Some firms find leasing staff, like leasing autos, pays dividends
Economist Nathan D. Jones fired all his employees last October, and they accepted their pink slips with big smiles. Several minutes later, after he signed the papers to lease them from Omnistaff Inc., a Dallas-based employee leasing company, they could look forward to greater benefits, including dental insurance, vision care, and reimbursement for job-related education.Skip to next paragraph
Subscribe Today to the Monitor
Dr. Jones is happy, too. The leasing company now does all the administrative work associated with employees - interviewing, hiring or firing, taking care of the payroll, and filing workers' compensation and tax-withholding forms. Jones, owner of NDJ Associates Inc. in Hurst, Texas, still has control over everyday operations and suggests raises and whom to lease (hire) or delease (fire). He is ''basically getting a personnel office,'' explains Guy Murrel, spokesman for Arno & Associates, an employee-leasing consultant.
The leasing company has cut to a trickle the flow of paper work from his office to Uncle Sam, saving Jones five hours a week and giving him ''more time to spend managing and growing the business,'' he says. The benefits reduce turnover, too.
''Employees will think twice before leaving,'' says Elaine McGowen, an administrative assistant at NDJ. ''It is a retainer and obtainer'' of employees for the office, she adds. ''We're interviewing for a receptionist, and they just can't believe the benefits.''
And this is the best part: For the improved employee-benefit package that Jones is getting, he pays only 2 percent more than when the workers were under his direct employ - and there are no administrative hassles. Other clients who choose fewer benefits for their former employees actually cut costs with employee leasing, counting in reduced paper-work time.
''Economy of scale'' provides the savings, says James Borgelt, general manager of Omnistaff. The leasing company has so many employees that it is able to get price breaks on insurance and is more specialized in personnel functions, in contrast to a small consulting or professional firm.
A tax-sheltering application of employee-leasing comes straight from the hills of northern California, where are nestled many canny CPAs. In the 1970s, they realized that an employer did not have to set up matching pension plans for employees if one did not have any employees. So they advised professionals with small office staffs to lease their ex-employees back from leasing companies already in existence.
With the congressional blessing of the ''safe harbor'' provision of the Tax Equity and Fiscal Responsibility Act of 1982, which took effect Jan. 1 of this year, TEFRA-ized employee leasing companies are off and running. As long as the leasing company contributes a generous 7.5 percent of employee compensation to its employee pension plan, the ex-employer dentist, lawyer, or accountant can shelter part of his income in his own private pension plan.
The effect of this publicity and sudden credibility for leasing firms is explosive. Omnistaff, even though not complying with TEFRA and consequently not conferring the tax benefit, recently picked up 500 employees per month and jumped from employing 1,500 leased-out workers last August to more than 5,000 today. Total leased employees in the United States have increased to 50,000 today from 4,000 before August of 1982, says Carmen Arno, president of the leasing consultant firm, all of whose office staff is leased.
Employee leasing is ''a sleeping giant,'' says Dr. Jones, an economist who studied the idea for months before subscribing himself. It could put small group-insurance companies (which charge small businesses exorbitant prices for insurance to absorb the cost of their paper work) out of business in five to 10 years, he says.
Critics of employee leasing point out that employees can feel abandoned by their real employer - if it is a large organization miles away. Even though the relationship between day-to-day boss and employee is still as close, the ''personnel department'' must be readily accessible for consultation on benefits and communicating raises or other information to its employees. This can be no problem if the leasing company has a service office close to the employees' workplace.
Close proximity can make it easier for the leasing company to perform all its duties as the legal employer. The IRS is looking at employee leasing very closely, says Mr. Murrel, to determine who is actually the employer. But when the IRS receives one check instead of 40 for the same amount of income, it will like it, says Dr. Jones, since it reduces IRS paper work.
Another group that might be expected to object to employee leasing is labor unions. But so far the leasing has cut across all trades - from office workers to factory workers to programmers, Murrel says. This, plus increased job security (the employee can get a transfer to another company instead of quitting) and better benefits, should keep union complaints low.
But ''if an employee leasing program looked better to employees than the union,'' Murrel adds, ''and the employees went with the leasing program instead of the union, they might not like that.''
Despite these objections, the projected future of this barely out-of-the-shell industry looks bright. If the leasing companies can sign up just 20 percent of the employees of the 4 million companies with fewer than 35 employees (and 20 percent is a cinch, says Mr. Arno), in the next 10 years 28 million employees will be leased.