The Essential Guide to Employee Lease Agreements

What Are Employee Lease Agreements?

An employee lease agreement is a contract between a staffing company and a client company. According to this agreement, the staffing company provides workers at a client company’s facility for an agreed upon fee. Staffing companies may enter into any number of employee lease agreements with any number of client companies. The fee stated in the agreement is a flat amount, and typically includes compensation for administrative services, general liability insurance and workers’ compensation coverage. These costs are charged to the client company at the time the staffing company issues a pay check. If the employee requests a vacation or sick leave, this cost is deducted from the worker’s paycheck.
The premise behind an employee lease agreement is that the staffing company assumes full responsibility for the staff it provides. The staffing company deals with healthcare , unemployment insurance and other human resource aspects. The client company does not need to hire or fire the workers, and any related responsibilities (compensation, benefits, taxation and so on) are handled by the staffing company.
Any type of business may enter into an employee lease agreement with a staffing agency or a Professional Employer Organization (PEO). The PEO is a company that handles professional employer organization services, including payroll, human resources, employee benefits and more. Most leasing companies contract with small to medium size businesses, but large firms may choose to enter into an employee leasing arrangement as well.

Key Elements of an Employee Lease Agreement

Any agreement between an employer and an employee, particularly one that requires the employee to be placed at a client or customer facility, should include the duration of the agreement. For instance, if the employment will last for the life of a particular project, the agreement should say so. This is not only helpful for all parties—but it is required by law under the WARN Act in the event the employment is terminated due to a "mass lay-off"—which is defined as more than 500 employees (well, you get the idea).
The agreement should also set forth the responsibilities of the employee. Simply stating that the employee will perform "duties to be assigned" is insufficient. The responsibilities should be spelled out. So, for instance, if the employee is going to be working on the employer’s reception desk, the employer should specifically state "answer telephones, transfer calls and greet clients".
Also, the compensation for the employee should be detailed in the agreement. Does the employee get benefits? Are there health benefits? Such as a 401k plan? What about vacation days, sick leave and holidays? Who pays for travel?
Most importantly, the agreement should explain how to terminate the employment. Do you give 2 weeks notice, 30 days, 3 months? Is the employee entitled to any severance? Can the employee be fired without warning? There are no one size fits all arrangements. Negotiation is the name of the game in most cases. But before you guys sign on the dotted line, you need to make sure you have made every attempt to develop a clear and meaningful document that both sides understand the terms of the employment.

Benefits of Employee Leasing

Many employers have chosen to enter into employee leases to save money, decrease administrative burdens, and have more flexible employees without losing the benefits of having full-time staff to train and develop.
What is an employee lease? Like many co-employment arrangements, the employee lease agreement has two parties: the company leasing an employee (the "lessee") and the company leasing out an employee (the "lessor"). The lessor enters into a contract with the employee to lease the employee to the lessee under terms and conditions established by the lessor and the lessee. The lessee pays a fee to the lessor that is generally less than the effective cost of the employee as an employee of the lessee. However, the employee receives all of his or her benefits co-workers at the lessee. On the other hand, the lessee receives the benefits of a better trained and often more experienced employee without the cost of maintaining the employee long-term on its payroll.
One advantage of the employee lease agreement for the employer is flexibility. Often companies are confronted with one or more employee that the company has employed for a long period of time and upon terms that are favorable to the employee. However, the employee lacks the skills necessary for the employer to employ them any longer. Or the company has needs for an employee for a discrete period of time. Or the company just found out that its payroll costs have become too expensive and it must reduce its staff. In these scenarios, the employer must consider terminating the employee, transferring the employee to a different position, or laying off the employee. Entering into an employee lease agreement provides the employer with more flexibility than the alternatives. The employee can be employed by the lessor and the employer can obtain the employee back when needed. Alternatively, the employer can terminate its long-term employee and the employee can be moved on the lessor.
Second, often employees may stay with the lessee for a long time because of the benefits they receive from the lessee. Often an employee will ask for a raise first from their supervisor before taking it to human resources to review and remedy. A lessor may offer better salary and benefits than the existing employer. An employee wage analysis can be performed by the lessor to see if it can offer better wages and benefits than the lessee. This can be useful when hiring new employees by offering a better wage without sacrificing the current employee.
Third, another useful feature of an employee lease agreement for the employer is that it reduces the administrative burden. Often missing payroll deadlines is a problem for an employer. This results in fines, penalties and interest. By using an employee lease, the employer only pays the employee when the lessor requires the lessor to pay the employee. This enables the employer to cash flow better and to not incur interest and fines for late payments.
In a similar vein, an employer’s human resources employees often do not have the training to conduct human resources functions. To use an employee leasing arrangement, human resources functions may need to be offloaded onto the lessor. This would relieve the employer from the human resources function and allow the employer to focus on its core business functions.
Finally, often money can be saved by using an employee lease. For an employer that is seeking lower costs for their employee they can seek out a lower wage that offers a reduced fee to the lessor for the employee. The lessor can also conduct an employee wage analysis to determine if it can continue getting the employee at a lower wage. And the lessor can conduct an employee selection process out of the lessor’s pool of employees to find employees for the lessee at no reduce to the lessee.
These are just some of the advantages of an employee leasing arrangement for an employer.

