What Is Employee Leasing And How Does It Work

The Empuls Glossary

Glossary of Human Resources Management and Employee Benefit Terms

What are the drawbacks of employee leasing?

The drawbacks of employee leasing are

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Loss of full control: One of the main drawbacks is that the client company relinquishes a degree of control over HR functions to the PEO. While the client retains control over day-to-day operations, certain HR decisions and administrative processes are managed by the PEO.
Potential communication challenges: Effective communication is crucial in a co-employment relationship. Miscommunication or lack of coordination between the client company and the PEO could lead to issues related to employee management, compliance, and overall efficiency.
Dependency on peo's performance: The effectiveness of employee leasing is heavily reliant on the performance and capabilities of the chosen PEO. If the PEO fails to meet expectations or encounters financial difficulties, it could impact the client company.
Cost considerations: While cost savings are often cited as a benefit, some businesses may find that the fees charged by PEOs can be significant. It's essential to carefully assess the costs associated with employee leasing and compare them to the potential savings and benefits.
Limited customization: PEOs typically offer standardized HR solutions. This might not be suitable for companies with unique HR policies or specific requirements that fall outside the standard offerings of the PEO.
Complex contractual agreements: Employee leasing agreements can be complex, with detailed contractual arrangements outlining the responsibilities of both parties. It's crucial for client companies to thoroughly understand and negotiate these agreements to ensure they align with their needs.
Employee confusion: Employees may feel confused or uncertain about changes in HR processes and the introduction of a third-party entity. Clear communication is essential to address any concerns and ensure a smooth transition.
Potential for disruption during transition: The transition to an employee leasing arrangement may involve changes in HR systems, payroll processing, and benefits administration. If not managed properly, this transition could lead to temporary disruptions and employee dissatisfaction.
Limited influence on benefits packages: While PEOs often offer comprehensive benefits packages, client companies may have limited influence over the specific benefits offered. This can be a drawback for businesses with unique employee benefit preferences.
Cultural misalignment: PEOs may have their own corporate culture and way of operating. If there is a significant misalignment between the culture of the PEO and that of the client company, it could lead to challenges in collaboration and employee engagement.
Not suitable for all industries: Employee leasing may not be suitable for industries with highly specialized workforce needs or those with unique employment arrangements. Each industry has different requirements, and some may not align well with the standardized services provided by PEOs.
Limited flexibility: Some client companies may find that the standardized processes of a PEO limit their flexibility in managing HR functions in a way that aligns with their specific business strategies.

What is employee leasing?

Employee leasing, also known as professional employer organization (PEO) services or co-employment, is a business arrangement where a company contracts with an external organization to handle various human resource (HR) functions and employer responsibilities. Research has shown that outsourcing human resources to a PEO helps companies “grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business. (Source: napeo.org)

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Who typically uses employee leasing services?

The types of businesses that typically use employee leasing services include:

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‍Small and medium-sized enterprises (SMEs): SMEs often benefit from employee leasing services as they may lack the internal resources and expertise to handle complex HR functions, compliance, and benefits administration.
Startups: Startups, particularly those in their early stages, may turn to employee leasing services to streamline HR processes, reduce administrative burdens, and access expertise without the need to build an in-house HR team.
Companies with limited HR infrastructure: Businesses that do not have a well-established HR infrastructure may opt for employee leasing to gain access to comprehensive HR services, including payroll processing, benefits management, and compliance support.
Companies in rapid growth phases: Businesses experiencing rapid growth may find it challenging to scale their HR functions quickly. Employee leasing services provide a solution to manage increased workforce demands without sacrificing efficiency.
Businesses in compliance-intensive industries: Industries with complex and highly regulated compliance requirements, such as healthcare, finance, and manufacturing, often turn to PEOs for assistance in navigating and ensuring compliance with intricate regulations.
Companies with variable workforce needs: Businesses that experience fluctuations in their workforce needs, such as seasonal industries or those involved in project-based work, can benefit from the flexibility offered by employee leasing services.
Franchise businesses: Franchise businesses may use employee leasing services to ensure consistent HR practices and compliance across multiple locations. PEOs help maintain standardized HR processes for franchisees.
Companies with limited budgets: Businesses with limited financial resources may find that employee leasing services offer a cost-effective solution for accessing professional HR expertise without the expense of building an in-house HR department.
Geographically diverse companies: Companies with operations in multiple locations, especially across different states or countries, may use employee leasing services to navigate varying employment laws, tax regulations, and compliance requirements.
Companies seeking employee benefits solutions: Businesses looking to provide competitive employee benefits without managing the complexities of benefits administration often turn to PEOs for access to comprehensive and cost-effective benefit packages.
Professional services firms: Professional services firms, such as consulting or law firms, may use employee leasing services to focus on their core business functions while outsourcing HR tasks to experts.
Companies with limited time for HR management: Businesses where management wants to focus on core business activities and strategic initiatives rather than spending time on HR functions may choose employee leasing to handle routine HR tasks.

