Implications of Employee Leasing for Small Businesses

By Traynor, Kenneth; Pesek, James G. | Journal of Small Business Management, October 1987 | Go to article overview

Implications of Employee Leasing for Small Businesses


Traynor, Kenneth, Pesek, James G., Journal of Small Business Management


IMPLICATIONS OF EMPLOYEE LEASING FOR SMALL BUSINESSES

If you could fire all of your employees while maintaining their respect and gratitude, and increase your profitability by doing so, would you subscribe to our employee leasing firm today? This almost unbelievable sales pitch is commonly delivered by a growing number of employee leasing firms. As a result, many small businesses are considering employee leasing.

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) opened possibilities for significant savings in taxes, time, and personnel administration costs.1 Although the Tax Reform Act of 1986 has, for all practical purposes, eliminated the potential tax savings, the potential for personnel administration cost and time savings remains.2 This article examines the status and implications of employee leasing for small businesses, incorporating the effects of the Tax Reform Act of 1986. After evaluating the advantages and disadvantages of employee leasing in the areas of taxes, costs, control, and flexibility, guidelines are presented for choosing a reliable leasing firm.

1 Public Law 97-248 (1982).

2 Public Law 99-841 (1966).

THE GROWTH OF EMPLOYEE LEASING

Employee leasing refers to any arrangement whereby a company obtains a labor supply by contracting for the services of employees on the payroll of another company. The recent popularity of this approach to staffing a work force is, to a large degree, attributable to the passage of TEFRA. Employee leasing is hardly a new idea. Firms such as Kelly Services, Manpower and Payday are widely used "temporary' employee services. Temporary personnel services technically are lessors of employees.

Subcontracting and the use of independent contractors is also similar to employee leasing. Only five leasing firms existed before the enactment of TEFRA, but many more firms have appeared over the last few years.3 In just three years, employee leasing has mushroomed into an industry with annual revenues of more than $1 billion. In 1983, an estimated 4,000 people worked for leasing companies; by 1985, an estimated 75,000 men and women, ranging from high school graduates with only clerical skills to Ph.D.s in electronics, worked under leasing arrangements. Although approximately 275 companies are providing specialized leasing services nationally, the industry is very new and many firms have not been in operation for more than several months.4

3 James R. Redeker and James O. Castagnera, "The Legal Nightmares of Employee Leasing,' Personnel Journal (February 1985), pp. 58-62; "Be an Employer When You're Not,' Personnel Journal (August 1984), pp. 6, 9; Jaclyn Fierman, "Employees Learn to Love Being Leased Out,' Fortune (April 1985), p. 80.

4 Jaclyn Fierman, "Employees Learn to Love Being Leased Out.'

The basic intent of TEFRA was to establish regulations regarding pension plans. Congress imposed severe restrictions on pension plans, but approved the concept of employee leasing, which allows employers to structure their benefit plans without the cost or burden of employee involvement. Under TEFRA, employers who otherwise would have been required to provide pension benefits to their employees were able to avoid this responsibility by leasing employees from another company.

The so-called "safe harbor' provision of TEFRA specified that a subscriber (i.e., a company owner who contracts for leased employee services) who establishes a leased arrangement with his or her employees effectively became the only employee of the firm.5 The "safe harbor' provision was eliminated with the passage of the Tax Reform Act of 1986, but employee leasing remains an attractive option, particularly for small businesses that want to reduce the time and money spent on personnel administration.6

5 William Moreland, "TEFRA Allows Employee Leasing,' Law Office Economics & Management (Fall 1983), pp. …

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