Leased Employees: Meaning, Benefits and Risks

What are Leased Employees?

Leased employees are workers who are hired through a special kind of company called a Professional Employer Organization, or PEO in short. This setup is really helpful for businesses that want to focus on their main work without worrying too much about complicated HR tasks. The professional employer organization is the official boss of these workers. It handles all the tricky stuff, like making sure they get paid, sorting out their taxes and benefits, and dealing with legal things like workers’ compensation insurance. All the paperwork and rules that come with having employees are covered here.

Geeky Takeaways:

• The business that needs these workers, called the client company, just pays the PEO a fee.
• This fee covers the workers’ pay, their benefits, and a bit extra for the Professional Employer Organization services.
• Even though these workers are paid by the PEO, they actually work at the client company and do their day-to-day jobs there, under the management of the client company.

Who is the Employer of a Leased Employee?

In the case of Leased employees, the Professional Employer Organization is their formal employer. This means that the PEO is legally responsible for all aspects of their employment. This includes not just hiring the employees, but also managing their payroll, calculating and paying their taxes, providing benefits like health insurance and retirement plans, and ensuring compliance with various employment-related laws and regulations. While these employees physically work at and carry out tasks for a client company, it is the PEO that handles the intricacies of their employment. This relationship allows the client company to benefit from the workers’ services without taking on the administrative burden that typically comes with being an employer. For the employees, the PEO becomes the entity they turn to for HR-related queries, benefits management, and issues related to their employment.

This setup is particularly beneficial for small and medium-sized businesses that may not have the resources or expertise to manage complex HR functions. By outsourcing these tasks to a PEO, these companies can focus more on their core business operations. However, it’s important for businesses to carefully choose a PEO that is reliable and compliant with all the relevant employment laws to ensure a smooth and legally sound working relationship.

Difference between Leased Employees and Contract Employees

Leased employees and Contract employees are two distinct types of employment arrangements, each with its own characteristics and implications for both the workers and the companies they work for. Some of the differences are as follows,

Basis	Leased Employees	Contract Employees
Employment Structure	They are employed by a Professional Employer Organization (PEO). The PEO handles all administrative tasks related to employment, such as payroll, benefits, and tax withholdings. Leased employees work at the client company, but they are not directly employed by it.	These individuals are typically hired directly by a company to work on a specific project or for a set period. They can also be self-employed or work through a staffing agency. Unlike leased employees, contract employees handle their own taxes and benefits.
Duration and Scope of Work	They often work for the client company on a long-term basis. Their roles are usually similar to regular employees of the company.	Their work is usually project-specific or for a fixed term. Once the project is completed or the term ends, the contract employee’s engagement with the company typically concludes.
Benefits and Taxation	They receive benefits like health insurance, retirement plans, etc., from the PEO. The PEO also takes care of tax withholdings and compliance.	Generally, they do not receive benefits from the company they are working for. They are responsible for their own taxes, often paying self-employment tax, as they are considered independent contractors.
Control and Supervision	While the PEO is the official employer, the client company has control over the leased employees’ day-to-day activities and job duties.	They usually have more autonomy regarding how and when they work, especially if they are self-employed. The company hiring them typically focuses on the outcome or deliverables rather than supervising the day-to-day work.
Legal and Financial Responsibilities	The PEO assumes most of the legal and financial responsibilities related to employment.	These individuals or their agencies bear the legal and financial responsibilities for their work, including taxes and insurance.

When should Employee Leasing be used?

Employee leasing through a Professional Employer Organization (PEO) can be particularly beneficial in certain situations:

1. Small to Medium-Sized Businesses: For businesses that don’t have a large or specialized HR department, leasing employees can be a great solution. It allows them to delegate complex HR tasks, payroll, benefits administration, and compliance with employment laws to the PEO.

2. Need for Streamlined HR Operations: If a company wants to simplify its human resources operations, employee leasing can consolidate these services under the PEO, providing a more streamlined approach to managing employees.

3. Access to Better Benefits: Smaller businesses often struggle to offer competitive benefits due to higher costs. PEOs, because of their scale, can often provide access to a wider range of benefits at a more affordable cost.

4. Rapid Growth: For businesses experiencing rapid growth, managing HR tasks can become overwhelming. Employee leasing allows these companies to scale up their workforce quickly without the added administrative burden.

5. Reducing Employer Liability: Since the PEO becomes the legal employer, they assume many of the liabilities and responsibilities associated with employees, which can be advantageous for companies looking to mitigate risks.

6. Focus on Core Business: If a company wants to focus more on its core competencies and less on administrative tasks, leasing employees can free up time and resources to concentrate on business growth and development.

7. Need for HR Expertise: Companies that lack in-house HR expertise can benefit from the professional knowledge and experience a PEO provides, ensuring compliance with employment laws and effective HR management.

