Lease on Life?

Leasing workers can reduce your paperwork, but don't forget your legal obligations to those employees.
Magazine Contributor
3 min read

This story appears in the November 2004 issue of Entrepreneur. Subscribe »

If it looks like a duck and quacks like a duck, it's a duck. The same goes for employees, even when they're leased from a staffing company or professional employer organization (PEO). When an employee is under your supervision and control, you can't contract away your legal responsibility for payroll taxes, workers' comp, and the like.

The employee leasing business has grown rapidly. The National Association of Professional Employer Organizations (NAPEO) estimates that 2 million to 3 million Americans are co-employed in PEO arrangements. The idea is to put personnel administration into the hands of professionals so you can concentrate on your business.

The PEO handles workers' comp and other benefits-all for what you were paying on your own, because the PEO can get volume discounts. Indeed, many business owners sign on because they want to offer benefits to their employees that they could never afford on their own.

"It can make a lot of sense," says J. Daniel Marr, an attorney with Hamblett & Kerrigan in Nashua, New Hampshire. "With a good company that has a good reputation, it can be an excellent decision."

In the early days, employee leasing companies claimed they would be the sole employer of the staff. Businesses would "fire" their entire staff, the leasing company would hire everyone, and they'd return to their jobs the next day as leased employees. Indeed, some businesses looked to protect themselves from liability, believing that in case of a lawsuit over employment matters, the leasing company would stand up in court as the sole employer.

A lawsuit against Merrill Lynch in 1984 eliminated that fantasy. The company had leased an administrative assistant from a temporary-help agency. After two weeks, the woman's boss at Merrill Lynch dismissed her. She sued, alleging racial discrimination. Merrill Lynch argued that it wasn't even her employer and therefore wasn't liable under the federal Civil Rights Act. The court disagreed and required Merrill Lynch to stand trial. Even if the company wasn't her employer, it couldn't limit her opportunities through racial discrimination.

In subsequent cases, courts have recognized that the PEO and the client company are co-employers. Both are liable for payment of payroll taxes and workers' comp, and compliance with government regulations. "It's still your responsibility," Marr says, noting that the key question in determining whether someone is an employee is one of control: Who is directing what the worker should do, and how? "You're delegating, but under the law, it's nondelegable. If you discriminate, you're liable. If the leasing company fails to pay workers' compensation, there's that provision in state law."

If you partner with a PEO, Marr says, check its reputation to make sure you're dealing with a responsible company. Draw up a contract specifying who will take care of what. Include a clause stating that if the PEO fails to pay workers' comp or payroll taxes, it will indemnify your company.

Finally, Marr advises, don't assume you're not liable for how you treat leased employees. "Treat them with the same dignity you treat your other employees."

Jane Easter Bahls is a writer in Rock Island, Illinois, specializing in business and legal topics.


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