Renters' Rights

A co-employer can relieve you of a load of paperwork-but watch out for these legal traps.

Interwest Insulation of Seattle had 16 employees-enough to require a raft of paperwork but not enough to justify a human resources manager to take care of it all. And like many small businesses, Interwest couldn't afford to offer its employees big-league benefits. So Interwest turned to an employee leasing company.

Owner Scott Sonners entered into a contract with Barrett Business Services Inc. in which Barrett hired almost all of Interwest's employees, including Sonners himself, then leased them back to Interwest. The two companies became joint employers. The employee leasing agreement stated that the workers would be employees of Barrett for certain purposes, including hiring, discipline and firing, payroll, benefits, and workers' compensation insurance. Interwest would retain control of the business side of employee issues and follow Barrett's instructions on such matters as workplace safety. Under the new arrangement, safety improved and so did employee benefits. Sonners was able to concentrate on the business of his company rather than on keeping track of employee paperwork.

Although such industries as building security have leased employees for decades, leasing of general employees has been commonplace for only about 15 years. "The law is still catching up," says Miami attorney Norman Davis of Steel, Hector & Davis LLP, who has represented some of Florida's largest employee leasing companies. Davis contends that leasing employees can be ideal for entrepreneurs because it frees them to focus on their businesses. "They're entering these arrangements so they can get all the paperwork off their backs," he says. But because the field is regulated by state laws that vary widely, it's easy to trip over legal stumbling blocks.

Complicating the matter is the fact that "employee leasing" can refer to a whole spectrum of arrangements. At one end is the traditional temporary worker, employed by a temp agency and dispatched to clients to help with seasonal overloads, employee vacations and such. Large corporations have expanded this concept into the usage of long-term temps, often highly skilled people working on contract to complete a particular project, sometimes for years. Typically, long-term temps receive no benefits. Indeed, many large companies use long-term temps to avoid paying benefits. (That backfired a few years ago for Microsoft when a court ruled that long-term temporary computer programmers working side by side with the company's regular em-ployees, doing the same work year after year, should be entitled to the same stock options as its regular employees.)

At the other end of the spectrum stand thousands of small businesses leasing employees for the opposite reason: They want their employees to have health insurance and other benefits, which leasing companies can offer at affordable rates because they're pooling thousands of employees. Typically, a business will turn its entire work force over to the leasing company for purposes of payroll, taxes, benefits and so on. Many leasing companies now prefer to be called "professional employer organizations" (PEOs) to distinguish themselves from temporary agencies.

In the early days, some leasing companies insisted that they were the sole employers, and that the workers were merely leased to client companies that were to be absolved of all liability for employment-related lawsuits. Few make that claim anymore because off-site companies can't exercise control over such matters as sexual harassment. Indeed, leasing companies in Florida recently persuaded the state legislature to pass a statute declaring that the parties in leasing arrangements are considered co-employers.

In any state, it's up to the parties involved to decide who should be responsible for what. Typically, the client company is responsible for matters involving the business and the direct supervision of employees, while the PEO is responsible for all other matters related to employment. The distinction is spelled out in an extensive employee leasing agreement. "If it's clear in the agreement," Davis says, "courts tend to recognize it."


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.


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This article was originally published in the March 2001 print edition of Entrepreneur with the headline: Renters' Rights.

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