Employee leasing is an arrangement between a business and a staffing firm, who supplies workers on a project-specific or temporary basis. These employees work for the client business, but the leasing agency pays their salaries and handles all of the HR administration associated with their employment. Employee leasing, although once used to describe professional employer organizations (PEOs), should not be confused with co-employment relationships.

Leasing employees can sometimes be advantageous if you run a business with seasonal demands, lack the resources to recruit employees on your own or need temporary assistance with special projects. In these situations, a staffing agency may be able to help you:

A leased employee is a person who receives a paycheck from one employer, a “staffing firm”, but is performing services for another company, a “recipient company”.

Employee Leasing Explained

Benefits of leasing an employee

If youre looking to contract work but are not necessarily ready to hire and manage employees on your own, leased employees may be an appealing option for a variety of reasons, such as:

Prioritize your business

Because the PEO handles all payroll, taxes, benefits and insurance, all of the administrative work that typically comes with hiring an employee full time is considerably reduced. This can give you more time to focus on your business and the work your employee is doing. Even though the PEO manages the administrative side, the leased employee still only reports to your company.

Provide flexibility

Because hiring an employee full time usually involves extra paperwork, your investment in the employee is considerably higher. When you lease an employee, you hire them on a contractual basis, and you can extend that contract if needed.

Minimize liability

Payroll and taxes, as well as the number of laws and regulations that accompany them, can present a liability risk for a business. Outsourcing those responsibilities to organizations that specialize in handling this work can reduce that risk.

What is a leased employee?

A leased employee performs work for a separate business on behalf of a professional staffing firm or organization. A leasing company or professional employer organization (PEO) typically hires leased employees, then organizes all human resources-related functions for the role, such as payroll, benefits and any other important paperwork. While the PEO handles administrative functions for the employee, the leased employee performs work for the company that hired them through the PEO.

Leased employees are officially employed by both the professional employment organization as well as the recipient company, but only perform work for the recipient company. Depending on the state, both the PEO and recipient company may be considered “co-employers” for the leased employee.

Typically, leased employees are hired on a standard, full-time basis, which means they could receive certain benefits from the PEO, such as retirement plans, paid time off and health insurance coverage.

Compensation and benefits of a leased employee

Although the professional employer organization is in charge of a leased employees compensation and benefits, it is important to understand what they are doing for you and how your leased employees will be paid.

Typically, there are a few key things most PEOs will take care of:

Some PEOs provide more benefits and services, but these are the main three to keep in mind. In return, the recipient company pays a fee to the PEO to lease the employee.

Leased employee vs. independent contractor

At first glance, leased employees and independent contractors appear to share some key similarities. Neither are technically employed by the company or business they are performing work for, but some differences are helpful to be aware of.

Independent contractors, as the name suggests, operate independently of any employer. Typically, independent contractors provide a service to a client who pays them directly for those services. The client has no power or control over how the work is accomplished, and the independent contractor manages their own taxes.

Leased employees are officially employed by a professional employment organization. This means that the PEO handles their taxes, insurance and benefits so the leased employees dont need to.

Tax reporting as a leased employee

Typically, full-time employees have a relatively straightforward tax process. Employers provide employees with the paperwork and documentation necessary to file taxes.

A leased employees taxes might be a little different. Even if the recipient company, or common law employer (CLE), is outsourcing their payroll, they may still be responsible for paying taxes and filing returns. This is typically dependent on the specific company involved and state regulations. Some PEOs can also be certified by the IRS to provide full tax functions.

Depending on the state, the PEO or CLE may be the default employer, so its important to check with your local and state regulations to evaluate your businesss unique situation.

How to hire a leased employee

If youre interested in working with a PEO to lease employees, here are the steps you can take:

1. Assess your company

To hire a leased employee, youll first find the right PEO to suit your businesss needs. Because PEOs handle all recruiting efforts, most of the work that you would need to do to find a qualified employee is already done by the time you reach out to a PEO. All you need to do is determine what kind of employee you need.

The size and location of your business will also be deciding factors for your needs. For example, a mid-sized businesss recruitment needs will probably be different from that of a small business looking for one or two people. Likewise, depending on your area, you may need to meet different insurance requirements before hiring a leased employee.

2. Ask for references

Because the PEO you work with will handle most, if not all, of the employee-related financials, it is important to certify that they are operating as they should. This is also the time to reach out to the PEOs clients and learn more information to help you make your decision. Depending on the PEOs clientele, you may find that certain organizations are better suited to you and your business needs than others.

3. Start with a trial

Most PEO contracts will allow your business a 30- to 90-day grace period. Starting with a trial gives you the chance to determine whether or not working with a leased employee is the right decision for you.

FAQ

Is a leased employee an employee?

The term “leased employee”, as defined in section 414(n)(2) of the Code, specifies that a leased employee is a person who is not an employee of the recipient.

What is the difference between a temporary employee and a leased employee?

One significant difference, among several, is the leased employee feels more like an employee with a stronger connection to the employer. Leased employees also receive more benefits than temporary employees do. A temporary employee does not usually have a strong bond to the client company.

What is a leased employee for 401 K?

Leased employees are employed by a leasing organization while performing services for a recipient employer. Leased employees are not considered common law employees of the recipient employer, but for plan purposes, they frequently must be treated that way.

What is an employee leasing organization?

Employee Leasing Company — an organization whose business it is to furnish workers to another entity (usually referred to as the client company) on a long-term basis. Organizations in this industry are referred to by a number of descriptive names.

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