Employee Leasing Pros and Cons

A workforce is required for a business to operate, but hiring employees comes with upsides and downsides, which may take a toll if the operation becomes large. One way that companies take the load off employee recruitment and management is to hire leased employees. Taking additional staff on board, minus the extra payroll and administrative load, can prove beneficial.

Employee leasing or contract staffing has been around since the mid-80s. It all started with the Tax Equity and Fiscal Responsibility Act or TEFRA, the legislation that introduced significant tax benefits for any company that leases employees. When the tax loophole of TEFRA closed, employee leasing stuck around and even evolved and expanded into what is now a billion-dollar industry known as the Professional Employer Organization (PEO). Some of the best leasing companies are members of the PEO and holds the prestigious Employers Service Assurance Corporation (ESAC) certification.

Leased workers are usually responsible for doing payroll, withholding, administering benefits, keeping records, and other administrative work. They take over some of the tasks of permanent employees, but without changing the actual makeup of a business staff organization. This could be the best staffing solution for a company. Or it could have an adverse effect, causing some problems. This is why it is vital to consider the pros and cons of this method of filling staffing needs, before you venture into employee leasing.

What Are the Pros of Employee Leasing?

1. “Co-Employment” Relationship
Entering into this relationship would mean that the employee leasing service is held accountable for the employer responsibilities of the leased workforce. They will be responsible for payroll processing, tax administration, human resource management, and workers compensation management of all the staff under their employ, taking away additional burden from the client or the business that is leasing employees.

There will be no need to acquire their own workers compensation policy, or create and process forms when recruiting people.

2. Reduced Workload
Leased employees are defined as workers employed by a PEO who are primarily responsible for overseeing HR related functions, but actually perform different types of work for a company. By simply cutting down on the time that HR spends on routine administrative tasks, a company will have more things done in a day.

Employee leasing also gives you access to professionals who are experts in human resources, risk management, employee benefits and payroll. This also means that, apart from reduced administrative workload, you also acquire assistance with regards to labor law compliance. Considering the number of rules and regulations that you need to follow, having one area taken care of will help minimize risks of violating labor laws.

3. Reduced Overall Employment Costs
Because the workers compensation (WC) coverage is paid to the PEO in a pay-as-you-go manner, the client is spared from large annual WC premiums. Employee leasing services are also offered at a flat rate. This means, if the payroll reduces for whatever reason, the cost of administration also reduces proportionately. The flat rate greatly benefits companies with fluctuating payrolls.

Employee leasing can also reduce costs associated with payroll taxes. Although the clients are not entirely relieved of this responsibility, the burden is shared between them and the leasing agency. This arrangement will only go sour if the leasing agency goes bankrupt, in which case the responsibility for the entire tax amount will be transferred to the client.

4. Employee Benefits
Permanent staff will also benefit from employee leasing in many ways. Because experts are working on payroll and other routine administrative tasks, they are assured of timely and accurate paychecks, better protection under federal labor laws, timely assistance with employment related issues, and efficient and convenient claim processing. But the real highlight is that access to benefits, such as insurance and 401 (k) plans, would be quicker and easier. Suffice to say that these will be readily available to them with the help of leased employees.

What Are the Cons of Employee Leasing?

1. Shared Responsibilities
A co-employment relationship has its share of advantages and disadvantages. While it can ease up on the workload, it also carries some risks. If a client is unlucky enough to work with a poorly managed leasing firm, payroll and benefits may be mishandled or the company could go under. This would leave the client to face the leasing firm’s obligations, including payroll taxes owed. In the event that a leased staff assaults a customer, you could be held liable instead of the leasing agency. You may also have to face fines and sanctions, if the leasing agency is involved in illegal employment practices. So choose a leasing firm wisely.

Make sure to carefully evaluate a company’s financial stability, track record, industry experience, customer satisfaction rating, and safety record. You should also look into the insurance they can provide with major considerations to possible fallout within a lease contract.

2. Seasonal Employees
In most cases, clients lease employees when the operation becomes large or the existing staff can no longer handle the increased workload. So when the project is completed and everything goes back to normal, the client has to let go of the leased employees hired. The recruitment process becomes more tedious than the traditional way of hiring people. Although you do to get to work with professionals and experts, they won’t stay with you forever. The opposite is also true. That is, if you end up hiring workers who are uncooperative, you will be stuck with them until your contract allows you to kick them out.

Know that not all PEO are created equal, with some harder to work with than others. Add to this a horrible customer service and you could be in for some serious trouble. Good enough if you find out early on about a leasing agency’s bad reputation before you sign up with them. Otherwise, you would have to suffer, which could translate to bad business.

On the side of the leased personnel, their employment would be like going on a rollercoaster ride. A client hires them, lets them got at the end of an employment contract, and the leasing agency would have to re-hire them. There is no job stability, and the benefits they receive may not be equal between the leasing agency and the hiring client.