EMPLOYEE LEASING

Employee leasing is one of the fastest growing industries in the country today. For the business owner, it is an alternative to hiring employees that can offer advantages of specialization, economies of scale and favorable tax treatment. Depending upon the philosophy and goals of a company and the specific needs or requirements to achieve those goals, employee leasing can be a viable tool in the overall scheme of financial planning and asset management.

Two general categories of small to medium-size businesses can benefit by contracting to lease workers. The first category is businesses with high cash availability and principal or key stockholders looking for ways to get money out of the business without incurring substantial tax liabilities. Doctors and attorneys have historically been grouped in this category, but many other businesses qualify.

Most people are aware that a qualified retirement plan is one of the best tax shelters today. A business owner, however, may not necessarily want to reward all employees with the same benefits. The Tax Reform Act of 1984, allowed an employer to lease workers from a third party and still set up any type pension plan for non-leased employees, including a “top heavy” plan that gave generous benefits to key employees, and one that essentially serves as a personal tax shelter.

SAFE HARBOR

The Tax Reform Act of 1986 further modified the “Safe Harbor” rules, and still allowed an employer to shift the burden of an employee pension plan to the employee leasing company, as long as the percent of leased employees is less than twenty (20) percent. Better known as the “Safe Harbor” provision, it states that: “An individual who would otherwise be treated as such an employee, if certain requirements are met with respect to contributions and benefits provided for the individual under a qualified money purchase pension plan maintained by the leasing organization.”

The guidelines state that the leasing organization’s plan must cover all employees who earn $1,000 or more per year and meet the qualification rules of Section 401, including the anti-discrimination provisions. Congress not only approves, but likes the concept. Government agencies have difficulty looking after employees in a small business. Support staff working in jobs related to the medical field comprise the majority of leased personnel who have benefited from the “Safe Harbor” ruling.

The “Safe Harbor” rules apply only to an employer that has a pension or other qualified retirement plan. Some firms avoid this by discontinuing such plans and purchasing comparable, or even better, benefits on a non-qualified, personal basis.

The second category of business that can benefit from employee leasing includes any business experiencing competitive disadvantages in hiring new employees and/or retaining existing personnel. This may occur if they cannot compete with the generous benefits package offered by larger companies. Such a group is also burdened in a disproportionate way by the ever-increasing employee related paperwork required just being in business. Small Business Report, Vol. 1, Issue 6, gave these statistics:

1. Small to medium-sized businesses pay 10 to 20 percent more than large corporations for comparable benefit programs.
2. The average cost per employee for turnover was $1,185, according to the Bureau of Labor, and this is increasing.
3. The average small business spends between 7 and 23 percent of its time handling employee-related paperwork.
4. A U.S. Chamber of Commerce study says that a full-time employee costs an employer 46.32 percent over the employee’s hourly rate, to cover all employee benefits, vacation and pay for time not worked.

Benefits provided to employees by a leasing company typically include all or most of the following:

• Medical and dental coverage
• Prescription card
• Vision care
• Life and accidental death insurance

A few leasing companies offer more than one program that is available at a lower cost. These rates are based on a lower pension contribution with modified vesting schedules and limited medical benefits as compared to the plans meeting “Safe Harbor” criteria.

Small companies and those experiencing rapid growth are often caught in a bind. They suffer because they do not have the time to develop comprehensive benefit policies, or because valuable time is lost solving personnel related problems. It is not unusual for a small company to have to shop for group insurance plans annually. A 40 percent or more increase in rates, or the fact that the current policy will not include a newly hired employee with a poor medical history, are common reasons to change plans.

When a business shifts, its non-productive employee-related responsibilities and liabilities to a third-party leasing firm, the business owner can concentrate his or her efforts toward increased productivity, which may translate directly to the bottom line. Significant improvement in communications, teamwork and morale are intangible bonuses.

How exactly does employee-leasing work? The process is simple. The owner of a firm “fires” some of the workforce that is immediately hired by the leasing company. That organization, for a fee, leases the same workforce back to the original employer. The employees’ jobs do not change, only the employer. The leasing company is now the employer, assuming all administrative and fiduciary responsibilities - meeting payroll, paying statutory payroll taxes and providing all benefits. Remember though, that less than 20 percent of the staff can be leased, or there are serious complications with the employee benefits of the remaining employees.

The business - the lessee - writes one check per pay period to the leasing firm. This covers gross payroll, taxes, cost of administrative services, benefit programs and the leasing company mark-up. Leasing fees are generally contracted as a percentage of gross payroll and vary with the number of benefits and the level of wages. Since benefits are uniform within each agreement, the percentage cost of benefits would be higher for a low wage payroll than for one with a higher wage base.

The standard leasing agreement has a 12 month term, but generally includes a cancellation clause giving the lessee the right to cancel services in 30 to 120 days with written notification to the leasing company. Responsibilities of both parties should be clearly stated. Since employees of the leasing company can be working at numerous locations, a field supervisor representing the leasing firm may make periodic visits to the work site to inspect working conditions and review personnel policies.

SELECTION CRITERIA

Assuming that an employee leasing arrangement makes financial sense to a business plan, certain criteria should be evaluated when selecting an employee-leasing firm:

1. Select a firm that provides services and benefits that meet the determined needs of the business plan.
2. Confirm the financial stability of the leasing company. There are few tangible assets in a service-oriented business.
3. Look for well-defined terms, conditions, and personnel management policies.
4. Contact existing clients to confirm quality of service.
5. Check to see that benefit programs are underwritten by major recognized carriers. Leasing firms that are self-insured may not be able to sustain large claims.

The benefits to small and medium-sized businesses are clear: simplified operations; tax advantages to the owners, key personnel and the business; reduction in administrative costs; and benefit packages for employees comparable to those of larger companies.

Source: Tax Facts, National Underwriter Company