What is Employee Leasing and How Does It Differ from PEO?
Employee leasing has been used by businesses of all sizes to manage their workforce more efficiently. It provides a cost-effective way for companies to maintain a flexible and scalable workforce, particularly during a peak period of time. This practice is becoming increasingly popular as it allows businesses to access a pool of talented and skilled workers without the time and cost associated with traditional hiring methods.
Employee Leasing Definition: What Is Employee Leasing?
Employee leasing, also known as staff leasing, is a business arrangement where a company hires employees from a third-party organization and then leases them back to the original company. Here’s how this employment arrangement works.
In this employment relationship, the leasing company assumes responsibility for administrative tasks such as payroll, benefits, and compliance with labor laws, while the client company maintains control over the daily work and management of the employees. Moreover, the leasing company is responsible for handling admin fees, employment taxes, and paychecks of the leased employees.
Related: What Is Employee Leasing?
Essentially, the employee leasing company becomes the employer of record for the leased employees, while the client company benefits from access to qualified and competent workers. Employee leasing can also be defined as a business arrangement in which a staffing agency gives employees or human resources to another company during an agreed period.
Employee Leasing vs PEO: What’s the Difference Between a PEO and Employee Leasing?
First, let’s see what PEO stands for. A Professional Employer Organization (PEO) is a company that provides HR services and helps manage the employer-employee relationship. PEOs essentially act as co-employer with their clients, meaning that they share certain employer responsibilities with the client company.
In practical terms, a PEO will handle tasks such as payroll processing, benefits administration, workers’ compensation insurance, and regulatory compliance on behalf of their clients. Doing so, PEOs can help medium-sized and small businesses save time and money while reducing administrative burdens.
PEO vs Employee Leasing
Employee leasing and PEO are two terms that are often used interchangeably, but there are some differences between them: PEO is typically a long-term solution for businesses; employee leasing is usually a short-term solution.
In PEO arrangements, the staff is employed by the client firm directly. Therefore, their relationship with the employer will not be changed in case of severing this partnership. Once it’s severed, employees who want to continue their job will still be able to report to the work site of the client.
While both PEOs and employee leasing companies provide HR services to client companies, the main difference is that in an employee leasing arrangement, the leasing company becomes the employer of record for the leased employees, while in a PEO arrangement, the client company retains that status.
What Are the Disadvantages of Using PEOs for Staff Leasing?
It’s important to carefully consider all the disadvantages before deciding to partner with a PEO. One drawback of using PEOs for staff leasing is that it can create a lack of control over the leased employees. Because the PEO is the legal employer, it may have more say in how the employees are managed, trained, and evaluated.
Another potential disadvantage is that PEOs can be expensive, and the costs may not be immediately apparent. PEOs typically charge a fee for their services. These fees can add up quickly and may not be reflected in the initial quote.
Finally, there may be some legal and regulatory issues associated with using PEOs for staff leasing. That said, companies should carefully review the terms of any agreement with a PEO to ensure that they comply with all applicable laws and regulations.
What Are the Downsides to a PEO?
Before a company enters into a co-employer agreement with a PEO, it’s important to be aware of potential downsides. While PEO employee leasing arrangements offer many employees benefits to business owners, there are also some potential downsides to consider, including:
- Loss of control: When you outsource your HR functions to a PEO, you may lose some control over how your employees are managed, as the PEO takes over many HR administrative responsibilities.
- Limited customization: PEOs typically offer a standardized set of HR services, which may not be customizable to meet the unique needs of your business.
- Potential communication issues: If communication between the PEO and your company isn’t clear, it could result in miscommunication or misunderstandings that can negatively affect your business.
- Cost: While PEOs can save money in some areas, they may come with their costs, such as fees for their services.
- Legal liability: While a PEO can help with compliance and risk management, your company is still responsible for complying with all legal and regulatory requirements. If something goes wrong, your company may still be liable.
What Is the Difference Between PEO and Payrolling?
PEO and payrolling are two different ways of managing employee-related tasks for a business. The biggest difference is that a PEO provides a comprehensive range of HR services while payrolling focuses solely on payroll processing.
Payrolling is a service where a third-party company takes on the payroll processing duties for a business. This can include calculating and processing employee paychecks, managing tax withholdings, and distributing tax documents at year-end. However, payrolling companies typically don’t handle other HR-related day-to-day tasks.