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Companies are always looking for ways to achieve cost-savings and operational efficiencies. One solution many companies are considering today is employee leasing. This practice is a form of outsourcing or offshoring, depending on the location of the company with which you contract. But what exactly is employee leasing, and how does it work? Here’s everything you need to know.
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Employee Leasing Definition
The practice of employee leasing is actually quite straightforward. In this arrangement, there will be a contract between two parties: the client company and the leasing company.
Through this arrangement, some responsibilities will be shared by both the client company and the leasing company. The client company, for instance, will still serve as the employees’ official employer and will maintain management and control over work that is performed for the company.
The leasing company, however, will assume all responsibility for tasks such as handling and reporting employment taxes and reporting wages. The client company pays the leasing company an agreed-upon fee for the work, and the leasing company handles administrative fees, taxes, payroll, and employee benefits.
What Companies Lease Employees?
You may have heard of employees leasing before without realizing it. That’s because employee leasing companies go by another name: Professional Employer Organizations, or PEOs. PEOs are set up to handle the administrative functions of a client company’s HR responsibilities.
In this way, they operate similarly to third-party HR outsourcing companies, except they act as a co-employer with the client company. This provides a number of additional benefits to the client company than simply hiring a third-party HR outsourcing company.
The Benefits of Employee Leasing
One of the biggest benefits to employee leasing is that it allows the client company to grow at a rapid pace without adding to the administrative complexity of managing the larger workforce.
Most companies can only handle incremental hires, because they simply can’t keep pace with the administrative work that goes along with it. By hiring an employee leasing company, the client company doesn’t have to worry at all about this administrative aspect. The leasing company will handle all of the administrative work on their client’s behalf.
Here are some other benefits of employee leasing:
Purchasing Power
Many client companies pay excessive prices for things such as workers’ compensation and employee benefits. Employee leasing companies provide client companies with more purchasing power since they already have a large pool of employees.
One of the major factors influencing the price of benefits such as workers’ compensation and employee health insurance is the size of the workforce. The larger the workforce, the lower the potential price. With the employee leasing company serving as a co-employer, the client company can benefit from the benefits cost saving associated with the leasing company’s larger workforce. This is a huge potential cost saver for the client company.
Local Compliance
If a client company is outsourcing to another country, the employee leasing company will help with the setup and compliance in that foreign country. The employee leasing company will mostly likely be located in the same country where the work is being done. They will therefore be familiar with the local tax laws and business compliance regulations, and they will help the client company abide by them. This is an important benefit that can’t be overlooked. One misstep in this area can shut down a client company’s operations in a foreign country for good, so it’s important to have a partner who can be trusted to manage compliance in the foreign country.
Improve Focus
When a client company hires an employee leasing company to handle HR and administrative functions, it can free up time to focus on its core competencies. Payroll, benefits, taxes and employee administration aren’t typically the core competencies of many businesses. They are necessary evils that often distract from the true work at hand. By hiring an employee leasing company, a client company rids itself of that burden, allowing it to focus on creating new products and solutions to ultimately grow revenue and profit.
Retain Control
Because the client company remains the official employer, it won’t lose complete control of the people who are working for them. This is much different than true outsourcing, which requires the client company to be comfortable with giving up control over some essential company functions.
While the employees will be co-employed by both the leasing company and the client company, the client company will still have complete control over the day-to-day tasks that employees do and the management of them.
This ensures that the client company can maintain a high level of quality control that matches with the rest of the company. This may seem like a minor fact, but it’s not. Ensuring a consistent level of high quality across the entire spectrum is essential if a client company wants to be successful and grow.
What is the difference between outsourcing and employee leasing?
Outsourcing refers to the practice of hiring an external company or individual to perform a specific task or provide a service that is typically done in-house.
Employee leasing, on the other hand, is a type of outsourcing in which a company hires a professional employer organization (PEO) to handle all or most of its human resources functions, including recruiting, hiring, and managing employees.
In this arrangement, the PEO becomes the employer of record for the leased employees, but the original company retains control over how the employees are used and managed.
Expand Your Business
SERVIAP is a leading Professional Employer Organization (PEO) ready to help your business expand operations throughout the Western Hemisphere. PEO is a model of co-employment, where we assume total responsibility for your talent, allowing you to focus on the strategic activities of your organization. Contact us today to learn more about how you can expand your business in South America and Latin America.
