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Employee Leasing - "To Lease or not to Lease?"
 

An objective discussion on the merits and demerits of leasing staff from a Professional Employer Organization (PEO). 

By David G. Mair, AIS
Applied Insurance Services, Inc.

Information is power! This article endeavors to present essential facts about risks and responsibilities of both the direct hiring of employees, and the contracting for employee services from a Professional Employer organization (PEO). The author seeks to be objective in delivery of these facts. In the end, you should have new basses for deciding which is better, “To lease or not to lease employees.”

Most business owners know some essentials about hiring their own employees, but Employee Leasing is, clearly, an emerging or evolving industry with it’s own set of advantages and disadvantages, many business owners know little about.  Only a few States have allowed their operation. Florida is one of twelve states that license PEO companies; beginning in 1991. As in Florida, PEOs have grown to produce lucrative returns for their operators. 

Regulatory Body for PEOs in Florida:
Fl. Dept. of Business & Professional Regulation
Northwood Center, 1940 N. Monroe St.,
Tallahassee, FL 32399-0767

TO LEASE OR NOT TO LEASE?”

At a glance.

 Advantages of using employee leasing services                             

 Employee leasing companies, known as Professional Employer Organizations (PEO’S), are usually associated with the National Association of Professional Employers Organization (NAPEO).  Those that at members of the NAPEO agree to operate within certain parameters.

No premium deposit needed.

Eliminate assessment (No longer applicable as the Self-insured Funds have restructured become standard companies)

Experience Modification advantage (possible if you have a heavy debit modifier you can’t lower.)

 SUTA rate belong to PEO.  High turnover or layoffs can increase the SUTA rate.

 Disadvantages of leasing employees

No individual licensing is required for the sales force. The sale is considered to be an employment service not an insurance

sale.  This can lead to misrepresentation or misunderstanding of some important insurance issues without being professionally liable.

Several employee-leasing companies are not members of the NAPEO, or the PEO.

No coverage for new employees not recognized by leasing company.  PEO contracts also exclude coverage of your statutory obligations to employees of uninsured subcontractors.

Exposure: Salaried workers, not meeting requirements for exemption, are entitled to overtime.  The responsibility rests with the company in control.

Requirements for exemption are:

·        Receive salary

·        Spend  < 80% of time on administrative duties.

·        Supervise at least 2 full time employees.

·        Have the right to make substantial decisions.

·        Company must have min. of 5 employees.

The following Wage and Hour violation produce the most fines:

  • Failure to pay overtime.
  • Failure to keep record in hours worked.
  • Failure to maintain completed I-9 form.
  • Failure to properly classify workers as employees.        

Loss of owner / officer exemption. ($62,700 limitation)

Failure to credit client with FICA reductions on Section 125 benefit programs.

Loss of ADA exemption

Under workers Compensation:

      Loss of experience modifier (Good if mod was bad beyond repair

      Loss of  5% credit for Drug Free programs

      Loss of 2% credit for Safety programs

 

General Liability policy excludes coverage for suits brought by leased employees, but these employees can sue.

 PEOs can, and do cancel contracts without allowing sufficient time to replace insurance coverage.  A company would have to close operation until they replaced vital coverage.

 

Some Details

As yet, there is little that is “Professional” about a Professional Employer Organizations (PEO or Employee Leasing Company). There are no professional licenses required of their representatives. The State does not require the companies to adhere to any code of professional standards, nor are there any educational standards required in the Florida Statute 468.52 – 468.535.  The only standards are those encouraged by the National Association of Employee Leasing Organizations (NAPEO). Unlike insurance, accounting, medicine and law, PEO’s are not policed by any government body." Expect, therefore, to see a diverse range of practices.  It is largely assumed that they been able to maintain their lucrative modus operandi (Mode of operation) as a result of heavy lobbying efforts in the halls of on the legislators.

 The PEO Target

"Employee Leasing" is offered to small to medium sized businesses as a solutions to and relief from the burdensome administrative process of acquiring and retaining employees.   Employee Leasing Organizations sell the concept of relieving the business of their employee administrative and benefits management responsibilities by turning them over to their organization for a fee.  It also permits individual employers to pool the following administrative functions with other employers;

Payroll, Payroll Tax Records, and Payment

Health Benefits

Workers Compensation

Voluntary Benefits

401k's

Benefit Record keeping

Personnel (Human Resource) Regulation and Compliance

In certain situations these PEO services can be of benefit to employers.  They can be valuable to an organization that has little interest in developing it’s own personnel management.  In most cases, however, Employee Leasing is a costly alternative to in-house personnel administration programs.   

The Relationship

Florida statutes make the licensed Professional Employer Organization (PEO)the employer of your workers.  You still remain the business owner with responsible for the workplace, and still subject to any and all claims associated with the treatment of your employees. The business owner remains responsible for Federal, State and Local Employee Welfare Legislation.  The Professional Employer Organization can only become the administrative employer.  , The Professional Employer Organization will not assume this liability for you.  As the business owner you may still be responsible for Federal and State payroll taxes.  The relationship with the workers from the PEO and the client company is defined by a written agreement.  This legal document must be reviewed carefully because it defines the duties and liabilities of each party.

