To save time and money administering employee benefits and payroll, a growing number of employers are turning to leasing—or outsourcing—employees rather than hiring them outright. In this special two-part series, we’ll look at whether employee leasing is right for you and explore some of its hidden pitfalls.
How Employee Leasing Works
The most common employee leasing arrangement involves transferring your existing employees to the leasing company’s payroll. The leasing company then handles all aspects of employee administration, including providing health insurance, workers’ compensation and other benefits.
A popular type of employee leasing is through professional employer organizations (PEOs), which act as co-employers. PEOs usually assume responsibility for hiring, firing, wage negotiations and benefits, as well as employment compliance responsibilities such as meeting wage-and-hour requirements. The PEO industry has grown significantly in recent years, according to the National Association of Professional Employer Organizaions, which estimates there are 800 PEOs in the U.S. serving 180,000 clients and employing 2 million workers.
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Who Uses Employee Leasing And Why
Many small to mid-size employers see leasing as more cost-effective than assigning a full-time employee in-house to handle complex payroll, benefits and other human resources matters. But larger companies increasingly use employee leasing companies to outsource their human resource functions, too, according to a 2002 survey by the Conference Board and outsourcing provider Accenture.The survey also found that the top reasons for outsourcing are to reduce the cost of providing support services; gain access to expertise and technology the company does not have; improve the efficiency and quality of service; and allow the company to focus on its core business.
Savings On Benefits
Using a leasing firm may also allow you to lower the cost of employee benefits or offer improved benefits to your employees. That’s because, by pooling employees of many firms, leasing companies can often get better rates than individual employers for 401(k) plans, health coverage and other benefits. It’s important to note that the U.S. Supreme Court has ruled that it’s illegal to make employment decisions for the purpose of depriving employees of benefits, vested or not. But it’s unclear whether the court’s ruling would apply to a decision to transfer your workers to a leasing company to save money on benefits.
Hidden Dangers
Despite the advantages of employee leasing, some employers tell horror stories of leasing providers who bounced paychecks, mishandled funds or filed for bankruptcy—leaving their clients to clean up the mess. And the sometimes painful truth is that you and the leasing company are considered co-employers for legal purposes, which means you can each be held responsible for the other’s mistakes.Here’s a look at some of the risks:
- Liability for discrimination. You could find yourself facing a lawsuit for something the leasing company did wrong. For example, if an outsourcing firm hires employees for you and illegally discriminates against a job applicant, you could get sued. What’s more, using a leasing company won’t get you off the hook for harassment that occurs in your workplace.
- New Americans with Disabilities Act and family leave obligations. Employers with fewer than 50 employees don’t have to provide time off under the federal family leave law. But if you transfer your workers to a leasing company with more than 50 employees leased out, your own employees will probably be entitled to family leave under the law. By the same token, even if you have fewer than 15 workers (the threshold for ADA compliance), your leased employees would be covered by the ADA because most leasing companies have more than 15 workers under contract.
- Tax penalties. What happens if the leasing company doesn’t cover payroll or other taxes? You can negotiate a contract with an outsourcing company that makes it solely responsible for unpaid taxes and penalties, but the IRS may not honor it and may look to you for payment.
- Financial risks. If the outsourcing company goes bankrupt or out of business, you could be forced to make good on its benefits package.
- Benefits problems. Some leased employees have successfully claimed that because the employer had the right to control their work, they were actually regular common-law employees—and therefore entitled to the same employee benefits the employer’s regular employees enjoyed. To avoid this situation, your benefits plans should define exactly who’s covered and who isn’t and state that the plan is only for workers listed on your payroll as regular employees. Add that the plan specifically excludes individuals you designate as leased employees or agency temps. You can also require leased workers to waive benefits you provide to regular employees. And it might be a good idea to ask leased workers to sign an agreement that if it is ever determined that they are regular employees, they waive the right to recover employee benefits for the time that they were treated as leased.