Employee Leasing

What Is a Leased Employee?

A leased employee (also known as a temporary employee) is someone who is hired and paid by a different company than the one they provide services for. The agency that hires and leases the employee takes care of all the HR duties associated with their employment. The client company usually leases the employee on a temporary or per-project basis.

6 Top Benefits of a Leased Employee

Leasing employees has many benefits for employers. Discover how your organization can benefit from this unique employment arrangement.

1. Quick Turnaround

Staffing agencies often have access to a large pool of potential candidates, who might have already been screened and tested for competencies. As a result, they can offer a quick turnaround when you need to get started with a project as soon as possible.

This is in stark contrast to the traditional way of doing things; the average time to hire for a full-time direct-hire employee is 44 days.

2. Specialized Sourcing

Because their talent pipelines are always full of candidates from various backgrounds, staffing agencies are excellent sources of specialized talent. Their teams are usually experts at sourcing and recruiting potential employees, including passive candidates who leave their resumes on file just in case a desirable position becomes available.

3. Lighter Load

In an employee leasing arrangement, the staffing agency is the employer of record. This means it takes care of all the HR administrative duties associated with the employee, including

• Hiring
• Onboarding
• Payroll
• Benefits administration
• Termination
• Firing

In turn, the HR manager at the client company can focus on more strategic tasks.

4. Cost Savings

Hiring full-time employees can get expensive. Some reports say it can cost companies as much as $4,700 per employee. Others estimate that it may be as much as three to four times the role’s salary.

Because the client company doesn’t have to cover the costs of recruitment, onboarding, insurance, and other requirements, employee leasing can offer some savings. Additionally, the costs for employee leasing are usually fixed, which means they are much easier to budget for.

5. HR Expertise

Because the staffing agency is responsible for HR administration for its employees, it will take on the burden of maintaining compliance. This can bring peace of mind for HR professionals without a legal background or teams that don’t have a dedicated compliance officer. You also won’t have to worry about keeping up with shifting regulations—the staffing agency will do that for you.

6. Ideal Employees

Over the course of your employee leasing contract, you may come in contact with exceptional employees who perform well and fit in with your company culture. When this happens, you can just hire those employees directly. You’ll face fewer expenses since these employees have already been working with your company.

Drawbacks to Employee Leases

Like most things in HR, signing an employee lease agreement has both pros and cons. Here are some of the drawbacks your organization may experience with this type of arrangement.

Control Issues

Because your organization is not the employer of record for leased employees, you don’t have complete control over their HR processing. If you’re a hands-on HR professional, passing over the reins may be difficult for you, especially if the leasing agency’s procedures are different from the way you normally do things.

Loss of Internal HR Value

With someone else taking care of the administrative HR tasks, your internal team members may begin to question how much they’re needed. This can especially be an issue for organizations that lease most of their the workforce. One way to combat this is to have the HR team focus on more strategic work, such as aligning policies and procedures with business goals and working with senior leadership to launch new initiatives.

Loss of Tax Incentives

Not being the employer of record for leased employees also means losing out on tax incentives from the IRS. For example, the Work Opportunity Tax Credit provides tax credits to employers hiring individuals from certain populations. Because your organization isn’t hiring those leased employees, it would not be eligible for this and other breaks.

Expensive Benefits

With fewer employees on your books, you may struggle to offer competitive healthcare options and other benefits to those you do employ full-time. These benefits may become more expensive as you struggle to find competitive rates.

You may be treated like a small business, 60% of which limit the insurance plans they offer due to costs. This can cause organizations to become less competitive for top talent.

No Performance-Based Pay

When your organization works with a staffing agency, you often must pay a fee whether a leased employee performs well or not. This also makes it challenging to use an employee leasing arrangement for roles where pay is based on employee performance.

How Do Taxes Work for Leased Employees?

How taxes work for leased employees depends on the type of agency an employer is working with and how the employee leasing agreement is set up. In most cases, a staffing agency is considered a vendor. Once you have paid the staffing agency for its services, that organization is responsible for withholding and paying employment taxes because it is considered the employer of record.

Still, a leased employee could be considered a “common law” employee of your organization in the following circumstances:

• The employee works on a long-term basis
• Your organization determines pay and makes hiring and firing decisions
• The employee performs services full-time for at least one year (1,500 hours over 12 months or 75% of what an average full-time employee would typically work)

What’s the Difference Between Leased Employees and PEO?

Client companies often use leased employees on a short-term or per-project basis. In many cases, the relationship has a defined start and end date. Using a professional employer organization (PEO), however, is a long-term solution. This means that the client company hires the employee to work for them indefinitely.

Additionally, a staffing or employee leasing agency hires employees and then leases them out to the client company. In a PEO relationship, you can’t assume staff will be provided unless the PEO happens to offer that service.

Finally, in a leased employment arrangement, there is only one employer—the staffing agency. When a client company ends its relationship with the agency, the leased employee does not continue working at the site (unless the organization hires that employee directly).

However, when a company chooses to work with a PEO, it enters into a co-employment situation. This means that the PEO becomes an additional employer of record to take on HR and other administrative responsibilities. When the employer ends its relationship with a PEO, the employee remains on staff at the client company.

Best Practices for Using Leased Employees

Your arrangement with a staffing agency will be unique. However, there are a few common tips you should follow when working with these types of agencies:

• Determine recruiting needs, including the number and type of roles to hire for
• Ask for references from businesses similar to your size and type
• Use the trial period to test the agency’s capacity to handle your requirements
• Ask about cancellation, renewal, and price increase policies
• Build rapport with the agency and help its team truly understand your business

Above all, be sure to work with agencies that are responsive to your needs. This will give you the best chance of ending up with a temporary workforce that is aligned with your mission and goals.