What are the drawbacks of employee leasing?

The drawbacks of employee leasing are

‍

Loss of full control: One of the main drawbacks is that the client company relinquishes a degree of control over HR functions to the PEO. While the client retains control over day-to-day operations, certain HR decisions and administrative processes are managed by the PEO.
Potential communication challenges: Effective communication is crucial in a co-employment relationship. Miscommunication or lack of coordination between the client company and the PEO could lead to issues related to employee management, compliance, and overall efficiency.
Dependency on peo's performance: The effectiveness of employee leasing is heavily reliant on the performance and capabilities of the chosen PEO. If the PEO fails to meet expectations or encounters financial difficulties, it could impact the client company.
Cost considerations: While cost savings are often cited as a benefit, some businesses may find that the fees charged by PEOs can be significant. It's essential to carefully assess the costs associated with employee leasing and compare them to the potential savings and benefits.
Limited customization: PEOs typically offer standardized HR solutions. This might not be suitable for companies with unique HR policies or specific requirements that fall outside the standard offerings of the PEO.
Complex contractual agreements: Employee leasing agreements can be complex, with detailed contractual arrangements outlining the responsibilities of both parties. It's crucial for client companies to thoroughly understand and negotiate these agreements to ensure they align with their needs.
Employee confusion: Employees may feel confused or uncertain about changes in HR processes and the introduction of a third-party entity. Clear communication is essential to address any concerns and ensure a smooth transition.
Potential for disruption during transition: The transition to an employee leasing arrangement may involve changes in HR systems, payroll processing, and benefits administration. If not managed properly, this transition could lead to temporary disruptions and employee dissatisfaction.
Limited influence on benefits packages: While PEOs often offer comprehensive benefits packages, client companies may have limited influence over the specific benefits offered. This can be a drawback for businesses with unique employee benefit preferences.
Cultural misalignment: PEOs may have their own corporate culture and way of operating. If there is a significant misalignment between the culture of the PEO and that of the client company, it could lead to challenges in collaboration and employee engagement.
Not suitable for all industries: Employee leasing may not be suitable for industries with highly specialized workforce needs or those with unique employment arrangements. Each industry has different requirements, and some may not align well with the standardized services provided by PEOs.
Limited flexibility: Some client companies may find that the standardized processes of a PEO limit their flexibility in managing HR functions in a way that aligns with their specific business strategies.

What are the benefits of employee leasing?

Here are some key advantages of employee leasing:

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HR expertise: Client companies can leverage the expertise of the PEO in human resource (HR) management. PEOs typically have HR professionals who are knowledgeable about employment laws, compliance, and best practices.
Cost savings: Employee leasing can result in cost savings for client companies. PEOs can achieve economies of scale by consolidating HR functions across multiple clients, leading to reduced administrative costs.
Access to comprehensive benefits: PEOs often offer a comprehensive benefits package, including health insurance, retirement plans, and other perks. Client companies and their employees may have access to a broader range of benefits than they could secure on their own.
Payroll processing efficiency: PEOs handle payroll processing, including tax withholding and compliance tasks. This reduces the administrative burden on client companies, allowing them to focus on core business functions.
Risk management: PEOs share certain risks and liabilities associated with employment. This risk-sharing arrangement helps distribute the burden of legal and regulatory compliance, reducing the potential impact on the client company.
Time savings: Client companies save time by outsourcing HR functions to a PEO. This allows them to redirect resources and time toward their core business activities.
Access to technology: PEOs often provide access to advanced HR technology and software, enhancing efficiency in time and attendance tracking, benefits administration, and other HR processes.
Improved employee benefits: Employees of client companies may gain access to better and more cost-effective employee benefits, including health insurance, retirement plans, and other perks provided by the PEO.
Regulatory compliance: PEOs assist client companies in staying compliant with local, state, and federal employment laws. This is particularly beneficial for smaller companies that may lack the resources or expertise to navigate complex regulatory environments.
Focus on core business: Client companies can concentrate on their core business functions while the PEO manages HR-related tasks. This allows for increased focus on strategic objectives and business growth.
Employee relations support: While client companies retain control over day-to-day operations and workforce management, PEOs may provide assistance with employee relations, conflict resolution, and other HR-related matters.
Scalability: Employee leasing allows for scalability, making it easier for client companies to adapt to changes in their workforce size without facing significant administrative challenges.
Enhanced recruitment and retention: Access to attractive employee benefits and HR support can contribute to improved recruitment efforts and increased employee retention.
Employee training and development: Some PEOs offer training and development programs for employees, contributing to skill enhancement and professional growth.
Simplified compliance reporting: PEOs often handle compliance reporting, reducing the administrative burden on client companies and ensuring accurate and timely reporting.

