EMPLOYEE LEASING PROGRAMS
Employee leasing programs are arrangements in which businesses lease their
employees through an outside contractor that attends to the various
personnel-related activities commonly associated with human resources
management. Employee leasing programs have become particularly popular
among small-and mid-sized companies, who view leasing as:1) a viable
option for increasing the benefits that their work force receives, and 2)
an effective strategy for getting rid of burdensome and time-consuming
paperwork. Writing in
Jay Finegan offered a succinct summary of the employee leasing process:
"An employee-leasing company, also known as a professional
employer organization (PEO), 'leases' the employees of the
business that's hired it. That means the PEO serves as a
co-employer, taking control of the personnel administration and paperwork
that drive small business owners to distraction. Most PEOs offer a wide
range of services and benefits packages, including payroll administration,
medical benefits, workers' compensation and unemployment insurance,
retirement plans, and compliance assistance with labor laws. In return,
the PEO charges an administrative fee of roughly 2 percent to 8 percent of
Employee leasing surged in popularity in the 1980s, when observers tracked
annual increases of anywhere from 20 to 40 percent in the total number of
employees involved in the programs. This pace showed no sign of slowing
during the 1990s. Indeed, the National Association of Professional
Employer Organizations (NAPEO) reported in 1995 that the industry was
growing at an annual rate of 30 percent, and in 1997
reported that according to one analysis, the industry could involve $185
billion in revenues and more than 9 million employees by the year 2005.
ADVANTAGES OF EMPLOYEE LEASING
Supporters of employee leasing programs point to a variety of advantages
associated with such arrangements:
Since leasing firms handle more than one company payroll, they can wield
their greater buying power to get discounts on group health insurance,
life insurance, and dental insurance that smaller companies simply would
not be able to get. The small company is thus able to provide its
workers with better benefits, which in turn help it to keep valuable
current employees and attract promising new employees.
Leasing companies can handle chores associated with workers'
compensation and unemployment insurance. Indeed, studies undertaken by
various governmental and industry groups suggest that small businesses
with 1 to 25 employees can save as much as 40 percent on the cost of
unemployment and workers' compensation with a PEO, while
businesses with up to 100 employees can register savings of 25-35
Leasing companies assume risk and responsibility for preparing a client
company's payroll and for paying payroll taxes, along with state
and federal reporting requirements.
Employee leasing programs allow small business owners and managers to
spend their time doing what they do best, rather than struggling in
swamps of paperwork. "A good 35-40 percent of my time, which
could have been used more efficiently, was being used to evaluate health
policies and benefits packages for my staff," recalled one
"Plus, my controller was spending an enormous amount of time on
payroll, taxes, and so forth." Once the organization turned to an
employee leasing program, however, the firm's leadership was able
to devote much more of its time and energy to more appropriate tasks.
PEOs can often lend significant human resources expertise.
"Because of the numbers of employees they represent (hundreds, if
not thousands), [leasing companies] can hire in-house experts in areas
of human resources management that small companies rarely have,"
noted Bruce G. Posner in
Other analysts confirm that many PEOs offer a wealth of knowledge that
can be utilized by client companies for everything from rewriting job
descriptions to helping with recruiting. "The better PEOs are
much more than dressed-up payroll services," wrote Sammi Soutar
"They assume the role of your off-site human resource
professional, performing the sometimes perplexing, often complicated,
and time-consuming duties of that office."
Companies still wield ultimate control over how their business is run.
Leasing companies take care of payroll and benefits administration
functions, but this does not give them a voice in their clients'
other business decisions. "Under a leasing arrangement, the
employees still report to the same bosses, who remain in charge of how
the business is managed," stated Posner.
Leasing companies can also provide legal assistance to their clients in
various aspects of personnel law. There is some self-interest involved
here, since in the event of a lawsuit, both the leasing company and its
client could be targeted as co-employers.
DISADVANTAGES OF EMPLOYEE LEASING PROGRAMS
Employee leasing programs obviously have many well-documented advantages,
as evidenced by the ever-growing popularity of the practice. But as Posner
observed, "however appealing leasing may
be, it isn't without risks. Essentially … you're
delegating a vital area of your business to outsiders." And as
Finegan noted, "the employee-leasing industry has seen spectacular
flameouts, owing to everything from bad risks and poor management to
outright fraud. When a PEO goes under, its clients often discover that
their payroll cash and insurance coverage vanish with it."
