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What Is Employee Leasing?

Key Takeaways

1. “Employee leasing” or “staff leasing” is an arrangement where a professional employer organization (PEO) and a client company in which the PEO takes the position as the official employer to an employee, but the employee works for the client company. The benefit of this for the client company is that they have an employee that undergoes day-to-day tasks within the company but the HR responsibilities, such as payroll and employee tax withholding are outsourced to the PEO.

2. The PEO serves as the “Employer of Record” (EOR) for insurance and tax purposes which means that the PEO technically employs the individual on behalf of the client company.

3. A PEO provides a client company assistance with things like payroll, tax administration and human resources solutions. Additionally, a global PEO specialises in global employment and tax laws which means that legal compliance is handled.

4. PEO solutions are a good way to expand and grow a business without having to set up a foreign entity or subsidiary, as it means that employees can be recruited and handled separately and that the legal compliance is dealt with by the PEO instead of the international business itself.

5. This relationship is similar to ‘co-employment’ were the employer responsibilities are split between the PEO and client company.

When companies look to expand their business to other countries, it is often quicker, easier and more cost-effective to use the services of a global PEO rather than setting up a foreign company or subsidiary. A PEO (professional employer organization) is an employment solution for companies that want to hire internationally or throughout different states in the USA.

With some similarities to contract staffing agencies, a PEO is able to provide assistance with hiring and recruiting global talent to ensure that companies are employing the most suitable individuals. As well as this, PEOs take away the burden of having to set up payroll and do tax administration tasks in order to abide by local labor and tax laws.

In the relationship between the PEO and the client company, the PEO serves as the “Employer of Record” (EOR) for insurance and tax purposes. This means that the PEO is technically the legal employer but the client company still has day-to-day involvement with the employee and provides management instructions to the employee.

This relationship is similar to ‘co-employment‘ which is where different organizations split the employer responsibilities. This allows efficient payroll management and more streamlined HR processes.

What is employee leasing?

“Employee leasing” is commonly used as a synonym for professional employer organization (PEO) services. A PEO is also sometimes known as a ‘leasing company’ and is typically able to provide help with the following:

  • Payroll assistance
  • Tax administration
  • Employee recruitment and management
  • Assistance with legal compliance
  • Help with human resources.

The employment duties met by the PEO and the company are shared between both, so that the PEO has responsibility for reporting wages and employment taxes, whereas the company has responsibility for the employee’s day-to-day work. The PEO is able to take control of the taxes, employee benefits, and contributions that are required when dealing with payroll which means that the company does not have to handle this.

Employee leasing first came about in the late 1960s  in the United States where it was known as “labor leasing” , in which employees of a third-party company were leased to client companies. For the client companies, as they were not directly employing the employees, they could avoid pension plan obligations. In 1982 and 1986, this arrangement was formalized to allow client companies to legally avoid pension obligations that would normally apply to an employer providing the company did not lease more than 20% of its workforce.

Since then, PEOs have become more of a global employment solution for those companies that expand and scale across countries.

Is employee leasing the same as PEO?

‘Employee leasing’ is a popular way to describe what a PEO does on behalf of a client company. In some cases, the term ’employee leasing’ might be used for an arrangement where the worker is permanently hired by the leasing company, and then contracted out on a project basis to successive companies. While a PEO could do this, typically the employee’s contract would begin and end with the one client. 

Note that in Germany, the most common third-party employment solution uses the term ’employee leasing’ rather than ‘PEO’. Read more at What is an AUG License?  

When should I use employee leasing?

Staff leasing can provide many benefits to companies. PEOs tend to have large networks of suitable employees that they can refer to companies and therefore when a company needs to fill positions quickly, often PEOs can find a good match for the role fairly swiftly. In this sense, there are not big waiting times or gaps between companies losing staff and waiting for new staff to join. Due to the connections and networks that PEOs have, finding highly skilled specialists and experts in certain fields is not an issue.

Additionally, instructing a PEO takes the burden of having to go through recruitment processes, running background checks, reviewing resumes, and interviewing which can take time away from business activity. Similarly, time is saved by not having to set up payroll systems and looking into the local laws and regulations in each country of operation.

Employee leasing can be used when companies are expanding to other countries. It is a great solution to use as it allows companies to be able to scale easier and quicker without having to actually set up a foreign entity (such as a subsidiary company). Client companies do not need to ensure compliance with local employment laws and regulations, as this can be dealt with by the PEO. Sometimes tax laws and employment regulations in other countries can be complex with limited information available to companies to help them understand. Global PEOs specialize in complying with international laws which is beneficial for companies that are wanting to expand and do not have knowledge of a certain jurisdiction.

In some countries, employee misclassification can lead to serious implications for companies and individuals. This is where a worker is classified as a contractor or freelancer but is actually working in more of an employee capacity. If a company is found to be misclassifying or disguising employees, this can lead to consequences. This is why it is beneficial to have a global PEO in place to ensure that companies are following the rules of the countries in which they operate.

Conclusion

At Horizons we are able to hire employees from around the world on a temporary basis. If you believe that an employee leasing or PEO arrangement will be beneficial for your business, please do not hesitate to contact us for more information.

Frequently Asked Questions (FAQ)

Leasing employees is ideal for companies that want to expand abroad and want to make the process as efficient and cost-effective as possible. A global PEO/international leasing company has access to good networks of experts and highly skilled professionals and takes the burden away from companies of having to go through the recruitment processes of hiring suitable candidates. Additionally, payroll and other tax administration tasks will be dealt with by the PEO which means that companies do not have to review local laws and regulations in order to comply as it will be handled by the PEO/leasing company. This can help avoid tax or legal implications that companies may not even be aware of.

A leased employee or leased staff member is still an employee, but their legal employer is the PEO/leasing company. In terms of traditional employer responsibilities, these are divided between the client company and the PEO (professional employer organization).

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