What are the features of employee leasing?

Key features of employee leasing include:

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Co-employment relationship: In a co-employment relationship, both the client company and the PEO share certain employer responsibilities. The PEO becomes the employer of record for certain HR-related functions, while the client company remains the employer for other aspects of the employee-employer relationship.
HR functions outsourcing: The PEO typically takes on various HR functions, including payroll processing, benefits administration, workers' compensation, tax compliance, and other administrative tasks related to human resources.
Risk and liability sharing: The PEO shares certain risks and liabilities associated with employment, such as compliance with labor laws, with the client company. This shared responsibility helps distribute the burden of legal and regulatory compliance.
Employee benefits management: The PEO often manages employee benefits, such as health insurance, retirement plans, and other perks. This can provide access to a broader range of benefits for employees of the client company.
Payroll and tax administration: Payroll processing and tax administration are commonly handled by the PEO. This includes withholding and remitting taxes, issuing paychecks, and managing payroll-related compliance.
Efficiency and expertise: Employee leasing allows the client company to leverage the expertise of the PEO in HR and employment matters, potentially leading to increased efficiency, cost savings, and access to specialized knowledge.
Regulatory compliance: The PEO assists in ensuring compliance with local, state, and federal employment laws and regulations. This is particularly beneficial for smaller companies that may lack the resources or expertise to navigate complex regulatory environments.
Focus on core business functions: By outsourcing HR functions to a PEO, the client company can focus more on its core business functions and strategic objectives, leaving HR-related tasks to the experts.
Employee relations: While the client company retains control over day-to-day operations and the management of its workforce, the PEO may assist with employee relations, conflict resolution, and other HR-related aspects.

How does the process of employee leasing work?

Here is an overview of the typical steps and the process of employee leasing:

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Engagement and agreement: The client company and the PEO initiate the process by entering into an agreement. This agreement outlines the terms of the co-employment relationship, the specific HR functions the PEO will handle, and the responsibilities of both parties.
Establishing co-employment relationship: The co-employment relationship is established, where both the client company and the PEO share certain employer responsibilities. The PEO becomes the employer of record for specific HR-related functions, while the client company retains control over its day-to-day operations and business activities.
Assessment and onboarding: The PEO assesses the HR needs of the client company and works onboarding employees into the co-employment structure. This may involve transitioning existing employees onto the PEO's payroll system.
Transfer of HR functions: The PEO takes over various HR functions, which may include payroll processing, benefits administration, tax compliance, workers' compensation, and other administrative tasks related to human resources. This transfer allows the client company to leverage the PEO's expertise in HR management.
Employee benefits administration: The PEO typically manages employee benefits, such as health insurance, retirement plans, and other perks. This can provide employees with access to a broader range of benefits.
Payroll and tax administration: The PEO assumes responsibility for payroll processing, tax withholding, and related compliance tasks. This includes issuing paychecks, handling payroll taxes, and ensuring compliance with applicable employment laws.
Legal and regulatory compliance: The PEO assists the client company in ensuring compliance with local, state, and federal employment laws and regulations. This includes staying up-to-date with changes in legislation and advising the client on compliance matters.
Employee relations support: While the client company maintains control over day-to-day operations and workforce management, the PEO may provide assistance with employee relations, conflict resolution, and other HR-related matters.
Risk and liability sharing: The PEO and the client company share certain risks and liabilities associated with employment. This risk-sharing arrangement helps distribute the burden of legal and regulatory compliance.
Access to peo's expertise: The client company benefits from the PEO's expertise in HR and employment matters. This can lead to increased efficiency, cost savings, and access to specialized knowledge.
Ongoing communication and review: Regular communication and reviews between the client company and the PEO are essential to ensure that the co-employment relationship is functioning smoothly. Adjustments and refinements may be made as needed.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

Promoters
Employees who have responded positively or agreed.
Detractors
Employees who have reacted negatively or disagreed.
Passives
Employees who have stayed neutral with their responses.

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The Empuls Glossary

What are the drawbacks of employee leasing?

What is employee leasing?

Who typically uses employee leasing services?

What are the drawbacks of employee leasing?

What are the benefits of employee leasing?

What are the features of employee leasing?