Why Employee Leasing can be Bad for Your Business

Why Employee Leasing can be Bad for Your Business

The business of leasing workers to other employers has become a $92 billion dollar industry, according to the National Association of Professional Employer Organizations. Businesses of all sizes have chosen to outsource employee management to leasing firms, attracted by reduced paperwork, benefits costs, and legal obligations they would otherwise have. However, employee leasing comes with risks that business owners should contemplate before making the leap into such an arrangement.

First, an employer paying to lease employees loses a certain amount of control over them. They're not the client's employees, so he cannot hire or fire them. Leasing firms may give him choices among available workers, but there's no guarantee that he will get the ones he wants. He may find himself with a group of workers who don't meet his needs, whether because of skill levels, work ethic, attitude, or some other reason.

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.

Some leased employees may also not be committed to the client's business. While some businesses have "fired" their entire staffs and then leased them from a firm that hired them, others simply accept those employees that the leasing company provides. This may create an environment where the workers feel like temporary or seasonal employees with no long-term future at the client's firm. As a result, they may not feel the same level of commitment that permanent employees might feel.

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 with the worst of both worlds - 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 still require the client to have its own Workers' Compensation insurance policy, which reduces one of the advantages of leasing. Even where the leasing company provides the insurance, the cost of providing that insurance 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.

Having a permanent paid staff presents a lot of challenges to business owners, from human resources issues, unions, complying with employment laws, and handling payroll, taxes and benefits. However, employee leasing may not be an ideal solution to those challenges. Please feel free to call me to discuss further.

Dan Zeiler

dan@zeiler.com 

708.597.5900 x134

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