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What is Employee Leasing?

Michael Pollick
By
Updated May 17, 2024
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Smaller companies looking to expand their workforce may be comfortable with the technical side of the hiring process, but not the human resource side. Business owners often find themselves overwhelmed by all the payroll accounting, record keeping and benefits which accompany newly hired employees. One popular solution to this problem is the practice of employee leasing.

Employee leasing is similar to the process of hiring temporary workers, but the key difference is permanency. A company wishing to pursue this process will first contact a Professional Employment Organization (PEO) to discuss its particular employment needs. The PEO or other employment leasing company might set up an interview process for recruiting new staff, or might take responsibility for existing workers. The company can still participate in the hiring process, but any hired personnel will officially work for the leasing company.

For many employees, the switch from their original company to an employee leasing company is actually a better deal financially. Since a typical PEO handles a large number of employees from numerous companies, future health insurance and other benefits can be negotiated in bulk. A worker at a small electronics company can enjoy the same level of benefits as a worker in a massive automotive plant. Wages and performance reviews are under the auspices of the employee leasing organization, not the original companies.

Employers often lease employees to eliminate the need for accountants and human resource managers. The leasing agency charges a fee in addition to the employees' wages, much like temporary employment agencies. This fee is often less than the cost of hiring human resource experts and payroll accountants. Because workers are not considered employees of the company in a legal sense, personal injuries and workers' compensation claims become the responsibility of the employee leasing agency.

Employee leasing is not a perfect solution for some companies, however. Since workers are not completely under the control of management, communications may become strained. Conflicts may have to be arbitrated by representatives of the leasing agency. Termination of non-productive workers may not be as simple as handing out pink slips. Certain union contracts actually prohibit the use of employee leasing agencies or PEOs in order to prevent companies from outsourcing their human resource departments.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Michael Pollick
By Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range of topics. His curiosity drives him to study subjects in-depth, resulting in informative and engaging articles. Prior to becoming a professional writer, Michael honed his skills as an English tutor, poet, voice-over artist, and DJ.
Discussion Comments
By anon63875 — On Feb 04, 2010

This article really gives relevant information about offshore employee leasing which people can understand the true meaning of it.

By trollh — On Jan 15, 2010

Does this type of agreement mean that both the original company and the PEO function as one entity? Do they each report the same number of employees to their state Department of Labor?

By anon44847 — On Sep 11, 2009

Hi. Thanks for writing such a great article. It’s really good to know about human resources in such a detail. There are many companies reeling under pressure in the last two years, due to the global economic downturn. And it has become absolutely necessary for companies in every business to look at cost cutting measures. Thanks, Sibley

By HWMwife — On Mar 24, 2009

My husband has been an employee, actually started the company with the owner, 16 years ago. He showed up for a meeting one afternoon and was told that the company needed all employees to fill out new "insurance paperwork" and unknown people were in said meeting, and introduced as the new "insurance agents and contacts." Everyone was made to fill out forms, and a couple weeks later all paychecks were now being issued from an employment leasing company.

Is this legal? My husband was never given the opportunity to consent becoming an employee of this company or look for other employment? How can this be legal?

He doesn't know which company handbook to follow and now this PEO is demanding new medical history information forms to be filled out (all of which is on file with the original employer)if they are not filled out they have threatened to withhold paychecks.

Any advice on what my husband's rights are or where we can find information would be helpful.

Thanks.

Hard working man's wife.

By anon25671 — On Feb 02, 2009

my husband was hired in a management position for a company 3yrs ago. After working there three months his checks began coming from an agency and not the company and then suddenly back from the company. He was told that was their accountant now because of other bookkeeping issues with this company. We have learned this was a leasing company. Does that mean that for those three months he was employed with the leasing company and not his company? Should he not have signed something in this regard or been informed that this was the circumstance or is that not required?

By anon17697 — On Sep 04, 2008

my husband was hired in a management position for a company 3yrs ago after working there three months his checks began coming from an agency and not the company and then suddenly back from the company- he was told that was their accountant- now because of other bookkeeping issues with this company we have learned - this was a leasing company- does that mean that for those three months - he was employed with the leasing company and not his company? Should he not have signed something in this regard-or been informed that this was the circumstances, or is that not required?

By ambition2008 — On May 19, 2008

what are the benefits for each: employees, the original company, the leasing agency and State, in this case " Employee Leasing" ?

Michael Pollick
Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range...
Learn more
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