratic leadership are careerist politicians who have no private-sector experience and don’t understand how jobs are created. How else can you explain Mr. Obama’s July 13th speech in Roanoke Virginia where he said:

If you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, ‘Well, it must be ’cause I was just so smart.’ There are a lot of smart people out there. ‘It must be because I worked harder than everybody else.’ . . . . Let me tell you something: If you’ve got a business, you didn’t build that. Somebody else made that happen.

Somebody else? This disparagement of individual accomplishment and hard work has not only been called un-American, but has alienated many small business owners, including Jack Gilchrist of Gilchrist Metal Fabricating Company in Hudson, New Hampshire. Mr. Gilchrist built his company with his own hands and resents being told that the government built it instead of him.

Staffing Companies are Prime Beneficiaries of Obamacare’s Job Outsourcing

None of this is good news for the overall U.S. economy, but one industry sector that is primed to benefit from Obamacare’s outsourcing of jobs is the $97.1 billion U.S. staffing industry ($87.4 billion temporary workers, $9.7 billion permanent placement, according to the American Staffing Association). If an employer doesn’t want to pay health insurance for unskilled workers, all he has to do is hire temporary and part-time workers from a staffing company. True, staffing companies face some record-keeping problems (pp. 11-12) of their own under Obamacare, but I believe the increase in business from Obamacare-avoiding employers more than outweighs this increased administrative cost, which can be minimized by reducing the permanent-placement aspect (a small part of the staffing business in any event).

Furthermore, there are demographic forces at work (e.g., the aging of America) outside of Obamacare that promise to grow staffing needs for years to come.

The Aging of America and the End of Retirement

With the advent of the global economy, U.S. business face competitive pressures like never before. Employers are looking for workers with specialized skill sets and need help screening candidates for these skills. The aging of the baby boom generation and the likely retirement of millions of U.S. workers in the next few years puts added strain on companies, which need help retaining existing employees and attracting top talent from a shrinking pool of workers. Companies are increasingly seeking to outsource their human resources administration to staffing companies.

The baby boom generation comprises 78 million American born between 1946 and 1964, and represents nearly half of the U.S. workforce. According to a 2005 report by the Conference Board, a non-profit research organization, approximately 64 million of these baby boomers (more than 40% of the U.S. workforce) will turn 55 within the next decade and be nearing retirement. The first baby boomers to turn 62 (and thus be eligible for social security) will occur in 2008. The peak birth year for boomers was 1960, so they will turn 62 in 2022 and the share of the U.S. population that is 65 years or older is projected to continue increasing until 2040. The bottom line is that the aging of the U.S. workforce means change and lots of it – retirements will result in a lot of job openings that companies will need to fill and they will look towards staffing companies to help fill them.

These millions of baby boomers will help staffing companies in more than one way. Not only will most of them be retiring soon, but they will be looking for part-time jobs. According to a 2005 report by Brightwork Partners, a research consulting firm, about one-third of all “retirees” re-enter the workforce after retirement, most in jobs that require the same skill level as their previous positions. In fact, retirement only lasted, on average, 1 ½ years before they decided to go back to work. But the retirees going back to work said that they wanted flexible work hours – a form of “partial” retirement. According to a 2005 report on older workers by the U.S. Government Accountability Office (GAO), employers are increasingly willing to accommodate older workers because the employers are facing the prospect of a “brain drain” and don’t want to lose the expertise of older workers.

Only about one-third of employers, however, have actually established a program designed to recruit or retain older workers. Combine this fact with findings by the American Staffing Association that only 15% of U.S. companies currently use staffing services in a given year or that only 2% of all U.S. workers are placed through staffing agencies, and the huge opportunity available to staffing companies becomes crystal clear. The growth opportunities for the staffing services industry are also recognized by the Bureau of Labor Statistics, which estimates that staffing companies will grow more than three times faster than the general economy over the next decade.

List of Staffing Companies

The top three global players in staffing are Switzerland-based Adecco Group (OTC Markets: AHEXY), U.S.-based Manpower (NYSE: MAN), and Netherlands-based Randstad (OTC Markets: RANJY). Adecco and Randstad have benefitted from the job-killing socialistic policies in Western Europe for many years, but are currently getting hurt from the cascading recessions hitting Eurozone countries because of the European debt crisis. Consequently, I prefer to play this job outsourcing theme via U.S.-based Manpower and smaller U.S. staffing companies that are pure plays on Obamacare (timestamp 1:10).

