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To escape the rising costs of workers' compensation (WC) insurance and avoid often-significant administrative burdens of human resource management, many companies are opting for employee leasing arrangements. As a business, employee leasing did not exist before 1970; the industry now consists of some 1,400 companies nationwide, handling annual payrolls exceeding $17 billion. Although a variety of leasing arrangements have gained popularity, they are not without risks.
Companies must understand the complexities of employee leasing before making the transition. Although many success stories have been documented, some employers have suffered financially or been left exposed without required workers' compensation insurance coverage. This article highlights risks associated with the leasing practice; discusses state mandates; and outlines sound strategies for pursuing employee leasing arrangements.
HOW LEASING WORKS
In an employee leasing agreement, an employer essentially "fires" its employees, who are then hired by an employee leasing firm. The employer, as a client of the leasing firm, "leases back" those employees to perform the same work they have always performed. The employer pays the firm a fee (typically two to six percent of payroll costs) to assume responsibility for payroll management and other administrative duties. Such fees typically cover preparation of payroll checks, payment of payroll taxes, obtaining WC insurance (for which the leasing firm bills the client), and related administrative tasks such as government reporting and regulatory compliance.
GAINING IN POPULARITY
National Safety Leasing Assn., an Arlington, VA-based trade group, estimates that some 1 million workers are employed by leasing firms throughout the U.S. This statistic reflects enormous growth in the industry since 1984, when an estimated 10,000 employees were leased (Ponder).
Many employers applaud such arrangements. Smaller companies, often unable to handle administrative functions such as payroll and accounting, are some of the industry's greatest proponents. By hiring the leasing firm to prepare payroll, comply with immigration regulations, obtain WC coverage and handle Americans with Disabilities Act (ADA) requirements, companies can devote resources to other profit-making activities.
Employees also reap benefits from leasing arrangements. Since the typical leasing firm has numerous clients, with hundreds (or perhaps thousands) of employees, significant purchasing power exists for benefits such as life/health insurance and 401(k) plans. Employees can obtain better insurance coverage and benefits than those available from a small company.