{title} icon

Articles From Lumsden McCormick

Engaging Leased Employees - What are the Concerns?

The "gig economy" has opened plenty of new opportunities for employers and workers. Now businesses in virtually every industry can find freelancers for ongoing or one-off jobs on a cost-effective basis.

But there's another way employers can meet personnel needs and save money: "Lease" employees through databases provided by staffing agencies or "professional employer organizations" (PEOs). Engaging temp agency workers was popular before the gig economy exploded and is still relevant today. Because the workers are employed by the agency or PEO, they aren't included on your payroll, which helps minimize costs and payroll tax obligations.  

However, leasing employees isn't completely worry-free. Depending on how you manage worker leasing relationships, you may still have certain responsibilities. Before going this route, consider how you'll work with leased employees, including how legal, insurance and safety aspects may come into play. 

Four Factors 

Review these four factors before contracting with a staffing agency or PEO:

1. Potential legal liability. Your business potentially could be liable for injuries or harm caused by leased employees operating under your authority. If a lawsuit is filed and a settlement can't be reached, federal or state courts typically determine the outcome after taking several factors into account. No one factor will determine the outcome. But courts typically focus on the level of control companies exert over leased employees and the work they perform. In particular, they look at the work instructions and guidance provided to leased employees. 

They may also consider:

  • How long the company has engaged the leased worker,
  • Whether the company has the right to terminate employment,
  • Whether it's obligated to pay the worker, and
  • If work tools and the worksite are provided by the company. 
  • Legal liability is complicated, so always consult with an attorney concerning actual disputes. 

2. Workers' compensation claims. Workers' comp claims can be another stumbling block for employers that lease employees — regardless of whether leased workers' contracts exclude them from "employee" status. In the past, courts have sometimes treated leased workers as employees if the employer exerted significant control over how they performed the job. To avoid trouble, check with the staffing agency and your insurance company to determine if alternate employer endorsements or multiple coordinated policy endorsements might alleviate workers' comp concerns. 

Alternate employer endorsements reduce exposure to liability by requiring the staffing contractor to include your business as a "special employer" on its workers' compensation policy. This enables your company to effectively step into the shoes of the staffing organization for workers' compensation claims. With multiple coordinated policy endorsements, you're required to include applicable workers on your own workers' compensation plan. This has the same practical effect as an alternate employer endorsement.

3. Safety issues. The Occupational Safety Health Administration (OSHA) requires employers to meet minimum standards for maintaining a safe and healthy workplace. Your business and its staffing partners share responsibility for leased employees. 

According to OSHA, staffing agencies and PEOs must ensure that their employees receive adequate training before they're leased. But your company may need to offer additional training on job-specific hazards. Furthermore, you may need to supply safety equipment and conduct medical evaluations. This could add to the cost of leasing workers. 

Both parties are jointly responsible for ensuring all employees are notified and trained about any hazardous chemicals they may encounter on the job. Employers potentially are subject to violations, so OSHA advises them to address these issues in contracts with staffing providers. 

4. Regulatory compliance. In general, federal regulations require employers to comply with certain procedures depending on the number of individuals employed. This number may include leased workers as well as traditional hires. 

For example, the Worker Adjustment and Retraining Notification (WARN) Act mandates that an employer count leased employees toward the 100-employee threshold for providing advance notice of expected layoffs and work terminations. If your company is close to having 100 employees, be sure to factor the WARN Act rule and possible obligations associated with it into your worker-leasing decisions.

Pros and Cons

Employee leasing remains a viable option for businesses looking to cut payroll costs, avoid HR hassles, and save on taxes, but you need to review the pros and cons of this solution before signing any contracts. Rely on your professional legal and financial advisors to steer you in the right direction.

Engaging Leased Employees - What are the Concerns?

for more information

As a manager in our tax department, Kristin serves businesses and individuals. She works primarily with commercial entities in a variety of industries, including Partnerships, S-Corporations, and C-Corporations. She has also worked extensively with manufacturers and start-up companies. Kristin helps companies obtain various tax incentives to reduce tax liability and improve cash flow. Her focus is on various federal, state, and local business development incentives, including Start-Up New York, Excelsior Jobs Program, New York State Film Tax credits, and Federal Research and Development tax credits.


Comprehensive. Proactive. Accessible.
How Can We Help?