This investment thesis will take time to play out because the “benefits” provided by the employer mandate to staffing companies’ bottom lines won’t start until the employer mandate goes into effect in 2014. Of course, the stock market will anticipate these benefits prior to 2014, but mid-2012 is probably too early to expect an Obamacare-induced price pop. For patient long-term investors, however, the current depressed stock prices of staffing companies may present a compelling opportunity.

Top 10 Staffing Companies

Company

Annual Sales

Market Cap

Return on Invested Capital

Adecco Group (OTC Markets: AHEXY)

$25.1 billion

$8.0 billion

10.3%

Manpower (NYSE: MAN)

$21.6 billion

$2.7 billion

7.8%

Randstad (OTC Markets: RANJY)

$20.3 billion

$4.9 billion

6.3%

Kelly Services Class A (NasdaqGS: KELYA)

$5.6 billion

$438 million

9.7%

Robert Half International (NYSE: RHI)

$3.9 billion

$4.0 billion

20.4%

Michael Page International (LSE: MPI.L)

$1.6 billion

$1.7 billion

31.1%

Kforce (NasdaqGS: KFRC)

$1.1 billion

$479 million

10.0%

Hudson Global (NasdaqGS: HSON)

$916 million

$147 million

7.2%

Korn/Ferry International (NYSE: KFY)

$791 million

$671 million

9.0%

On Assignment (NasdaqGS: ASGN)

$635 million

$810 million

8.3%

Source: Bloomberg

What do you think of this article? Please post your feedback in the “comments” section below!



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  1. avatar
    Saul Acosta Reply July 30, 2013 at 6:46 PM EST

    I have a Medical Staffing company in Miami, Florida. At current we have over 100 Doctors working for us in various health care establishments through the State. The overall feed back i obtain from Doctors,Physician Assistants and Nurse Practitioners is that Obama care will expand the industry and open the door for allot of mid-level type health care practitioners. My company has grown immensely since we open for business 10 years ago and now that we have become known in this industry i have opportunities to talk with many health care professionals who see everything positive from this new law . I welcome conversation with anyone to share my insight and opinion from the trenches. Can be contacted at kaizenmedhealth@gmail.com. Thanks folks…… Saul

  2. avatar
    Eden Reply March 18, 2013 at 12:51 PM EST

    Jim,

    As an owner of a staffing company I just don’t think its accurate to depict the staffing as an industry as one that is made up of a large segment of “part-time” employees. 85% of my workers work more than 30 hours per week on long-term or “temp-to-hire” assignments. As for seasonal, short-term and contract work, I think we’ve already seen a major shift away from this type of business in our industry due to skyrocketing unemployment insurance costs (up 300% in our state). When the work is completed, these people file for unemployment benefits which has major implications on our premiums and our profits. Typically we turn seasonal business down in many instances for this purpose.

    To avoid the mandate, can I tell my customers that as of Jan 1, 2014 that none of my employees can work more than 30 hours? Sure. This of course reduces our revenues by 25% since we bill by the hour. Will our customers hire more part-time workers to make up for the lost production? Perhaps, but my 15 years of experience tells me that we’ll see more companies try to go lean first rather than add immediate head count. Many will be successful in finding ways to squeeze out more productivity from their workers and thus our billable hours will be reduced.

    It is true that our industry may be better equipped to avoid some of the penalty than a traditional employer, but, we too will no doubt be penalized to some degree and will pass this cost on to our customers. When the “sticker shock” hits, I’m afraid companies will realize that they too can simply hire part-time employees to avoid the penalty. Keep in mind that one allure of a contingent temporary workforce (although not advertised) is that a company can effectively have a two-tiered system where some of their employees receive company benefits (their permanent staff) while others do not (temporary workers). Companies, of course, did not need us to do this before as they could have simply employed a part-time workforce – see Walmart. With Obamacare, this is exactly what they are going to get with or without us. Why not just do it themselves without the added premium?

    I’m not saying that Healthcare Reform is good or bad for the industry as a whole because I don’t think anyone really knows how companies will react to our higher bill rates. Will they do more in-house part-time hiring or will they continue to pay us to do it for them at a higher premium? I can tell you this- my industry peers are lobbying hard AGAINST it, not FOR it.

