Employee Leasing FAQs

What is an employee leasing company?

An Employee Leasing Company is a company which contractually assumes and manages critical human resource and personnel responsibilities and employer risks for its small to mid-sized businesses clients by establishing and maintaining a co-employer relationship with worksite employees and business owners as well ( if desired so by the client)

Why would a small business use an Employee Leasing Company?

Small business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." As businesses grow, most small business owners don't have the necessary human resource training; payroll and accounting skills; knowledge of regulatory compliance; or backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an effective employer.

Are Employee Leasing Companies recognized as employers of leased employees?

The Internal Revenue Service acknowledges that an Employee Leasing Company (or a PEO) may be the employer for federal income and unemployment taxes. Seventeen states provide some form of licensing, registration, or regulation for employee leasing companies. Moreover, many states statutorily recognize employee leasing companies as the employer or co-employer of worksite employees for purposes of workers' compensation and state unemployment insurance taxes.

How does this employee leasing system work?

In the relationship among a leasing employee company, a worksite or leased employee, and a client company, there exists a co-employment relationship in which both the leasing company and client company have an employment relationship with the employee (worker). The leasing company and client company contractually allocate some and share other traditional employer responsibilities and liabilities. The leasing company assumes responsibility and liability for the "business of employment" such as risk management, personnel management, human resource compliance, and payroll & employee tax compliance. The client company manages product development and production, marketing, sales, and service. The leasing company assumes and establishes an employment relationship with the worksite employee and provides a complete human resource and employee benefit package to the leased employees.

Do clients retain authority to hire and fire employees?

Yes, client becomes on-site supervisor or manager for employee leasing company and has full authority to hire and fire any employee.

What is the advantage of employee leasing system?

• Businesses owners don’t have the time or the necessary human resource training; payroll and accounting skills; knowledge of regulatory compliance; or backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. Most importantly, business owners like to focus on the "business of their business" that makes them money. They are not in the "business of employment". Employee Leasing companies are in the business of employment.

• U.S. Business Administration reports that the average annual cost of regulation, paperwork, and tax compliance for firms with fewer than 500 employees is about $5,000 per employee, compared with $3,400 per employee for firms with more than 500 employees. The average small business owner spends between 7% and 25% of his or her time handling employee-related paperwork. - U. S. Small Business Administration

• An employee leasing service may provide any or all of the following suite of services. The extent of the relationship is usually defined in the client service Agreement.

Does the small business owner lose control of his or her business?

As co-employers, the leasing company and small business owner become partners in the employment of their workers. The client retains ownership of the company. The leasing company assumes a real and factual employer role, responsible for payroll and employment taxes, maintaining employee records, reserve the ultimate right to hire and fire, and have the authority to resolve employee disputes. By shifting these responsibilities to the leasing company, the client gains more command of the "core" revenue generating aspects of their business.

Is this a scheme to avoid providing health or retirement saving benefits to rank and file workers?

No. In fact, an employee leasing or PEO arrangement is often the only opportunity for a worker of many small businesses to receive Fortune 500 quality employee benefits like health insurance, dental and vision care, life insurance, retirement saving plans, job counseling, adoption assistance, and educational benefits.

Who is responsible for workers' compensation?

Many states recognize the leasing company or PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.

Who is responsible for the employee's wages and employment taxes?

The Leasing Company assume responsibility and liability for payment of wages and compliance with all rules and regulations governing the reporting and payment of federal and state taxes on wages paid to its employees. The Internal Revenue Service recognizes the employee leasing company as the employer for federal income and unemployment taxes, and case law affirms the principle that the leasing company is responsible for payroll taxes.

Who is responsible for state unemployment taxes?

As the employer for employment tax and employee benefits, leasing companies assume responsibility and liability for payment of state unemployment taxes., and most states recognize the employee leasing company as the responsible entity. A few states require the employee leasing company to report unemployment tax liability under its clients' account number, and some states have laws that hold the client and leasing company jointly liable for unemployment taxes.

Who is responsible and accountable for the enforcement of employment laws and regulations?

The Employee Leasing Company provide worksite employees with coverage under the entire spectrum of employment laws and regulations, including federal, state, and local discrimination laws, Title VII of the 1964 Civil Rights Act, Age Discrimination in Employment Act, ADA, FMLA, HIPAA, Equal Pay Act, and COBRA. In some cases, these laws would not apply to workers at small businesses without the employee leasing relationship, since many statutes have exemptions based upon the number of workers in a work force. Once included in the employee leasing company's workforce, the workers are protected by these laws.