You remain subject to and responsible for compliance with:

      o       ADA (Americans with Disabilities Act) COBRA (Consolidated Omnibus Budget                                                                                       Reconciliation Act)

o       ADEA (Age Discrimination in Employment Act)

o       FMLA (Family and Medical Leave Act)

o       EEO (Equal Employment Opportunity)

o       Civil Rights Act

o       Older Workers Benefit Protection Act

o       Pregnancy Discrimination Act

o       WARN (Worker Adjustment and Retraining                                                                                               Notification Act)

 

 

Federal, and State Unemployment taxes, and FICA are reassessed when you enter or leave the PEO.  As a client of a PEO a small employer could become subject to Federal, State, and Local legislation that they were exempt from as a small business.

 

 

How Do Professional Employer Organizations Price Their Product?

 

PEOs bundle the cost of the various components of their program and present them as a percentage of payroll.  The individual rates for unemployment and workers' compensation shown for "presentation purposes only." The cost of some components like workers' compensation may appear less, but are often offset by higher administrative costs.

 

To appropriately analyze a Professional Employer Organization’s

Proposal consider the gross cost and not the cost of the components.

 

 

General Issues

 

The Workers Compensation Inequity

 

With their collective employee count, PEO’s can negotiate “large premium” pricing plans. Few, however, develop experience modification credit.  Rates are typically applied to full payroll, including overtime.  Although the workers compensation rates can be changed at the end of the contract, the PEO never allow the benefit of experience credits, or dividends earned, as could be earned outside the leasing circle.  There is usually no comparison between workers comp cost inside the leasing contract and an employer’s net cost.  The employers cost have the potential to be a lot less.

 

The State Unemployment Tax Assessment (SUTA) and Workers Compensation Experience Mods from a Professional Employer Organizations (PEO).

 

The lower workers' compensation modifications and the lower unemployment rates are usually accurate. Florida’s statutes allow PEO to purchase shell companies or other inactive corporations with lower factors, and permit them to roll the employment into those shell corporations even as their SUTA factors increase.

 

The legislature should recognize the way PEO's circumvent the higher SUTA rates, and experience modification.  The legislators should not be influenced ignore by big money lobbyists and impose suitable restraints.  By not doing so, they encourage inaccurate statistical reporting, and an inequitable burned on tax payers and employers alike.  In other words, unemployment taxes and workers' compensation rating rely, statistically, on accurate reporting.  If an employer who earned high rates, is allowed to escape them, and the need for revenue remains constant, then those Employers unable to escape, as are those outside of the Employee Leasing environment, will be unfairly penalized.  Employers should demand that consumer protection laws protect them from such inequity!

 

 

Employment Liability under Employee Leasing Arrangements

 

When an employer terminates part or all of their workforce, those employees can then be hired by a leasing company and leased back to the original employer.  When that happens, the leasing company becomes "employer of record" for tax and insurance purposes, and the client company continues as the business owner. The Employee Leasing Company; Professional Employer Organization (PEO), or Leased Labor Company, becomes a third party, and produce many of the following concerns:

 

Employee Loyalty -               Loss of staff's allegiance.

Loss of Control -                    Relinquishing authority over employment decisions.

Cost Concerns -                    Will it cost more than it' worth?

Credibility -                            The bottom line is seldom the way it was understood.

 

Legal Responsibility

 

The PEO will not take on any exposure it does not have to take on. The old question remains: Who is legally responsible, the employer or the leasing agency, for such things as taxes, workers' compensation, and employment discrimination laws.  Court and administrative agency opinions are not uniform on this issue, and they range from finding either the client employer or the PEO firm solely liable to finding them jointly liable.

 

In general, the written contract between the employer and the leasing company spells out the legal responsibilities of each party.  This relationship helps decide who is liable. Because of this, employers that enter into a leasing arrangement should ensure that their relationship with the leasing firm is clearly defined and agreed upon to reduce the risk of unexpected legal liability.

 

Leasing companies generally structure, unless a state statute prohibits, the employee leasing relationship so that the leasing firm is the sole employer with all legal responsibilities.  However, a growing number of leasing arrangements involve a joint or co-employer relationship between the leasing firm and the client employer.

 

Under the joint or co-employer relationship, both the leasing company and the client employer are exposed to actions resulting from the employment relationship.  A major consideration in the arrangement involves the amount of control the client employer has in determining how jobs are performed.  Allowing the leasing firm to assume complete management of the workforce, an extreme approach, is generally unpalatable for the client employer~.  Both parties are legally responsible for issues such as payroll taxes, unemployment and workers' compensation insurance, and employment discrimination claims.  A number of court and administrative agencies have found a joint relationship to exist regardless of how the parties structured their relationship.  Therefore, many leasing companies now favor the joint or co-employer relationship over the sole employer arrangement, wherein the leasing company is the legally responsible employer.

