The Pros and Cons of Employee Leasing For Business Owners
Employees are essential to a successful business, but they can also be an administrative hassle to manage. From hiring and payroll to HR issues that may arise, handling the day-to-day tasks associated with workforce management can be challenging. If this sounds like you, one option you may want to consider is a leased employee model. What is employee leasing and how can you decide if it’s right for your company? Let’s find out!
In this article, we’ll explain what employee leasing is, how it differs from a PEO model, the pros and cons of leased employees, and the costs involved. After reading this, you’ll be able to decide if this approach is the best solution for your business.
What is employee leasing?
Under an employee leasing arrangement, you’ll lease workers from another company who becomes the employer of record for certain obligations. You’ll control the work the employees perform while the leasing company will issue their paycheck, report taxes, and manage benefits. For the leasing company to handle these tasks, you’ll pay the firm a fee.
What are the benefits of employee leasing?
There are several advantages to a leased employee as you grow. Some of these include:
- Reduced administrative burden: With employee leasing, the leasing firm will manage payroll, unemployment insurance, compliance with state and federal regulations, W-2 forms, and other paperwork. That way, you or other personnel who manage your workforce can be freed up to work on other, more strategic activities.
- Lower costs: Employee leasing may be able to save your company money in a number of ways. For example, if you don’t have employees, you won’t have to maintain unemployment insurance, eliminating that expense.
- Access to HR expertise: If you don’t have in-house HR experts on your team, you may be putting your company at risk of compliance violations and costly penalties. With employee leasing, you’ll have access to HR experts who have specialized knowledge in employment issues and deal with them day in and day out.
- Better budgeting: Since employee leasing involves fixed costs, you’ll be able to clearly calculate your annual expenses and budget accordingly. This can be particularly helpful if you’re planning to bring on a number of new workers since there are a lot of hidden costs to hiring employees that you may not be aware of or account for.
- Improved recruiting reach: Depending on the leasing firm, they may have access to a bigger pool of qualified candidates than you may be able to reach on your own and be able to target them more effectively to fill open positions more quickly.
What are the disadvantages of employee leasing?
While there are many benefits to employee leasing, there are also some downsides to this approach, including:
- Loss of control: Since the leasing company will be in charge of hiring your employees, offering benefits, and other administrative tasks like payroll, you’ll be giving up some control in the way your business is run, which could be challenging for you depending on how hands on you like to be in your operations.
- Impact on culture: As an outside agency tapped to hire your employees and manage other HR responsibilities, you may have less control over developing the culture in your organization, which could negatively affect morale and productivity.
- Lack of loyalty: Since workers know they’re not working for you per se, they may not have the same commitment to your company and, therefore, may not have the level of motivation or dedication that you’d want from employees.
- Leasing costs: When you use an employee leasing firm, you’ll need to pay the company for its services. Typically, they’ll charge you either a flat fee per employee per month or year or a fee calculated as a percentage of your payroll, meaning, your costs will depend on the number of employees you have through them. And the fees are due regardless of how well the workers perform.
What’s the difference between employee leasing and a PEO?
While both an employee leasing firm and professional employer organization (PEO) share some similarities, there are also important differences between the two types of arrangements.
The primary one is that, generally speaking, a leased employee is brought on for a set period of time or project. In that way, they’re often considered “temporary” employees and, when their work is done, they’ll return to the staffing company. With a PEO, on the other hand, the employment could be indefinite. And, since the PEO takes over management of your existing staff of permanent employees, even if you end your relationship with the PEO, your team will still work for you at your place of business.
What does employee leasing cost?
As we discussed earlier, employee leasing companies will charge you with a per employee per month (or year) fee or a percentage of your payroll. For a fixed rate approach, you may expect to pay anywhere from $40 to $160 per employee per month. If you pay a percentage based on your payroll, the average price is around 2%-12% of payroll.
In some cases, you may also have to pay a set-up or start-up cost. Either way, be sure to get firm quotes from a leasing firm so you can understand the specific services that will be provided for what you’re charged.
How to Best Staff Your Company
As we’ve discussed here, you can see you have options when it comes to bringing on workers to fill open roles. And a leased employee may make sense for you if you want controlled costs, freedom from the administrative tasks associated with managing your workers, and simplified recruiting. However, the downsides of this approach may be a deal breaker, particularly if you want more control over who you bring on and your culture.
If you decide hiring your own employees will work best, read our next article on the true price of a new hire so you can plan for these costs in your budget.