Many business observers blame the presence of unscrupulous leasing
companies in the industry on the lack of regulation that exists in many
states. Fortunately, associations such as the National Association of
Professional Employer Organizations (NAPEO) keep a close eye on the
industry. It accredits firms that meet its standards, and the organization
can be a valuable resource in determining whether an area PEO will
adequately fill your needs.
FINDING A GOOD PROFESSIONAL EMPLOYER ORGANIZATION
Small business owners looking into the possibility of establishing an
employee-leasing environment in their workplace, then, should make sure
that they select a solid leasing company. To help ensure that they secure
one, they should consider the following:
Services—small businesses need to make sure that the PEO under
consideration can meet the business's human resources
administration needs, including reasonable program customization
Financial Strength—This is a vital aspect of any PEO, for an
organization that is standing on faulty financial footing could
conceivably leave its clients with a crippling debt load if it
ultimately folds as a result of incompetent or criminal management.
"Ask for banking and credit references and proof that payroll
taxes and insurance premiums have been paid," wrote Soutar.
"NAPEO-accredited members must complete a quarterly audit. Make
sure PEOs under serious consideration have been certified for at least a
couple of years." Finegan agreed, commenting in
that small business owners should "demand to see audited
financial statements and have an accountant dissect them with
you." Small businesses should also check out the financial
standing of the banks and insurance companies with which the PEO works.
References—Ask for a good-sized list of PEO clients, and then
take the time to follow up. "A lengthy list of clients helps
ensure that you won't get only references who are well schooled
in the 'right' answers, and it also offers a look at the
PEO's customer base," noted Finegan. Conversely, small
businesses should be prepared for some scrutinization as well. As Pamela
Sherrid pointed out in
U.S. News and World Report,
"a reputable leasing firm will respond to your scrutiny by
scrutinizing you. It should want to inspect your workplace and look at
your workers'-compensation experience and at the claims history
of your group health plan. It might not want as a client a company with
serious workplace hazards, for instance, since it could be sued by an
injured employee. The cost of its health premiums could go up if your
employees are often sick."
Fee Structure—Small business owners and managers should examine
the fee structure closely to make sure that it is appropriate for all
services. Companies looking to secure the services of a PEO should avoid
companies that offer excessively expensive rates, but they should also
beware of those that offer "bargain basement" terms.
"Be on the lookout for companies that either don't charge
fees or charge rates significantly lower than the national
average," wrote Soutar. "This is a warning sign that the
leasing company's intention may be to get in the market, make a
quick buck from the client's cash flow, and then get out."
Personal Comfort—Industry analysts note that a good working
relationship is an important component in making any PEO arrangement
work. Small business owners and managers, then, need to make certain
that they get along with the PEO representatives with whom they will
Contractual Details—Contracts should spell out every detail of
the arrangement that is being made. After all, human resources
management is a complex area that is rife with complicated rules and
regulations in the realms of payroll, benefits, etc. Moreover, human
resources management has seen increased lawsuit activity in recent
years, a trend that has led some PEOs to ask for varying levels of input
in the realms of hiring and firing of workers in their clients'
workforce. "Even when a leasing firm only supplies help with
paper work and benefits, some firms demand the hire-and-fire prerogative
to ensure they won't be in legal trouble because you've
discriminated against a job candidate or an employee," explained
Sherrid. Small business consultants also encourage their clients to
insist on a contract that includes a termination clause. This clause
should allow the business to terminate the agreement with the leasing
company with 30 or 60 days' notice (90 days is the absolute
maximum that should be accepted). "The more specific your
contract about the leasing firm's responsibilities, the
better," concluded Sherrid. "It should be clear, for
example, that your partner will be liable for any mistakes made in the
activities it carries out. If it errs in calculating your taxes, for
example, it should be responsible for any fines or penalties."
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"If You're Considering Employee Leasing, Heed the Latest
Profit-Building Strategies for Business Owners.
Murthy, B., and Suzanne K. Murrmann. "Employee Leasing: An
Alternative Staffing Strategy."
Cornell Hotel and Restaurant Administration Quarterly.
Posner, Bruce G. "The Joy of Leasing."
Sherrid, Pamela. "More Time for Business: Owners can Avoid the
Paper Work and Buy Benefits Cheaper, too."
U.S. News and World Report.
November 5, 1990.
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November 24, 2000.
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