What is Employee Leasing?

Employee Leasing

The employee leasing method is another new contractual arrangement that has come up in recent years, together with the co-employment arrangement we have previously covered.

In this article we will deal with the definition of employee leasing, the differences between this model and the co-employment model, and the reasons why employee leasing can be a good option to start the internationalization process in a new country.

Origin and definition

The term “Employee Leasing” originated in the United States in the 60’s by three businessmen, but it became popular years later with Marvin R. Selter.

This contractual arrangement started to be used because, during these years, companies with workers under this model were not subject to certain taxes according to the   Employee Retirement Income Security Act of 1974 (ERISA), which increased the benefits for the companies. This Act was amended in 1986: if the temporal worker constituted the 20% of the company’s workforce, he/she must be contracted as an employee.

We can then define “Employee Leasing” as the employment arrangement between two companies where one company transfers workers to another. These workers will be active in the new company for a definite period of time stated in the agreement or they will be able to perform services for an indefinite period.

How Employee Leasing works

The parts will have to define what their obligations will be at the beginning of the employment relation in order to avoid misunderstandings or problems in the management by either party.

First off, the subscribing firm will provide detailed information about the activities to be performed and the personal and professional profile needed so that the leasing firm can search for the right candidate among the ones available. The leasing firm will therefore assume the responsibility for salary payment, which will be paid to the leasing firm, together with a service fee.

On the other hand, the leasing company will take on all the administrative, legal, fiscal tasks needed to operate, so that the client company – or subscribing firm – does not have to deal with any paperwork regarding their employees. Even though the worker will perform activities for the client company, the leasing firm will be the one actually paying the worker’s salary sincehe/she will be registered in the leasing firm’s payroll.

On their end, the worker will perform services for the client company, but will be included in the leasing firm’s payroll and will have to contact the latter in case there is any issues regarding his employment conditions.

The terms “temporary work agency” or “staffing company” are usually used as a synonym for “employee leasing”. However, there is a small difference between hiring one or more workers through a temp agency and doing it through an employee leasing firm.

• In the case of the temp agencies, the workers take part in a pre-established mission with specifc duration and, once completed, he can go on and find another mission for any other client of the temp agency.
• With the employee leasing arrangement, the worker is hired by the leasing firm in order to simplify the human resources management for the client company. There is no particular reason why the relationship should be temporal and, if the client firm is interested in keeping the relationship, the worker can be incorporated in the client’s payroll whenever they decide.

Two different perceptions of employee leasing and co-employment

In previous posts, we have dealt with the co-employment model and the characteristics of this type of arrangement. Now, we’ll see the diferences between these to concepts.

When analyzed separately, there’s always doubts whether these models offer the same service or if they are completely different arrangements.

Some say the difference between co-employment and employee leasing lies in the temporal aspect of the employment relationship. The leasing arrangement can be seen as a temporal employment relationship established between the client firm and the leasing firm, similar to the the agreement offered by temporal work agencies. It is understood that the employee is hired to perform a temporal activity and that, upon its completion, the worker will leave the client firm and will be available for the leasing firm.

However, if we take a closer look at the co-employment and employee leasing arrangements, we will see that both models operate in the same way: in both cases the client company will be in total control of the worker’s activities on a daily basis, and will be responsible for paying the leasing company the amount corresponding to the worker’s payroll, but they will outsource all legal, administrative and HR tasks relating to the  managing of the employee. The employee, on their end, will contact the leasing firm/co-employer whenever there are questions concerning the employment relationship, but will be in permanent contact with their supervisor at the client firm in order to perform their daily activities.

We can then conclude that the only actual difference between these two concepts is the perception they create when discussing this type of arrangements.

– In the case of employee leasing, the approach is focused on making the personnel available by the leasing firm to the client company.

– While in the co-employment model, the approach is focused on positioning the employee as dependant on the client company, at an operational level; and on the employer of record, at an administrative level.

Why is employee leasing interesting when it comes to internationalization

For those companies that wish to incorporate a branch in a foreign country, the employee leasing relationship can bring short-term and long-term benefits as a method to start operating before creating a structure in the foreign country, which, once created, will be able to hire the employee. This method allows the company to test the new market before incorporating a local company, and to acquire specialized personnel that can bring their knowledge to the company, as a way to avoid the long recruitment process for the perfect worker.

The employee leasing model means a pragmatic way to become operative from the start, when the company decides to disembark in the foreign country and structures in an efficient manner the activities around an operative team.

On an internationalization scenario, an agreement between the end client and the worker could be made with the aim of complementing the local agreement signed with the leasing firm. The goal of this agreement is to offer guarantees to the employee that will be working abroad. In this way, it can be assured that this employee will be reincorporated wherever the client company has a set up entity.

Conclusion

There are different services that allow us to hire employees in innovative and unconventional ways that will take the hiring process and management off of our shoulders.

This hiring method is very useful for those companies, especially small ones, that need to hire personnel for a determined period of time or to complete a specific project, but do not have the knowledge or time to spend on the recruitment processes and the rest of administrative tasks necessary to formalize the hiring process.

If what you are after is specific personnel for a temporary project, then the employee leasing model is right for you. You will have the necessary workers and you won’t need to worry about the recruitment process or employee management, small tasks that can take up a lot of valuable time.