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 Inc., 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 total payroll."
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 Inc. 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 percent.
* 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 executive in Association Management. "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 Inc. 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 in Association Management. "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 desires.
* 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 Inc. 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 interact.
* 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."