Legal Issues with Employee Leasing

Employee Leasing is not a regulatory scheme that just consists of assigning employees to a leasing company without the requirements of specific agreements and compliance with applicable local, state and federal laws. These agreements provide safeguards in the form of contractual provisions to minimize the risks and enhance the benefits of both business parties. Below are only some of the legal terms that could be included in a comprehensive agreement including the following provisions:
Liability
Influence
Responsibility
Intent
Dispute Resolution
Successor Liability
Indemnification
Termination
Insurance
Wage and Hour Compliance
Workplace Safety Compliance
Sexual Harassment Compliance
Substance Abuse Compliance
Drug-Free Workplace Compliance
Background checking Compliance
COBRA Compliance
FMLA Compliance
FLSA Compliance
Salaried Employee Pay Compliance
Independent Contractor Compliance
Unemployment Compensation Department of Labor Compliance
Workers Compensation Compliance
There are many other legal obligations that the employer must be aware of when signing an employee leasing agreement. The above is an attempt to provide an overview of this complex area of business law.

Writing a Robust Employee Lease Agreement

When it comes to drafting an employee lease agreement, a one-size-fits-all approach rarely works. Each lease should be tailored to suit the specific needs of the governing laws, the business it is intended for, and the expectations of the employer and employee involved. Use the following tips to help guide the process of drafting an effective employee lease agreement for your new hires: Ensure that all provisions are in compliance with the federal laws that apply to your business, and the laws that govern the particular state in which your business is located or where the employee will be working. Some states have their own requirements regarding the contents or enforceability of leases. If you have employees that work in other states , make sure you are in compliance with those as well. Failing to comply with one or more applicable laws can render your entire lease agreement invalid. It’s important that each provision of the lease agreement clearly sets forth the expectations and responsibilities of both the employer and the employee. Ensure that the language used in the lease agreement is easily understandable and concise so the employee knows exactly what they are agreeing to by signing the document. Each employee lease agreement should contain special clauses that limit the liability of the employer and protect its intellectual property, such as a salary cap clause and a trade secret clause. Make sure to include any unique clauses relevant to your business and industry. If you employ workers in multiple states, and require them to often travel while on the job, ensure that the lease agreement takes into account the various laws that govern employment in the states they travel to, including hours worked, fair labor standards, and overtime pay. If you have questions or concerns about your employee lease agreement, consult with an experienced employment law attorney who can help answer any questions you may have about legislation that affects your business.

Common Pitfalls and How to Avoid Them

The use of employment lease agreements is becoming more popular. Unfortunately, some employers have made costly mistakes in the drafting, execution, and re-execution of these agreements. Some common pitfalls and how to avoid them are examined below.
Parties Do Not Have Authority to Enter into Agreement
As in most business agreements, it is essential that all parties have authority from the corporate body to enter into the agreement. If a party does not have such authority, the agreement can be deemed unenforceable and/or void. At the least, it would be necessary to re-execute the agreement with clear authority.
Gaps in Time and Inherent Flexibility of Agreement
For the most part, all leases have built-in gaps or flexibilities in the terms. For example, lease periods often terminate on the first day of a calendar month whereas the employment relationship may not end until the actual date a person is required to be at a new job. The flexibility inherent in the agreement may lead either party to take advantage of the other. It is best if the parties can agree to a specific term and avoid the issue altogether.
Improper Clarity of Duties or Consideration
If the consideration for the employee’s lease is not carefully delineated, the employee may take advantage of the employer. Further, if the employee’s duties or position is not clearly defined, a court may try to force round pegs into square holes or vice versa. For example, if an employee’s lease provides that the employee should take annual leave in Japan but the employee’s actual duties are in France, a court may have trouble determining which country’s law should apply (or may apply both).

Case Studies of Successful Employee Leasing

Employee leasing is not as prevalent in Massachusetts as it is in other parts of the country, but there are a number of employers using it today. For example, one of my client’s suppliers uses an employee leasing arrangement. The supplier is in the raw materials business and employs over 350 individuals at locations in New England and New York.
The supplier designed its employee leasing arrangement to fit its size and industry. One of the reasons the supplier entered into the arrangement was that at the time, the company was developing an employee head count and benefits program for a facility in Kentucky, where there was no locally available human resources professional with the credentials to oversee the effort. Since the supplier has 19 locations in 14 states, including facilities in Massachusetts and New York, it decided to explore employee leasing because it wanted a service provider that could operate in multiple states with licenses to provide co-employment services. The supplier found a national PEO that was able to offer installation services in Kentucky (and any state in which the supplier operated) to assist with hiring, termination, wage issues, workplace health and safety, employee training, and other employee administration programming required by the new facility.
In addition to the supplier’s services in Kentucky, the employee leasing agreement also allowed the supplier to offer our client competitive benefits packages for employees of the Massachusetts facility. The supplier was able to offer our client a "menu" of benefits, including five medical plans , three dental plans and three unified enrollment plans for employees’ children. Our client was then able to choose the benefits that its employees wanted and to pay their costs. Like many states, the Massachusetts Commonwealth Care Connector, which operates Massachusetts’ health care insurance exchange, requires that employers’ health care insurance meet minimum standards. While the supplier’s numerous options satisfied the regulations, it also provided our client with significantly more flexibility than would be available through a typical benefit provider. The supplier reported that our client’s turnover was reduced and employee satisfaction increased upon implementing the employee leasing arrangement.
A second example also involves my client, who retained me to assist with an employee leasing agreement for its wholly owned subsidiary operating in New York. The subsidiary provides home health aide services in the Bronx and Brooklyn, where it employs full-time and part-time employees to provide in-home human assistance to the elderly. Client services include homemaker services, personal care services, home health aid services, nurse medical supervision, mental health aide, and nurse registry. The resulting employee leasing relationship empowered the subsidiary to offer enhanced benefits to employees who work 20 hours or more per week and to provide a menu of insurance and other benefits to participants with at least six months of employment. Because New York offers fewer benefit and insurance options than Massachusetts, the PEO, who had New York insurance coverage and licensed a variety of local providers, again provided our client with more options for benefit, new hire and wellness programs at relatively low operating costs.