The Employee Leasing Contract
An employee leasing contract is a type of hiring agreement through which a company hires all of its employees from a staffing company. The staffing company is an entirely separate legal entity from the company who hires its employees. This means that employee leasing contracts allow a company to hire all of its staff while having no direct employer-employee relationship with any of its employees. The staffing company, as the statutory employer of the employees it is leasing to the company, handles all tasks such as issuing salaries , employment contracts and tax certificates for the employees it is leasing. Typically, both the company and the staffing company are considered as joint and several liable for any due payments owed by any of the employees of the company. Commonly, companies that are struggling financially choose to enter into an employee leasing contract in order to more easily let go of employees, as these employees technically cease to be employees of the company, having been hired through a staffing company.
Advantages of Employee Leasing
Employee leasing is a strategic tool that can help businesses realize several significant benefits. When business owners evaluate their potential employee leasing agreement, they should understand how the agreement can support their organizational goals and the bottom line.
Reduced costs – A leasing agreement can help a struggling business save on costs in many ways. First, there are reduced payroll costs because employees who are leased are not directly on the company’s payroll. In addition, the leasing company covers the costs of general liability insurance, workers’ compensation insurance and other types of insurance coverage that would otherwise be covered by the individual employer. The hiring business is also spared from the costs of posting job ads and recruiting employees. It may be beneficial to hire a leasing company without any of the costs.
Access to the best employees – A leasing company has access to the best talent available. Many businesses are concerned about their ability to recruit the best talent if they can’t pay high salaries. However, a leasing agency typically pays higher salaries, which essentially means that it will have access to a larger talent pool than an employer that is not using a leasing company. A leasing company typically also spends more time and money advertising and recruiting employees, which further increases the talent pool.
Flexibility – An employer has flexibility with its staff when it contracts with a leasing company. Depending on the company’s specific needs, it may have the option of determining whether the employee will work full-time or part-time. A company can also reduce or increase its employee levels quickly and easily based on current business needs.
Increased Productivity – Leasing is a great way to eliminate the second-guessing of who to hire, and simply get to work and be productive. Without wasting time on employee recruitment and payroll management duties, the employer can focus on running the business. This allows the owner to put his or her energy towards running the company and making more money.
Leasing companies also tend to offer their employees better benefits packages than are offered by the client company. This makes both the leasing company and the individual more loyal to one another, which leads to a more productive working relationship.
Common provisions and conditions
An employee leasing contract usually includes a number of standard terms and conditions, including the duration and termination of the contract, an appointment of the employee leasing company’s obligations (wages and benefits) and obligations of the clients (paying certain fees to the employee leasing company or recruiting employees). The contract also typically contains provisions regarding termination by the parties as well as some conditions that are relevant to contracting parties in the context of labour law (termination and withdrawal of individual employment contracts, etc.). In addition to the terms and conditions of the contract, an employee leasing contract also usually includes several annexes – such as those that contain employees commitment letters, a catalogue of the client’s work, job descriptions, a time schedule, a catalogue of services and a different catalogue of fees and a catalogue of social security contributions, etc.
The Difference Between Employee Leasing and Regular Employment
Employee leasing is an employment arrangement in which the business owners outsource the management and administrative tasks of the company’s employees to a third-party company that specializes in these tasks. In exchange for handling the day-to-day details, the leasing company receives a small fee from the business owner for each employee leased. This is also commonly referred to as "staff leasing," "PEO" (professional employment organization) or "PPO" (professional employer organization). Regardless of the terminology, when you choose to enter into an employee leasing contract, you are creating a co-employment relationship between your company and the leasing company.
Under a traditional employment arrangement, the company hires employees directly and assumes all responsibilities and liability for its employees’ work. The employing company has a direct relationship with all of its employees, managing payroll, work duties, and employee benefits. Thus, the company is in complete control of the business structure, management style, and daily tasks.
With an employee leasing arrangement, however, you are still responsible for the management of your business and the employees within it, but you share these duties with the leasing company. Basically, you are outsourcing the administration of your employees to the leasing company, including some or all of the following duties:
The leasing company takes responsibility for those functions, allowing you to focus on the day-to-day management of your business. In a co-employment arrangement, the leasing company also enters into separate contracts with your employees. Thus, the leasing company manages all payroll duties and withholds applicable taxes. The leasing company assumes all liability and responsibility for properly withholding all state and federal taxes from the employees, and they also file all wage reports.
However, because you remain responsible for the management of your business, the leasing company usually requires employees to sign a non-solicit/covenant not to compete clause upon hire. So if this employee leaves a week after he starts, he can’t take his rolodex and start soliciting your clients. Further, although the leasing company may have the authority to hire and fire employees, it is generally considered best practice for the business owner to conduct the weekly performance reviews because this shows an investment and desire to make the engagement work. Thus, the company converts what has been a chore of interviewing, hiring, training, and firing into a perk of delegating personnel matters to an expert.
