Businesses of all sizes choose to outsource employee management to leasing firms, attracted by the reduced paperwork, benefits costs, and legal obligations they would otherwise have by doing so.
The business of leasing workers to other employers has become a $120 billion industry, and there are some 4.5 million workers in the U.S. that are engaged through employee leasing firms, according to the National Association of Professional Employer Organizations.
However, employee leasing comes with risks that business owners should contemplate before making the leap into such an arrangement.
Loss of Control
First, an employer paying to lease employees loses a certain amount of control over them. They aren’t the client’s employees, so the company cannot hire or fire them. Leasing firms may give the employer choices among available workers, but there’s no guarantee that they will get the ones they want.
The employer may find itself with a group of workers who don’t meet its needs, whether because of skill levels, work ethic, attitude, or some other reason.
A Complicated Relationship
In a non-leasing situation, there are two parties involved in a dispute over work hours, benefits, performance, or other issues — the employer and the employee. Leasing adds a third party to the conversation — the leasing company.
Some issues are between only the employee and the leasing company, but others may involve the client employer as well, such as arguments about hours worked or overtime. Adding an extra party to the discussion necessarily complicates it.
Lack of Commitment
Leased employees may not be committed to the client’s business. As leased staff, the workers may feel like they have no long-term future at the client’s business. As a result, they may not feel the same level of commitment as permanent employees.
Risk of Default
In a leasing arrangement, the leasing company assumes the obligations to meet payroll, pay taxes, administer benefits, and possibly obtain workers’ compensation and unemployment insurance.
However, if the leasing company goes out of business or is run poorly, these obligations will fall back on the client employer. This leaves the client paying fees to lease employees, while also incurring the costs and obligations of not leasing them.
While workers’ compensation laws have a lot of similarities from state to state, there are differences. Some states may preserve the client employer’s immunity from worker lawsuits, but others may not. Some states may require the client to have its own workers’ comp insurance policy, which reduces one of the advantages of leasing.
Even where the leasing company provides the insurance, the cost of providing that coverage is loaded into the leasing fees, and the client has no control over the choice of insurer, loss-sensitive pricing plans, or whether the premiums are paid.
The Takeaway
Having a permanent paid staff presents a lot of challenges to business owners, from human resources issues, unions, complying with employment laws, to handling payroll, taxes, and benefits. However, employee leasing may not be an ideal solution to those challenges.