    • Jim Fink
      Jim Fink Reply March 19, 2013 at 11:13 PM EST

      Hi Eden,

      Thanks for your comments. It’s always nice to hear from industry insiders. My response is that when I wrote this article on July 23, 2012 and recommended Manpower as a staffing company that would benefit from Obamacare, the stock was trading at $32.41. Today — eight months later — the stock is trading for $55.90, which constitutes a huge gain of 72.5 percent. This is FIVE TIMES the percentage gain of the S&P 500 over the same time period.

      Best,

      Jim

  3. avatar
    eventpro1234 Reply January 17, 2013 at 4:34 AM EST

    i have study full of your post related to Staffing Services Company.
    it is very knowledgeable content about Staffing Services who industry leading event staffing technology.Thanks friend

  4. avatar
    Robert Reply November 13, 2012 at 1:12 PM EST

    I neglected to say wich company I was talking about. It’s Manpower that gets most of it’s revenue overseas-France.

  5. avatar
    Robert Reply November 13, 2012 at 1:10 PM EST

    Morningstar: “Of its revenues, 90% are generated outside the United States, with one third produced in the French market alone.” Would this still be a good investment with so much of it’s revenue not affected by Obamacare??

  6. Jim Fink
    Jim Fink Reply October 27, 2012 at 12:07 AM EST

    Hi David,

    It is my understanding that Obamacare only requires large employers (50 or more employees) to provide health care coverage to full-time employees (i.e., employees that work 30 hours or more per week on average based on a measurement period of up to 12-months ). Temporary, seasonal, and part-time workers that don’t average 30 hours per week over a 12-month period are excluded from the employer mandate.

    Consequently, many employers may switch to part-time workers in order to avoid the employer mandate and will increase demand for part-time workers employed part-time by staffing companies.

    Best,

    Jim

    • avatar
      Warbo Reply October 31, 2012 at 5:37 PM EST

      Jim Fink,

      This makes little difference, since everyone did pay into the bridges and roads and for Obama to think that businesses owe the government more for them is off. It also shows that Obama misses the whole point. The government builds infrastructure to attract business. If you say to business that they owe you more, they’ll go somewhere else. If the gov’t refuses to build infrastructure, businesses will go somewhere else. It is government that is dependent on business, not the other way around.

      • avatar
        Warbo Reply October 31, 2012 at 5:39 PM EST

        Sorry, Jim,

        That reply was meant for Virgil J. Gabel

  7. avatar
    David Reply October 26, 2012 at 1:54 PM EST

    Jim, won’t the staffing agencies have to bare the burden of Obamacare also? How can a staffing agency be profitable if it all of a sudden has to provide health care for ALL of its temporary or contract employees?

    • avatar
      JP Reply November 15, 2012 at 4:23 PM EST

      Thanks David.
      Jim please address the fact that Staffing firms will have to either provide health care, or pay a $2000.00 tax for every employee – exceeding the 50 employee mark.

      If a small Staffing Firm has 2550 employees working 30+ hours on there payroll, they will have to pay an annual tax of $5,000.000.00!

      • Jim Fink
        Jim Fink Reply November 15, 2012 at 4:28 PM EST

        Hi JP,

        I assume that staffing companies will keep their employees under the average 30-hour-per-week threshold.

        Jim

  8. avatar
    Virgil J. Gabel Reply July 26, 2012 at 9:46 AM EST

    RE: The quote from President Obama’s July 13th speech in Roanake, Va.
    The author deliberately left out the salient part of the quote that preceeds the phrase” If you’ve got a business, you didn’t build THAT” It is obvious he was referring to the “someone invested in the roads and bridges” when he said “you didn’t build THAT.” The “That” refered to the “roads and bridges” NOT to the “business.” This is a prime example of how the meaning of an idea can be distorted and twisted by deliberate lifting a phrase from it’s context. Jim Fink should be ashamed of himself and rebuked for such a cheap shot!
    Virgil J. Gabel So. Glastonbury, Ct.

  9. avatar
    Spo101 Reply July 24, 2012 at 8:50 PM EST

    To Jack of Gilchrist Metal Fabricaing:

    You piece of shit motherfucker. Did you not watch the WHOLE video of what President Obama said about working people getting help from the government because of infrastructure? (roads and bridges) And then find out you and you traitorous family took a fortune from the government to start your business? Sad , man, soooo very disturbing.