Choosing an Employee Leasing Provider
When deciding whether to hire an employee leasing company, a business owner should first consider the reputation of the leasing company. Like most industries, there are reputable and disreputable employee leasers. Asking other business owners who have used the company is a good way to vet a leasing company. Be aware that a good employee leasing company will not want you to speak with their clients; however, a great leasing company will encourage you to do so. Another way to evaluate the leasing company is to visit their offices and meet their staff.
Business owners should also check the employee leasing company’s compliance with all relevant legal statutes. The leasing company should keep copies of the required Department of Labor forms related to Fair Labor Standards Act compliance, drug testing, compliance with Form I-9 and E-Verify, and Child Support Enforcement. Depending on the size of your business, the leasing company may be required to set up a self-funded medical plan or comparable medical plan . Be sure to ask about this and verify compliance before signing on with one of these companies.
A business owner should also consider whether or not a leasing company specializes in his industry or has worked with other businesses in his area. Employee leasing companies are often set up to service the needs of other local and similarly situated businesses. An employee leasing company may not be able to understand the needs and requirements of your business, the people in your community, or the culture within your industry if they do not have prior experience in these areas.
Finally, to the extent possible, a company should only hire an employee leasing company who will improve, and not detract from, the company’s culture. If a company hires an employee leasing company only to find that the employees they hired were not a good culture fit, the employees may not take kindly to being leased.
Legal and Compliance Considerations
Lease agreements for employee leasing companies can give rise to certain employment-related legal issues. For instance, while employee leasing companies can often protect themselves against issues that might arise from their clients’ misconduct, employees who suffer adverse consequences from their employer’s workplace misconduct may bring actions against the employer and the employee leasing company on various theories, including labor law violations.
There are also certain practical issues to consider. For example, a client’s failure to pay wages and/or failure to provide mandated workers’ compensation coverage could have negative labor law and insurance implications for the employee leasing company.
Therefore, employee leasing companies should maintain appropriate indemnification and hold harmless provisions in their lease agreements so that the client conveys its obligation, and agrees to indemnify the employee leasing company, for compliance with all labor laws, wage laws, and workers’ compensation laws. Leasing companies must also secure liability insurance coverage to cover violations of these laws by the client.
Examples of Successful Employee Leasing
Statistics from the United States Small Business Administration (SBA) notes that an average of 100,000 to 150,000 new businesses open every year, and close 6 months later with 70-80% perishing within five years. By mid-2008, it was estimated that there were 28 million businesses in the United States, and that 6.6 million of those were less than one year old, making start-up businesses account for 23.5% of the total, a 3.3% increase over 2007. The majority of success stories and tales of failures are attributed to management practices, employee turnover, public relations, and the economy. With an average of 50 states, each with their own state laws, county business rules, and city ordinances, majority of the start-up businesses find it difficult to keep up with each and every regulation and remaining compliant. That’s when Employee Leasing Contracts (ELC) come into the picture.
Many successful businesses that have committed themselves to the leasing system can account their success to having dedicated employees which grow with the company. For example, we first have Techway Services who have experienced two years of no turnover. They have seven highly qualified employees, which they account the success of their business to. They appreciate the peace of mind of having a full benefits package that includes health, dental, and retirement, along with commercials insuring their professional business. All these provided by the ELC at a fraction of the cost. In 2007, they were awarded three major contracts through bids , and acquired four new contracts in the same year. "The employee leasing system has made it easier for our company to expand each new office and keep staff and employees," said Mr. Bettermesh. "I can now focus on the business at hand and leave the HR issues to my leasing firm." Techway Services uses 30% of the earnings from contracts and projects to invest in their employees, in the form of additional training and support that they would not be able to afford otherwise. Another successful example is Aspire Facilities Services. Founded by Roger Lamb and Scott Hart, Aspire specializes in a variety of custodial, facility and construction management services. Roger and Scott successfully grew their business in their first year to $400,000 and in their second year reached $700,000. During the last five years, Aspire has tripled its revenue and employed over 200 people, while remaining committed to improving operational innovation and promoting a positive culture for all employees. The firm has also introduced a strong incentive and rewards program that encourages learning, knowledge, experience, training and hard work, all while being supported by the ELC staff. Aspire also grew their business with several multi-year contracts, including contracts with San Mateo County, Stanford University, Novartis Pharmaceuticals, and Lucille Packard Children’s Hospital, all requiring additional staff to support the services provided. Despite the growing size of the company, Roger and Scott have never missed a payroll due to growth.