Benefits of Leased Employees

Hiring Leased employees through a Professional Employer Organization (PEO) can bring several advantages to a business. Some of them are mentioned below:

• Reduced Administrative Burden: The PEO handles many of the time-consuming administrative tasks associated with employment, such as payroll processing, tax withholdings, and compliance with labour laws. This reduces the administrative workload on the client company.
• Access to Better Benefits: PEOs often have access to high-quality, comprehensive benefits packages due to their larger size and pooled resources. This allows smaller companies to offer more competitive benefits, helping them attract and retain talent.
• Compliance and Risk Management: PEOs are well-versed in employment laws and regulations, which helps ensure that the client company remains compliant, reducing the risk of legal issues related to employment.
• Cost Savings: By leveraging the services of a PEO, businesses can often save money on HR-related costs. This includes potentially lower rates for health insurance and workers’ compensation, as well as savings from not having to invest in HR infrastructure or personnel.
• Flexibility and Scalability: Leased employees allow businesses to quickly adjust their workforce based on current needs without the long-term commitments associated with hiring permanent staff. This flexibility is particularly beneficial for companies with fluctuating or seasonal demands.
• Focus on Core Business Activities: With the PEO handling HR responsibilities, the client company can focus more on its core business activities, which can lead to increased productivity and growth.
• Professional HR Management: Smaller businesses that might not have the resources for a full HR department can benefit from the professional HR management provided by a PEO, including handling of employee relations issues, performance management, and training.

Risks of Leased Employees

While leasing employees through a Professional Employer Organization offers numerous benefits, there are also certain risks and considerations to be aware of, such as:

• Loss of Control: While the client company directs the day-to-day activities of leased employees, some degree of control over HR functions is transferred to the PEO. This can sometimes lead to conflicts or issues if the company’s and PEO’s policies or culture don’t align well.
• Dependence on the PEO: The client company relies on the PEO for critical HR services. If the PEO fails to deliver quality service, or if there are disagreements, it could impact the company’s operations and employee satisfaction.
• Employee Loyalty and Culture Fit: Since leased employees are technically employed by the PEO, there might be challenges in building the same level of loyalty or cultural integration as with direct hires. This can affect team dynamics and company culture.
• Quality of Benefits and Services: While PEOs often offer access to superior benefits, the specifics depend on the PEO’s offerings. If the benefits package doesn’t meet employee needs or expectations, it could lead to dissatisfaction.
• Cost Considerations: Although using a PEO can be cost-effective, it’s important to thoroughly understand the fee structure. In some cases, the costs might outweigh the benefits, especially if the services provided are not fully utilized.
• Compliance Risks: While a PEO generally assumes responsibility for legal and regulatory compliance, the client company must ensure that the PEO stays up-to-date with relevant laws and regulations. Any oversight or error on the part of the PEO could potentially impact the client company.
• Limited Customization: The solutions and services offered by a PEO may be somewhat standardized. For companies requiring highly specialized HR services, this could be a limitation.
• Potential for Disruption: If a company decides to change PEOs or bring HR services back in-house, this transition can be disruptive to operations and employee morale.

What can HR leaders do to Incorporate Leased Employees into their Teams successfully?

HR leaders play a crucial role in successfully integrating leased employees into their teams. Some strategies they can follow are:

• Clear Communication: Establish open lines of communication with both the PEO and leased employees. Ensure that everyone understands their roles, responsibilities, and the work culture of the company.
• Define Roles and Expectations: Clearly outline the roles and responsibilities of leased employees. Make sure they understand what is expected of them and how their work contributes to the company’s goals.
• Cultural Integration: Foster a welcoming environment and include leased employees in team meetings, company events, and other activities. This helps build a sense of belonging and aligns them with the company’s culture and values.
• Training and Development: Provide adequate training to leased employees to ensure they have the necessary skills and knowledge to perform their roles effectively. Include them in professional development opportunities.
• Effective Onboarding: Develop a thorough onboarding process that helps leased employees understand the company’s operations, policies, and culture. This step is crucial for quick and effective integration.
• Feedback Mechanisms: Implement regular feedback sessions. This helps in understanding any challenges they might be facing and provides an opportunity for continuous improvement.
• Build Relationships: Encourage interaction between permanent and leased employees. Building relationships can improve teamwork and collaboration.
• Monitor Performance: Regularly assess the performance of leased employees. This ensures that they are meeting their objectives and contributing positively to the team.

Frequently Asked Questions (FAQs)

What are leased employees?

Leased employees are workers who are hired through a Professional Employer Organization (PEO). The PEO handles all the administrative aspects of employment like payroll, benefits, and compliance with labor laws, while the employees work at the client company.

How does employee leasing differ from hiring temporary workers?

The key difference is in the employment arrangement. Leased employees are long-term and are considered employees of the PEO, which manages their HR needs. Temporary workers are typically hired for short-term projects and are usually employed by a staffing agency.

What are the benefits of using leased employees?

Benefits include reduced administrative burden for HR tasks, access to better benefits packages, compliance with employment laws, and flexibility in workforce management. It’s also cost-effective for many businesses.

Who is responsible for the leased employees’ salaries and benefits?

The PEO is responsible for paying salaries and providing benefits to leased employees. The client company pays the PEO a fee for these services.

Can leased employees be fired or reassigned by the company they are working for?

While the client company can request the PEO to reassign or release an employee, the actual employment decision lies with the PEO. The company they work for can manage their day-to-day roles but doesn’t directly handle employment termination or reassignment.