    Tell me please, what better definition of TRAITOR than someone like YOU? Someone who would get on a National forum and lie to the American PEOPLE for that silver spoon trust fund baby Mitt Romney… How much money did you take for your seditious activity? The Concerned Citizens of American are going to make it our job to make you accountable for your Un-American activities.

  10. avatar
    Cathy Kandravi Reply July 24, 2012 at 8:46 AM EST

    What an article :Mr JIM F. I had to show to my husband of well lets just say since the1970’s which he is sharp and gotten sharper tuned to people than the almighty $ since 11-5-07 when he broke his neck ,has a cervical implant from St Judes at top of his spine and titanium from there down his left side over to his shoulders which keeps him full of literally elec, 24/7 and on some big time no name pain meds,one pill a day but it could do more harm death than help which he is helping the Med. Peoples of this tech. so it can help,others. He has pretty much seen it all from owning companies 2 which merged and went public in Houston Tx from the oil boom, bust and boom etc. and so much more world wide. If you took the top 50 Largest Comp.s and there clients you would be impressed,friends with all and competition he was in the Heavy Equip. and small tools and all the hand cleaner that went with them. His observations would catch any CEO’s att. on how to save and be safe and keep the client’s (EXXON’s) before there merger and that bundling that all the top especially infrastructure petro.water,utilities mining etc comp.s public and private went through and we are talking the biggest Comp’s of the world and they still are changing and one of always there biggest decisions was people , the art of needing them for projects letting them go and getting them back and keeping them positive, you know under budget on time and safe,ins huge part of getting the bid, for these $500,000 to Bil’ dollar expansions and maint projects. All the Equip was basically the same and the art of the Huge day to day we take for granted Comp’s personalities. Even before the big drug testing rules put in place by Govt. to clients own rules was individually was a tricky line. But People where the key and still are he says, they do a two week to a mn. shut down on a plant and the world was on fire, he called it stepping over dollars to get to a penny and the waste that went into doing that. But again retaining and bringing the right people was the key right down through the ranks. It was 10 lets say temp. workers to one superintendent and that put those people agencies on the map. There ability to keep an individual record and all the testing and complicated rules that grew daily just like the Govt. because of Insurance Comp’s and that was a right to work state with little on the union side but go to one of the same companies plant’s up north the unions called the shots mostly, not any more to the power that once was but still somewhat there. There own death the old days are gone they are or where not like the Apple’s of the world that put suicide nets up like in China where people are like ants, the cost of safety means little to the finish product they build but could never afford . Not just Apple that was just a small part of what goes on internationally and why your article is so on the money yet we have an election to go through so these Companies have to look at both sides of the fence with no gate. There are still so many products/ food that are made here that you would not touch if you got to look in the door where it is made ready for us and if it is still here just imagine the out of country tricks that people stand in line for ,it used to be what you needed to live and then what you wanted to keep up to the (JONES) and we are going back for the need and can not afford to be picky’ These people as you said in a average min. wage +3$’s which these companies have will now have a 1leader to 20 or 30 person to get the job done and the quality will show, the computer world still needs in most cases someone to hit the switch when to turn on and make money and turn off unless the Govt’ controls that. This is long winded and he could write chapters but the candy bar companies are gone.Meaning the product being produced is worth more to the Comp.’s than there own people because of what insurance Comp’s and Govt. so we will use some one people that are in and out when we are forced to live with what might happen and what might not, we have a choice or do we.He has been everywhere in every type of business for production of foods to fuel to med,s you name it . I asked him the best company not to work for by what he has seen and to add humor to this article he said Nestles makes the very best and that was buy all his standards and observations to get the chance to see what is behind the door.Love’s there stock owns none says it is inevitable for them to survive that they must loose value because of these changes and points to the Senate that he says if they can not make a budget for over three years and we put them there. the writing is on the wall unless you have the one an only equalizer people or the only one with the only specific product and the Gov’t will be told by the Ins. companies that unless do it our way you can not do it at all. We the People are not we the people anymore and back in the 1990’s the manpower game changed the rules forever, more or less time will tell but your outsourcing people to fit the Govt. which has no budget can not work but they will push that button even if the law is repealed part of the Apple has already been eaten and he is not talking about Adam and EVE! Good article he say’s but wishes it was not that way and maybe you opened some eyes to more than just a stock (PEOPLE).