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Pros and Cons of Employee Leasing

written by: Vikas Vij•edited by: Jean Scheid•updated: 1/10/2011

Wish to reduce the burden of administrative costs of employees? Consider the option of employee leasing. Here, we take a look at the pros and cons of employee leasing for your organization.

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    Employee Leasing for Small and Medium Businesses

    Reduce Costs with Employee Leasing The global economic environment has become highly competitive and businesses face new challenges from the emerging markets. Effective cost cutting measures and operational efficiencies are critical to survive in such an environment. Therefore, many business organizations are looking at the option of employee leasing instead of hiring permanent employees. Employee leasing is a convenient arrangement to lease employees from a professional job contractor. This helps the business to reduce its administrative cost burden of maintaining employees. However, it is important to be aware of the pros and cons of employee leasing before going for this option.

    Photo Credit: www.sxc.hu svilen001

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    Pros of Employee Leasing

    Employee leasing is a popular practice among medium and small businesses that are looking at innovative ways to reduce their costs. These companies view employee leasing as a good way to ensure extra benefits for the employees without incurring an extra financial burden on the company. The benefits for the leased employees may include unemployment insurance, medical benefits and retirement benefits, which are paid for by the professional employer organization (PEO) from where the employee is leased.

    Administrative and HR costs involved in maintaining the employee payrolls and other paperwork is eliminated for the company because these tasks are the responsibility of the PEO. The company also does not bear the risk of employee compensation in case of personal injury at work or tax liability issues arising on account of the employees. These responsibilities are also borne by the PEO in most cases. Many times the leasing companies also offer HR and legal expertise to their clients, which is an added advantage for small and medium businesses who do not need to hire employees for such expertise.

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    Cons of Employee Leasing

    Pros and cons of employee leasing must be considered together in order to evaluate whether this option suits a particular company or not. One of the key downsides of employee leasing is that the company becomes highly dependent on the PEO for its employees. In such a situation, if the PEO goes out of business, it can create a crisis for the business because legally the employees belong to the PEO only. There are numerous instances where the PEOs have gone bankrupt all of a sudden, causing a sudden emergency for their clients who do not have the administrative system in place to manage their own employees.

    Another disadvantage of employee leasing that is observed in certain cases is that the company finds it difficult to achieve employee loyalty, motivation and a sense of intimacy. Employees may have a feeling that they do not belong to the company permanently, and may be removed whenever the company desires. The problem may get compounded further if there is a conflict between the regular employees and leased employees of the company. Such conflicts are natural and may bring down the overall productivity of the company.

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    How to Minimize the Risks of Employee Leasing

    To minimize the risks associated with employee leasing, it is important to engage with only a well established and reputed professional employer organization. Small and medium businesses that are considering this option in the United States should get in touch with the National Association of Professional Employer Organizations (NAPEO). NAPEO accredits only such PEOs that fulfill the basic minimum norms set by the association. They can recommend an accredited PEO through which the company may lease its employees.