What is Employee Leasing?
You may have heard of companies that lease employees and wondered what it means to lease employees and why a company would want to lease employees. This is a quick overview to help you understand the basics of employee leasing.
Leased employees are workers provided by an employee leasing firm often referred to as PEOs (Professional Employer Organizations) to a business. Companies sometimes choose to lease all of their employees or specific groups of employees (i.e. employees at a specific location or perhaps employees in a specific department). Think of it as a temporary employment arrangement except that—
- Leased workers are often recently resigned or terminated employees of the business,
- The lease period is expected to be long-term rather than temporary, and
- Usually all (or nearly all) of the business's workers performing a given job are leased.
Obviously, there’s a cost to leasing employees, so why do companies use an employee leasing arrangement? There are many reasons that a company may choose to lease employees. Ultimately, it comes down to managing risks.
Businesses often lease employees as a way to relieve themselves of the burdens associated with human resources, payroll administration, and benefits negotiation.
Leasing firms can offer employers expert payroll, employee benefits, and personnel administration—from simple payroll and benefits compliance to complete human resources administration. This generally frees the business up from payroll administration and personnel matters.
Because PEOs often employ more workers, they often get larger group discounts on medical and retirement benefits and can provide more comprehensive fringe benefit programs. In some instances, they can obtain improved worker's compensation rates over that of the business.
- Delinquent payroll taxes.
- Payroll and/or benefit administration headaches.
- Spiraling benefit costs.
- Inability to retain key employees because of the lack of a competitive benefits program.
- Difficulty hiring good employees.
- Exposure to discrimination, immigration, or employee benefit claims.
The same reasons that may lead a company to look at employee leasing may also be factors that increase the costs of employee leasing. Certainly, no company is without risk, but in cases where all or most of the above factors exists, the PEO will most likely require higher leasing fees to mitigate risks.
Making the Decision to Lease Employees
While every company’s situation is unique, here are some of the factors to consider when making the decision to lease employees.
- Determine the objective of leasing employees versus direct employment.
- Objectively determine and quantify the costs savings of functions performed by the PEO.
- Obtain pricing from the PEO and determine the costs of utilizing leased employees.
- Review of the overall net cost of the leased employee proposal.
- Consult your tax advisor to see if there are any special tax circumstances to consider in the leasing arrangement.
- Determine if the net cost of the proposal is warranted by the risks mitigated under the proposal.
There’s no cut and dry correct answer when it comes to employee leasing. Companies choose to lease for many different reasons. For example, a growth company may choose leasing so that management is not preoccupied with building the HR infrastructure needed and focus on growing sales. Later when sales have grown and the company is maturing, management may choose to directly hire the workforce and put the required HR infrastructure in place.
When it comes to employee leasing, there’s no simple yes or no answer. But rather a combination of the factors outlined above and company objectives that must be considered. Every company’s situation is different and the leasing decision must be vetted by management.
The savings of not having HR infrastructure will be less than the premium of leasing employees. However leasing employees may allow an employer to offer benefits that would not normally be available to their employees or to achieve other company objectives.
If you are considering leasing employees, take time to gather information, get a couple of leased employee proposals, evaluate the net cost to lease.