What is Employee Leasing?
Employee leasing is an arrangement whereby a club enters a co-employment relationship with a Professional Employer Organization (PEO). In this arrangement, the PEO and the club are actually co-employers of the club staff. The club employees are "leased" to the club by the PEO. The club retains the responsibility of hiring, firing and day to day management of all employees and the PEO is typically responsible for obtaining benefits and worker's compensation.
Why do clubs use PEO's?
In theory, entering into a co-employment relationship offers overall cost savings and provides the club with additional HR support services. In most cases, potential savings are centered around the concept of "pooling" employees from a multitude of businesses in order to negotiate a more favorable premium by spreading the risk across a larger and more diversified base of employees.
In most cases, HR services such as an employee handbook, benefits enrollment, HR help desk and compliance management are provided by the PEO. Other services such as background screening, drug testing and employee assistance programs may also be part of the services offered.
Finally, worker's compensation insurance is typically provided to the club through the PEO. The PEO most likely will support and train the club in loss control to manage the worker's compensation premiums.
What's the catch?
The catch is this... PEO's work well in some cases when clubs have experienced above average worker's compensation or health benefit claims. In such cases, a PEO may save the club significantly on insurance rates. The PEO accomplishes this by combining the risk of all of its clients to negotiate a preferable worker's comp insurance rate.
Be careful though, because in order for the PEO to make a profit, some "low risk" clients must be blended with the "high risk" clients in order for the PEO to remain financially stable. This means the lower risk clients are effectively "subsidizing" the higher risk ones.
Many might find the initial benefits rates offered by the PEO to be very attractive. But the club gives up its control and ability to manage or bid on their own benefit coverage. In many cases, the club is forced to participate in more expensive plans in future years. Over time, they often see the savings in benefits cost quickly disappear while administrative fees charged by the PEO rise.
Finally, the HR service aspect the PEO offers is often underused or not used at all. In many cases, HR services actually provided by the PEO amount to little more than an updated employee handbook and an occasional call for advice. These services are easily obtained at a much lower investment from an independent HR service company.
Why leaving increases the taxes your club pays...
In many states, state unemployment tax is paid only on the first portion of earnings per employee. For example, in Florida, employers pay unemployment tax on the $7,000 in taxable wages. Likewise, federal unemployment is applied against the first $7,000 as well.
Because the club is in a co-employer relationship and operating under the PEO's FEIN number, if they leave the PEO, the clubs' rates will default back to the "new business" rate for Florida. What most clubs don't realize is that their thresholds will reset as well.
This means that even if the club has already paid SUTA/FUTA on the first $7,000 of each employee earnings, it will now be liable to pay again under the new FEIN number. This can be an expensive problem. For an average size club, say 115 employees, that have all hit the threshold, this will amount to over $28,000 in additional taxes.
Why it makes sense to change January 1
Your unemployment tax thresholds will re-set January 1st regardless so in most cases, this is when clubs will move away from a PEO relationship to working with an independent payroll company. For this reason, if your club has considered moving away from a PEO in order to reduce fees, the time to do this is now. Looking at your options during the fourth quarter will allow you to make the change at the beginning of the following first quarter.
Choosing to partner with a PEO arrangement should be reviewed very carefully. Once a club makes this decision, it can be very difficult to leave. What was initially a cost savings move can quickly turn and end up increasing expenses for years to come. If your club is currently with a PEO and is interested in reviewing options to reduce expenses, evaluate your options during fourth quarter to avoid paying additional taxes related to a mid-year conversion.