Employee Leasing, Part 2: How To Avoid Getting Burned; An 8-Point Checklist

The employee leasing business is booming, and many employers are lured by its promises of reduced administrative headaches and improved employee benefits. But, as we discussed last month in Part 1 of our special two-part series on employee leasing, signing up with an employee leasing company can also bring some unexpected financial and legal risks. This month, we’ll show you how to prepare your company for outsourcing and how to protect yourself when selecting an employee leasing firm.

Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.

8-Point Employer Checklist

The key to avoiding problems is to take some time to research employee leasing companies before signing up. It can pay off to carefully compare what different providers offer. Here are some strategies for evaluating leasing firms:

1. Investigate background and financial condition. Ask how long the company has been in business and learn about the principals’ backgrounds. Request banking and credit references and ask the company to show how it will prove to you that payroll taxes and insurance premiums have been paid.

    

2. Talk to references. Ask to speak to a few of the provider’s clients. Be sure to ask them whether the payroll is handled in an accurate and timely manner and whether the firm is professional and easy to work with.

    

3. Evaluate employment expertise. Check into how knowledgeable the company is about employment law and the kind of materials and support they provide to employers. For example, many leasing companies offer a client guidebook, which includes a set of all the forms you might need—such as requests for family or medical leave—and information on how to use them. Ask whether the company provides an employee handbook and if you can review it. Most providers are willing to incorporate your specific policies for vacation and other paid time off, hours of work and entitlement to benefits.

    

4. Check workers’ comp premiums. Legitimate outsourcing firms usually can’t save you money on workers’ compensation insurance, so be extremely wary if one company’s fees are much lower than its competitors’. Note that you can be on the hook for big penalties and damages if you use a leasing company that doesn’t carry a valid workers’ comp policy. To avoid this problem, enter into a written agreement stating that the leasing company has obtained workers’ comp coverage for the leased workers.

    

5. Don’t be tricked by glowing promises. Unless a leasing company manages every aspect of the work employees perform, it can’t protect you from all legal problems relating to employment. So view promises such as “We’ll become your HR department” with skepticism. Although the outsourcing firm can provide advice and handle many administrative tasks, the most sensitive personnel matters involving hiring, discipline and termination are likely to remain in your hands.

    

6. Review insurance. Ask the outsourcing provider to give you copies of certificates of insurance for each insurance policy that will cover your workers. Be very cautious about offshore insurers. Call the California Department of Insurance in Sacramento at (916) 322-3555 to be certain that each insurance company is licensed in California and isn’t under investigation. Be leery of leasing companies that are self-insured or that have to pay a large deductible before an insurance policy kicks in. If the provider goes broke, the claims won’t be covered.

    

7. Look for licensed or accredited companies. Some states require leasing companies to be licensed, but California isn’t one of them. Being licensed elsewhere gives a company some credibility, but licensing standards vary greatly from state to state. However, the private Employer Services Assurance Corp. has established a set of stringent financial, ethical and operational standards for leasing firms. For more information and a list of accredited leasing companies, call (501) 219-2045 or go to www.esacorp.org.

    

8. Take care with the agreement. Before signing up, be sure the leasing contract covers certain key points. It should specifically state that the outsourcing provider will be liable for any mistakes it makes—for instance, that it will pay fines and penalties for payroll tax errors. And negotiate any special issues that apply to your business, such as who will be responsible for getting trade secret agreements signed. Also make sure you have the right to cancel the agreement on 30 days’ notice.