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The concept of employee leasing has gained prominence as a strategic workforce solution. Leased employees, often known as contract workers or temps, fill temporarily vacant company positions. These temporary employees are often hired for particular projects or for a short time until a task is completed.
This article digs into the concept of employee leasing, examines the positive and negative aspects of hiring them, and offers tips on handling this type of employment.
Who is a Leased Employee?
A leased employee, often called a “temporary employee,” is an individual who works for a company but is formally hired by a separate entity, typically a staffing agency, professional employer organization (PEO) or employee leasing company. These employees work at client companies, performing tasks, projects, or roles as required. While the client company benefits from its services, the leasing company (PEO) handles the HR administrative responsibilities.
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Benefits of Employee Leasing
Why would a small business opt for an employee leasing solution? There are certain benefits that employee leasing offers especially when your existing workforce doesn’t have enough bandwidth.
No to little employment association: You may avoid the difficulties of establishing an employment relationship with your leased staff by opting to lease employees. Generally, since you are not their direct employer, you are exempt from managing their payroll and employment taxes or being accountable for their remuneration. The PEO or leasing agency often takes care of the same. However, not all PEOs/leasing companies offer the service.
Solution for short-term labor shortages: Short-term or seasonal labor shortages are a common problem for small businesses. It would be impractical to engage more permanent workers if you do not require long-term assistance. In such situations, employee leasing provides a speedy and relatively affordable solution.
Reduce your HR workload: Leasing employees relieves you of time and money-consuming hiring and recruitment processes, including reviewing applications and scheduling interviews.
Candidate qualifications: In most circumstances, an employee leasing agency with access to a vast database of workers will help fill the position with someone who has the relevant skills and work experience you need.
Steps to Classify a Leased Employee as a Common-Law Employee
It is clear that a leased employee is officially an employee of the staffing agency or the PEO through which they have been hired. However, a leased worker can be classified as a permanent employee of the client organization IF each of the following stands true:
The leased employee has been working for the client’s organization for an extended period. Here, a period is considered elongated under the following conditions.
The leased worker has been a full-time employee of the client business for one year.
There are more than 1500 hours put in at one company.
The number of hours worked is 75% of what a permanent employee of that company works on average.
An employee who is leased is hired or fired by the client company.
The salaries or other remuneration in the case of employee leasing is determined by the client company.
The job of the leased employee is directly supervised and directed by the client company.
A leased employee may be considered an organization's common-law employee if all of these requirements are met. Moreover, the client company must put up a retirement plan and ensure other employee benefits if their employment status changes to a common-law employee.
Drawbacks of Leased Employees
While employee leasing is beneficial, they are accompanied by a few work challenges that may put an employer in a difficult position. Some of the challenges are:
These employees are leased. Therefore, they need to be fully committed at times. The lack of commitment typically results from the realization that your business has no growth prospects for them. Compared to the in-house employees, this air of indifference reveals a lack of absolute devotion to the job.
Lack of Dedication and Drive
Due to their part-time status, many employees need more motivation and loyalty. Some employees are content to complete tasks and move on to the next client. Additionally, certain private information they might have come across during their work could end up with other businesses if they seem more lucrative. In situations like this, you must be cautious.
Dependence on a Third Party
This idea rests on the PEOs' ability to hire the most suitable employees. As they are responsible for making the call, you depend entirely on a 'third party' for hiring and other HR functions. Hence, externalizing the very first process of employee leasing could have serious consequences.
Lacking Interpersonal Relationships
With employee leasing, there is a lack of interpersonal ties because these employees are not your own. It can impair workplace communication, cause misunderstanding, and have a negative impact on production and productivity.
Tax Reporting as a Leased Employee
Like regular employees, leased employees are liable for employment taxes reporting and withholding. Full-time employee tax reporting is the responsibility of the employer and is an important component of the payroll procedure. Tax reporting, however, may vary in case of employee leasing.
An employee leasing company or PEO often handles your leased employees' payroll, benefits, and taxation; however, some organizations do not. In this case, the client company will be in charge of such employee's payroll and tax filing precisely as they do for their regular employees.
Now that you are familiar with employee leasing and the benefits, here’s a quick guide to employee leasing.
How to Hire a Leased Employee?
By following these steps, you can successfully hire employees and ensure that your business benefits from their expertise.
Choose the Right Approach
Decide whether you want to hire employees through a staffing agency or a Professional Employer Organization (PEO).
