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What Is the Difference Between PEO & Employee Leasing?
Updated: Septemeber 25th, 2023
As a business owner, you have to make important choices every day that will affect how your company grows and performs. One choice to make is deciding between a PEO and Employee Leasing. They are both popular HR services for small and medium-sized businesses (SMBs). Oftentimes, people get Employee Leasing and PEO mixed up. The two terms are not the same, but they are sometimes used interchangeably. In this post, we’ll explain what each service does, what its pros and cons are, and how they differ from each other and from other HR service providers. We’ll help you figure out which option would be best for your business.
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Defining Employee Leasing
Employee Leasing, or a Staffing Agency, is a business that provides temporary employees under an employee leasing agreement between two or more companies. A staffing company hires employees to work for your business on a temporary basis. They’re responsible for administrative tasks such as payroll, benefits, and compliance with labor laws, in addition to administrative fees, employment taxes, and paychecks for the temporary workers. On the other hand, the client company takes care of the workers’ daily tasks and manages them. Once your agreement, project, or timeframe with the provider ends, the leased employees leave your company and return to the original employer.
Key advantages and disadvantages of Employee Leasing
Leasing workers from another company can have a lot of benefits that include providing a quick solution to fill an open position, harnessing specialized talent, and having employees for seasonal or short-term projects. When you hire a staffing company, you avoid the headaches of hiring paperwork, which saves you time and money. The staffing company helps with things like job postings, resume screening, interviews, and background checks. This allows your company to focus on what it does best.
But there are downsides. Since the staffing company is the official employer, they could place the employee they once hired with you with a competing company, which could risk your business secrets. Additionally, if your employees work for someone else, your company might not be eligible for IRS tax benefits for employees like the Work Opportunity Tax Credit or the Employee Retention Credit. Lastly, some staffing companies charge higher rates than regular employee salaries. This led to the development of the PEO model as a better solution.
Could you have an entire office of leased employees from a staffing agency?
Yes, you can staff an entire office with leased employees from a staffing agency. These leased employees are chosen for their specific skills and expertise, making them a great fit for particular tasks or projects.
Professional Employer Organizations (PEO)
A PEO, or Professional Employer Organization, is a company that provides an extensive list of HR services to help you manage your human resources department under a co-employment agreement. This means that they share employer and legal responsibilities with you. As the employer of record, they tend to handle much more in your company than an Employee Leasing company, such as payroll processing, benefits administration, worker’s compensation insurance, health insurance, and regulatory compliance. Some even offer recruitment support, which includes creating and posting job ads, providing interview assistance, and more.
Key advantages and disadvantages of PEO
Partnering with a PEO helps you figure out the challenges of running or expanding your business. They make sure you are compliant with HR-related laws and regulations. However, when outsourcing your HR functions to a PEO, you might not be able to have a say in the benefit providers they choose to deal with. Additionally, a PEO can save you money in many areas, but its overall cost might be expensive. Because they work with a lot of client companies, their customer support services might be of lower quality.
PEO vs. Employee Leasing
According to the National Association of Professional Employer Organizations (NAPEO), initially, PEOs used to provide employee leasing services, which they then evolved from. That's when the confusion started. Some older state regulations governing PEOs still use leasing terminology, which adds to the complexity surrounding PEOs. There are now many differences between them, the main being that Employee Leasing companies provide businesses with workers for a short period of time. However, PEOs help you hire talented employees by offering the recruiting services previously mentioned, and the staff remains yours when the contract with the PEO ends. When they present you with the talent they find, the hiring or termination process is your responsibility.
A nationally recognized PEO provider like ADP TotalScource provides an extensive list of other important features, such as labor law compliance, fully integrated human resources technologies, and lowering risks when it comes to payroll services. This means a PEO will share more responsibilities and liabilities with you.
How Can PEOs or Leased Employees Benefit Your Business?
PEOs can help your business grow by assuming some of the risks and complex tasks of the human resources department. They offer competitive employee benefits plans and rates, enhancing productivity and profitability. They help you with your HR needs, including controlling liabilities, preparing employee handbooks, and preventing potential worksite dangers.
Opting for an employee staffing company gives you the number of employees you need for your project without having to worry about their compensation or employment taxes; you don't have to spend a lot of time and money on hiring procedures and sorting through the applications. Because these companies can access a large number of applications through their database, they can fill a position, no matter the qualifications required for it, with ease.
What Factors Should Be Considered When Choosing Between PEO & Employee Leasing?
When deciding between the two, a critical factor to consider is the type of agreement you want between you and the provider. If you're seeking a long-term partnership or co-employment arrangement to share responsibilities and risks, a PEO is the better choice.
On the other hand, if you have a short-term project that demands employees for a specific work duration, Employee Leasing is a suitable option. If you're a business owner in need of temporary workers for a defined project but wish to avoid the HR responsibilities that come with it, working with staffing companies can efficiently fulfill your hiring needs. You can also ask for a substitute to fill in for a worker who is sick and will not be back for a while. In this arrangement, you won't establish an employer-employee relationship with these workers; they will solely serve to meet your short-term or seasonal requirements.
Is a PEO a Better Fit for You?
If you're a small or medium-sized business owner and find yourself swamped with the demands of growing your company, outsourcing your HR responsibilities to a PEO can be a game-changer for both you and your employees. A PEO provider will not only help you navigate through the challenges you're facing but also assist you in prioritizing where your attention should be focused.
And it's not just limited to smaller businesses; even if you're running a larger company with many employees, partnering with a PEO can streamline your HR tasks, allowing you to concentrate on the day-to-day operations of your business. PEOs are versatile and can provide benefits across various industries, including real estate, technology, and financial sectors like stock trading and brokerage.
Conclusion
In summary, both Employee Leasing and PEO services have their pros and cons worth weighing. The Employee Leasing arrangement suits businesses aiming to maintain control over their workforce while needing a helping hand with temporary hires. On the flip side, PEOs offer a comprehensive solution, streamlining HR processes and delivering extra benefits to employees.
The choice between Employee Leasing and PEOs boils down to your business's unique needs and priorities. Consider factors like cost, administrative workload, and the level of HR support required before making your decision. You can also gain a clearer perspective on various PEO options by checking out our PEO comparison pages.