Employee Leasing: A Guide for Small Businesses

If you’re considering adding employees to your workforce, you may want to think about employee leasing. Leasing employees lets you add talented members to your team without creating an additional burden for your HR department processing payroll and other administrative complexities. Learning about the benefits and drawbacks of employee leasing can help you decide if this method is appropriate for your business.

 

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What is a leased employee?

A leased employee is someone who receives a paycheck from a leasing company while performing services for another company. The employer who’s leasing the employee controls the work they perform while the leasing firm is responsible for reporting their wages and taxes. To cover the leased employee’s wages, benefits, taxes and administrative fees, the employer pays the leasing firm directly.

Related: Contracting Independent Workers: What is a Contractor?

 

Benefits of employee leasing

There are a number of reasons why an employer may want to lease an employee rather than hire them directly:

  • To avoid administrative complexities: By leasing employees, you can add additional workers without adding additional administrative tasks, as the leasing firm handles payroll, W-2 forms claims processing, state and federal regulatory compliance, unemployment insurance and other paperwork responsibilities. Because the leasing firm handles these responsibilities, it frees up the time of in-house personnel for more high-impact tasks.
  • To provide better healthcare for employees: Because leasing firms can combine the employees of different companies into one large group, they can typically offer better rates for healthcare coverage, saving both the employer and employee money.
  • To access HR expertise: Because leasing firms employ hundreds, sometimes thousands, of employees, they have an abundance of knowledge to offer their clients, such as helping to rewrite job descriptions or with recruiting.
  • To estimate costs more easily: Employee leasing is often available for a flat rate, which makes it easier for companies to calculate their annual expenses.

Related: What is a Contingent Worker?

 

Drawbacks of employee leasing

While there are many well-documented advantages of employee leasing, there are some drawbacks as well, including:

  • Less control: One of the greatest risks of employee leasing is that you’re delegating an important part of your business to an outside company that doesn’t know your business as well as you do. You lose control of your processes, systems and benefits. 
  • Diminished value of internal HR department: If the leasing firm is handling the majority of your HR responsibilities, your internal HR team may be less valuable to the organization.
  • Outside influence on culture: When an outside company is responsible for employing your team members, you have less control over the internal culture you are creating within your organization.

 

Industries and business types that benefit from employee leasing

The companies that are the best fit for the services of a leasing company are ones where time equals money. In these cases, any time spent on administrative tasks is money wasted. For example, even if a lawyer runs a law firm and has a team of junior staff, they may still want to complete legal tasks themselves. If the lawyer who owns the practice spends hours each way on administrative tasks, those responsibilities take away from their ability to earn additional income practicing law. 

Other industries and types of jobs that are ideally suited for leasing firms include:

  • Consultants
  • Healthcare
  • Finance
  • Retail
  • Real estate
  • Legal
  • Aviation

 

Frequently asked questions about employee leasing

 

Are leased employees considered employees?

It depends. The leased employee is considered to be a common-law employee of the company they work for if each of the following is true:

  • The employee is assigned to the employer on a long-term basis.
  • The employer determines their pay rate.
  • The employer makes all hiring and firing decisions related to their employment.
  • The employee’s services are provided under an agreement between the staffing firm and employer.
  • The worker performed services for the employer on a full-time basis for at least one year, which according to IRS Revenue Code Section 414(n)(2)(B), is defined as 1,500 hours during a 12-month period or a number of hours that equals 75% of the average number of hours an employee would typically work.

It’s important to understand who’s the employee’s common-law employer for retirement purposes. If the person is the employer’s common-law employee, then they’re covered under the employer’s retirement plan rather than the leasing company’s.

 

What is the difference between employee leasing and a PEO?

Employee leasing is where a leasing firm provides contract workers to a client, typically on a temporary basis. When a business works with a leasing firm, the firm typically provides workers who do the work at the employer’s place of business and when the project or contract is complete, the worker returns to the leasing firm. 

With a professional employer organization, or PEO, the employees are employed by both the client and the PEO. In this type of co-employment relationship, the PEO assumes responsibility for administrative tasks like wages and tax withholdings, while the client retains control of the process of hiring or terminating employees and other day-to-day responsibilities.

Related: What Are PEOs? A Guide for Managers

 

Are leased employees eligible for benefits?

Yes, although whether they’re a common-law employee for the employer or the leasing agency depends on the requirements listed above. Employees may receive healthcare plans through a PEO, where they can often get better rates and better workers’ compensation coverage. Common-law employees who meet all the qualifications listed above are typically eligible for retirement benefits through the employer.

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