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Employee leasing is an arrangement between a business and a staffing firm, who supplies workers on a project-specific or temporary basis. These employees work for the client business, but the leasing agency pays their salaries and handles all of the HR administration associated with their employment. Employee leasing, although once used to describe professional employer organizations (PEOs), should not be confused with PEOs or co-employment relationships.

What is employee leasing?

Benefits of leased employees

Leasing employees can sometimes be advantageous if you run a business with seasonal demands, lack the resources to recruit employees on your own or need temporary assistance with special projects. In these situations, a staffing agency may be able to help you:

  • Fill open positions quickly
    Because of their large network of available workers, staffing agencies can sometimes supply you with a qualified candidate within a few days or less.

  • Find industry experts
    Staffing agencies can help you source workers with skills in highly-specialized areas, like health care.

  • Reduce administrative burdens
    Leasing employees alleviates many aspects of recruitment, such as the need to advertise job openings, review resumes, interview candidates or run background checks.

  • Retain talent
    If a leased employee meets your expectations, you may be able to hire the individual after the temporary assignment is completed.

Risks of leased employees

Leasing employees can create challenges and put an employer in a difficult position. These challenges have led to the growth of the PEO, or co-employment model, which shares many of the same benefits as employee leasing while mitigating risks, such as:

  • The leasing company employs the workforce
    Because the leasing agency is the employer of record, it can continue relationships with workers after they have been let go by their former employer. The agency may even assign these employees to positions that directly compete with the former employer’s business, potentially endangering trade secrets and procedures.

  • Employee-centric tax incentives
    When a staffing agency employs the workforce, the client business may no longer be eligible for employee-centric IRS tax benefits, such as the Work Opportunity Tax Credit or the Employee Retention Credit.

  • Employee benefits
    With a significantly smaller employee population, employers may find competitive benefits to be more expensive or difficult to access. They may have to limit their benefit offerings, thereby diminishing their overall value.

Leasing employees vs PEO co-employment: What’s the difference?

The key difference between employee leasing and co-employment is staffing. An employee leasing agency will provide you with temporary workers, but a PEO doesn’t. In a co-employment arrangement, you supply and manage your own workforce, while the PEO helps you handle HR administration.

How employee leasing and co-employment work

Leased employees may perform work for you for a specified time, after which they return to their staffing agency for another assignment. Co-employment is different because you maintain the ability to hire and terminate employees and should your PEO partnership end, your workers remain in your employment.

Is employee leasing or co-employment the right solution for your business?

Ask yourself the following questions if you’re considering working with a staffing agency or a PEO:

What PEO services will I need?

Consider a complete PEO solution that includes payroll and tax compliance, workers’ compensation, time tracking, recruiting and onboarding, and access to top-rated health and retirement benefits. Learn more about the services you can get from the ADP PEO, TotalSource®.

How do I pay for PEO services?

Some PEOs bill per employee, while others charge a service percentage.

What responsibilities do employers have with a PEO?

Although a PEO provides guidance and handles many employment-related duties, you still share liability in certain areas and remain primarily responsible in other areas, including business operations and personnel decisions.

Are employees eligible for benefits with a PEO?

When employers enter into a co-employment arrangement with a PEO, their benefit-eligible employees gain access to competitive benefits that are usually only available at larger companies. Health insurance, commuter benefits, perks and discounts, and retirement savings plans are common with some PEOs.

What should I look for in a PEO or an employee leasing company?

Look for providers with flexible options, years of experience and clients in your specific industry. If you decide that co-employment is right for you, choose a certified PEO, or CPEO, that meets the highest standards and requirements from the IRS.

How to find an employee leasing company or a PEO

  1. Request proposals from reputable employee leasing and PEO providers.
  2. Complete a needs assessment so the vendor can prepare an appropriate offer for your business.
  3. Provide information about your employees and your existing benefits plan if you’re pursuing co-employment.
  4. Once you receive the proposal, carefully review the services that will be provided and clarify which responsibilities will fall under the PEO and which will remain with your business.
  5. Confirm the cancellation and renewal policies and ask if you can expect annual price increases.

Leased Employee FAQs

See what other employers are asking about employee leasing:

Are temps leased employees?

Yes, temps, or temporary workers, are sometimes considered leased employees. Businesses can purchase their services from employee leasing or staffing agencies when they need work done on a contract basis.

Who is the employer of a leased employee?

Although they perform work for a client business, leased employees are usually employed by a staffing agency, who pays them, administers their benefits and handles other HR tasks related to their employment.

How do I report leased employees on a tax return?

When you lease employees, you’re typically not responsible for deducting taxes from their wages or paying unemployment tax. The employee leasing agency withholds the necessary payroll taxes and files them with government agencies.

Are leased employees eligible for benefits?

Leased employees may be eligible for benefits through the leasing agency that employs them.

How does a PEO impact my role as an employer?

When you partner with a PEO, you maintain control of the day-to-day management of your workforce and your business and gain assistance with some of your responsibilities as an employer. These may include:

ADP Editorial Team

ADP Editorial Team The ADP editorial team is comprised of human resource professionals with extensive experience solving complex HR challenges for businesses of all sizes.