Businesses are increasingly leasing workers, both domestic and foreign, to fill short-term and long-term positions. Employee leasing refers to an arrangement by which a third party business, often called a professional employer organization (PEO), “employs” a company’s staff through a contractual relationship, sharing employment responsibilities with the client company. The third party business essentially acts as an outsourced human resources, risk management, payroll, benefits, and administrative department for the company’s regular workforce.
Employee leasing isn’t like using a temp agency. Temp agencies determine employee wages and benefits, hire and fire employees at its will, and determine employee assignments; in an leasing arrangement, the company, not the PEO, retains control over these matters.
Leasing is also different from an independent contractor relationship, in which a company has no employer-employee relationship with the independent contractor. In employee leasing, the employee is employed by both the company for which he or she provides services and the PEO, and both may be jointly liable for employment-related claims.
Thinking about using employee leasing? Here’s a list of issues to consider:
- Cost. Compare the costs (both direct and indirect labor costs, including wages, benefits, and insurance) of keeping employees in-house with the fees to be paid to the PEO.
- Joint Employment Liability. Leasing employees may not provide you with a defense against employment claims, such as unpaid wages or discrimination; you may be held jointly and severally liable for these types of claims.
- Degree of Control. Determine whether you or the PEO will be responsible for decisions on hiring, firing, and discipline; training; and day-to-day employee supervision.
- Insurance. Make sure the PEO has adequate employment practices liability insurance and you are named as an additional insured on the policy.
- Proper Employee Classification. Define the leased employees’ jobs and whether they are exempt or non-exempt. As a joint employer, you may be found liable for any improper classifications.
- Payroll Taxes. As a joint employer, you may still be found liable for failure to pay or withhold employment taxes, even if it’s the PEO’s responsibility to do so.
- Benefits: Ascertain whether the employees will receive equal or greater benefits if outsourced to a PEO.
- Employment Law Compliance. Verify that the PEO has mechanisms in place to ensure compliance with federal, state, and local employment laws.
- Workers’ Compensation Insurance. Verify that the PEO has adequate workers’ compensation insurance and consider the effect of PEO coverage on your experience rating.
- Unemployment and Disability Insurance. Liability for unemployment insurance depends on whether the PEO qualifies as a “leasing employer” under the California Unemployment Insurance Code. See Un Ins C §606.5(c).
- Collective Bargaining Agreement. Check whether collective bargaining agreements prohibits contracting out employees’ work and whether you must give the union advance notice of the intent to do so or discuss alternatives. Even if an agreement doesn’t have these requirements, the union may challenge your decision to lease employees.
- Employee Morale and Loyalty. Employees may not be as loyal to you if they’re being outsourced to a third party business. However, if they will receive enhanced salary or benefits as a result of shifting to a third party business, morale may increase.
- Communication. Open and readily available communication between you and its PEO is crucial to a successful partnership. You and the PEO should assign a liaison to facilitate this communication.
- Timing and Notification to Employees. Careful planning of the time and manner for presenting the leasing decision to leased and nonleased employees is crucial to a smooth transition.
- Relationship to Other Company Strategies. Determine whether leasing employees is consistent with your other business plans and strategies, e.g., mergers and reorganizations.
For everything you need to know about employee leasing, including sample employee leasing agreement provisions, turn to CEB’s Drafting Employment Documents for California Employers, chap 5. On independent contractors, leased workers, and outsourcing, check out CEB’s Advising California Employers and Employees, chap 3. These books, along with several more, are part of CEB’s new online Employment Law Library.
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