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Dec 1990

Accounting firms have to assess rapid growth of employee leasing.

by Kerr, Barry

    Abstract- Accounting firms should consider using the services of a leasing company. Leasing companies provide such personnel-related services as preparing the payroll and administering the pension and health plans. The number of leased workers is expected to increase from approximately 500,000 in 1990 to 10 million by 2000. Employers using a leasing firm can still make all of their own personnel-related decisions. The employer pays the leasing firm, and the leasing firm pays the employees.

Joe Honick, Executive Director of the National Staff Leasing Association--the industry's trade group and fiduciary monitor--puts the number of leased workers at 500,000, about double the figure of just two years ago.

The Associated Press (AP) predicts there will probably be four million" leased workers by 1992 and John Naisbitt, author of "Reinventing the Corporation," claims that by the end of the decade there will be 10 million workers being leased nationally.

OK, But How Does It Work?

Here's how employee leasing works: To begin with, the employer puts its workers on the payroll of the leasing company. The employer still makes all personnel decisions, and instructs the leasing company as to rates of pay. The leasing firm delivers employee checks on payday. The employer writes only one check to the leasing firm, covering payroll plus an administrative fee for the pay period.

And What Will It Do for My Firm? in the words of Naisbitt, "Employers pay leasing firms a fee ... in turn, the firm handles the time and money-consuming tasks of administering the payroll, pension, health plans and other personnel-related functions." This is a business administrative service. John Cunniff, AP small business analyst, says Uncle Sam inadvertently created the industry "by bludgeoning existing businesses with such onerous paperwork burdens that they had to do something or die." Richard Yuran, Vice President of manhattan's J.N. Savasta Corp., agrees, You look at a lot of groups with 30 to 150 lives, and their owners don't know anything about ERISA, COBRA, and the rest. Especially if they are growing fast, you have mid-sized firms being run like Mom and Pop shops."

The Screw Turns

Employee leasing has been around since the early 1970s. Initially, it was conceived to provide professionals with a means to circumvent federal pension plan requirements. Employers awarded themselves large, tax deductible pensions until TEFRA 82 mandated that leased employees get a pension equal to 7 1/2% of earnings. This was raised by TRA 86 to 10%, which also limited enrollment of leased employees to 20% of staff.

Today leasing firms that offer pension plans must comply with all pension requirements on a company by company basis, enabling them to enroll all employees and adhere to the IRS non-discrimination laws.

Medical Coverage was the Catalyst

Leasing firms responded to the growing business problem of rising insurance costs: they were able to obtain better medical coverage at lower cost for small and mid-sized employers by combining their employees into pools of hundreds or thousands.

As many business owners saw their premiums drop 30% to 40%, leasing grew rapidly. And why not? Firms with under 100 employees commonly pay 60% to 75% more per person for health insurance than large self-insured corporations with like claims and benefits, according to a recent analysis of insurance industry data by Noble Lowndes, a benefits consulting firm. Leasing firms are quick to point out that by pooling the employees of scores of firms, they can also get superior medical packages, cheaper for hundreds of workers than small business owners can buy individually for five, 50, or 100 workers. Indeed, current studies show that up to 40% of American workers receive no benefits whatever from their employers. And, according to a July 25, 1990 report in USA Today, management attempts to cut health benefits during 1989 triggered 78% of all strikes.

What Role Does the Leasing Firm Play?

The leasing firm acts as an off-site combination of payroll, benefits and human resources departments. The leasing firm's economies of scale enable it to handle payroll and tax paperwork for much less than the small companies can do themselves. And "small" firms--those employing fewer than 100 workers--today make up 94% of all enterprises.

Another benefit of the leasing option is that a leasing firm puts medical coverage costs on a pay-as-you-go basis. Rather than owners putting up a large sum at the start of each quarter, they now pay premiums prorated on paydays.

Even the IRS Benefits

IRS recognizes that leasing firms pal, taxes promptly and report for many companies under one Federal I.D. number, simplifying collections. In 1987, the government claims, it was shortchanged $3.7 billion by firms that failed to withhold income taxes or pal, the employer's share of various employment taxes. A spokesperson for the New York office of the IRS says the agency's position on the leasing industry is favorable." He explained, payroll taxes are trust fund taxes."

Typical Services

Employee leasing companies usually do the following:

* Prepare payroll and pal, all employees.

* Pay payroll and all statutory taxes.

* Handle government compliance including immigration laws.

* File all governmental agency reports.

* Pay state and federal unemployment insurance, file reports and respond to workers' compensation hearings and reviews.

* Provide complete insurance packages and handle claims.

* Handle the administration of insurance claims.

* Handle all personnel administration such as recruiting and screening.

Leasing companies have been able to bring down medical coverage costs, particularly by self-funding plans, now in vogue among a majority of U.S. corporations. They can offer many benefits as part of their package: hospitalization, major medical, dental, vision, life, long term disability and accidental death and dismemberment. "If you're a company with 25 workers and you have two pregnancies in one year, no insurance company wants you," Joe Carlock of Advantage Corporate Services, of Cleburne, TX, an employee-lessor, told U.S. News & World Report. "But if your workers are part of a group of 500, then those pregnancies aren't going to affect rates." By contrast, owners who lease can now offer employees a veritable "cafeteria" assortment of financial instruments, including not only insurance vehicles but direct deposit, savings plans, United Buyers Service discount, employee assistance programs, etc. According to The Financial Manager, "Many leasing companies also offer benefits programs not available at small companies, such as a Section 125 plan, or flexible spending account (FSA)." FSAs allow employees to accrue a percentage of wages on a tax-free basis for certain expenses not covered by their benefits plan, such as insurance deductibles.

For some employers, turning to a leasing company represents their first opportunity, to give their workers the same buying advantages that employees have in large corporations, including group purchasing plan arrangements, credit union auto financing, etc. Small employers are empowered to compete for talent with the bigger players.

How Does it Benefit the CPA?

From an accountant's viewpoint, employee leasing frees CPAs from the deadlines of tax filings. "It takes time to prepare W-2s," says accountant Cleadous Murphy, of Wyndell Murphy & Co., Hauppauge, NY. Murphy says, "You're doing thousands of them and you can't bill properly. The leasing firm is one company and can handle thousands of workers efficiently. I have to do W-2s for 40 clients and worry about printing each batch correctly. Also, it frees me from preparing paychecks and keeping a full-time payroll person for my clients." Accountants appreciate the fact that they have an alternative to a payroll service.

The leasing industry association's Code of Ethics requires that "A member shall submit a quarterly statement to the association from an independent CPA or PA which indicates that all state and federal tax deposits, insurance contributions to health, and other employee benefits payments (are made)... "

By Barry Kerr, Executive Vice President, EmPloyee Leasing of New York, Inc.

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