 

Businesses considering a PEO should choose carefully before putting all their employees on someone else's payroll.  If a PEO goes out of business due to fraud or insolvency, and plenty have, your business is liable for back taxes, unemployment insurance, workers' compensation premiums and the like.  Although there has been significant growth in the employee leasing business, the results haven't all been positive.  Many firms have failed, fled with their clients' payrolls or filed for bankruptcy.  Linking up with a PEO is not necessarily the great panacea it may appear to be.  You cannot afford to let your guard down when dealing with PEOS, nor believe that you will be absolved from liability in the employment relationship.

 Retirement programs under PEO

 Areas of concern:

Participation by HCE

Participation by owners/ Officers of the client company.

Varying contribution plans by client companies.

Non-participation by client companies

Cliff vesting & redistribution of forfeitures

 

 

PEO Cost Comparison

 

                                    ABC Company                      XYZ Company           Real

 

                                               6.20                             6.20                            6.20                                                                          1.45                             1.45                            1.45

            FUTA                            .80                               .80                                .80

            SUTA  (.10  -  5.80)  2.70                             1.00                            2.70

            W.C.                        10.00                             3.00                            3.00

            Admin.                     10.00                             3.00                            3.00

                                             30.00                           28.45                         25.00

 

Admin. Fee:

                        Payroll admin. (1  - 4%)   4.0%

                        Admin. Cost                        2.0%

                        Exec. Cost                            4.0%

                        Retirement Plan               10.0%

 

 You loose the following limitations:

Payroll Tax Liability

SS (FICA)      6.20% - $67,000 Limitation

Medicare        1.45% - No limit

FUTA                .80% - $7,000 limitation

SUTA              varies  - $7,000 limitation

 

PEOs do not usually recognize the above limitations.

What are the other Options?

Alternative solutions

      §         Get Leasing without Workers Compensation.

       §         Contract Payroll Services, without leasing relationship

§         Get Group health and other employee benefits direct from source carrier, through competent Independent Agent

Benefits

Retain advantage of controlling cost. A workers compensation policy is needed to cover statutory

Obligations. i.e.- uninsured sub-contractors.

Avoids disadvantages of Leasing.           

Buying direct cost less when PEO fees are not included.

 

The Future

What to expect in the future

Legislative Issues

There is growing concern about PEOs in the following areas:

  §         The use of shell corporations to avoid  unemployment tax (SUTA) responsibilities, rob the state of revenue to cover unemployment cost.

§         The use of low experience modification companies breaks down the integrity of the modification process.

§         Inaccurate classification and payroll reports lessen the credibility of the statistics used to promulgate Workers Compensation rates.

§         Circumvention of ERISA and IRS rules and regulations on 401Ks and other group benefits could leave unsuspecting client companies (employers) with heavy fines.

§         Sale and recommendation of insurance by unlicensed PEO employees could leave Client companies without insurance.

            Forecast

 Professional Employer Organizations (PEO’s) will continue to grow, but many of their practices will be curtailed or restricted so as to protect the consumer, and preserve the integrity of the Federal and State payroll tax base.

 As the scrutiny of the PEO industry grows, the IRS, ERISA, and other Federal agencies will institute better regulation. When that happens, many PEO’s may fold, leaving the client business owner deep in the hole.

 Professional Employer Organizations can continue to offer valuable bundled service by streamlining payroll and payroll reporting; offering a variety of insurance products; low cost 401K administrations; and provide human resource assistance. 

When you enter an Employee Leasing agreement, you will pass on significant organization will decide on your group health benefits, the financial ratings of your future insurance carriers, will collect and hold your taxes, and withhold the individual costs associated with each transaction.  Still, there are Professional Employer Organizations that can offer valuable services responsibilities and rights. Another, without the inherent abuses, and that can be trusted with your company's dollars. 

 With or without Employee Leasing, your business will still be yours to protect and operate.  You will always need good risk management strategies, and strong internal controls.  

Managing your personnel and the inherent risks of employing people cannot be given away. If you are, however, ready to seriously consider the services of a PEO, then let us help you decide to do business with the best.

We are prepared to do a fair analysis of any proposal brought before you and discuss the merits of each plan.  Our services include:

 

           Help in reduction of continuing Client Business Owner practices exposure.

            Help identify the full potential coast to you.

            Identify possible weakness in the PEO, or their services.

            Compare alternative solutions

 

We offer a FREE Formal Safety Program; Custom written, just for your business, in exchange for the opportunity to complete an comprehensive insurance analysis for that business.  As a full service commercial insurance agency, we can offer competitive alternatives to other lines of insurance not available from the PEO; i.e. – property and liability insurance, auto, equipment, and fidelity insurance and bonds.



The author suggests that no one need rely on the contents thereof, but will be happy to correct any portion, should it become inaccurate with time, accepts no liability for any of the contents, nor warrants same.

 
  

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