Partner with a Staffing Agency
Research Staffing Agencies: Find reputable staffing agencies that offer a diverse portfolio of employees, from freshers to experienced professionals.
Assess Expertise: Choose employees with specific expertise relevant to your business needs.
Simplified Hiring: Staffing agencies streamline the hiring process, minimizing administrative burdens on your HR team.
Trial Period: Benefit from a 30–to 90-day trial period to evaluate the leased employee's fit with your team and work quality.
Engage a PEO
Source the Candidate: Find a candidate yourself by considering their qualifications and experience.
Onboarding, Payroll, and Benefits: PEOs handle the onboarding process, payroll, insurance, and benefits, ensuring compliance with legal requirements.
Define Your Business Needs
Understand your specific business requirements and the type of skills these employees should possess.
Research and Assess: Thoroughly evaluate the staffing agency or PEO you plan to partner with.
Service Extent: Ensure they cover essential administrative tasks like payroll, insurance, benefits, and taxation.
Leased Employee vs. Independent Contractor
Businesses often expand their workforce temporarily using two main employment relationships: leased employees and independent contractors. Choosing an appropriate route requires having a thorough understanding of the distinctions between these two alternatives.
Here are some differences between the two:
Leased Employee: Employee leasing typically involves hiring employees through a staffing agency or a Professional Employer Organization (PEO) and is then assigned to work with a client company. The client company exercises day-to-day control over the leased employee's work while the staffing agency or PEO handles administrative tasks.
Independent Contractor: An independent contractor, or a 1099 employee, is a self-employed individual or entity hired to perform specific tasks or projects for a client company. They retain more control over their work processes and are responsible for managing their own administrative and financial aspects.
In this comparison, we'll explore the advantages and drawbacks of both, providing valuable insights to help you make informed decisions regarding your staffing strategies.
Fill skill gaps with specialized talents.
Access niche expertise for projects.
Typically less flexible as employees are constrained by the agreement of the leasing company/PEO.
More flexible as contractors exercise more control over their work, however, as per the contract.
The PEO or leasing company is responsible for admin tasks like payroll, taxes, etc., reducing the burden on
Admin tasks are comparatively more cumbersome as the hiring company is responsible for payroll and compliance.
Specified in the lease agreement. Evaluate fit before permanent hiring.
Generally hired on a per-project or contract basis, which serves as a trial period for evaluating their work.
More cost-effective in reducing admin overhead but the leasing company or the PEO’s fees may be high.
More cost-effective as the hiring company negotiates the terms. However, admin tasks may contribute to the costs.
Employers generally exercise more control.
More autonomy over their work, employers generally have less control.
They may be costlier to onboard due to PEO/leasing company fees along with ongoing management.
More cost-effective as they often have hourly rates and fewer associated costs.
Training and skill development
May have to undergo more training, making the onboarding process time-consuming.
Usually not needed as they are often hired for their specialized skills.
Tips for Hiring a Leased Employee
With certain best practices, you can easily hire and onboard skillful and leased employees to your workforce. Below are a few tips to help you with the process.
Analyze Your Needs
Find a reputable employer organization that best understands your requirements before moving forward with employee leasing. By the time you contact the PEO, they have already done most of the work, i.e., gathered a vast pool of employee data to help you find qualified leads. Often, you must specify the type of employee you need, and the PEO will make a match.
Since the PEO you deal with manages most employee-related functions, ensuring the PEO is reputable and complies with all laws to reduce your responsibility is critical. Consider looking up the PEO's previous clients and getting in touch with them to find out more information to decide whether or not to employ it.
Start With a Trial
Many PEO contracts allow a business to have a 30- to 90-day trial period with a leased employee. Starting with a trial that allows the chance to determine whether working with a leased employee is the right decision for you.
Hire Compliantly With Skuad
Looking to onboard employees or contractors globally? We can help. With Skuad as your global PEO or Employer of Record platform, you can easily hire, onboard, manage and pay talent in 160+ countries – all while being 100% compliant with local laws and regulations. Book a demo to start your seamless global employment journey.
1. What is an Employee Leasing Company?
An employee leasing company, also known as a PEO (Professional Employer Organization), is a third-party organization that hires and manages employees on behalf of client companies.
2. Are Leased Employees Considered Employees?
Yes, leased employees are considered employees, but they are employed by the leasing company rather than the client company.
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Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.