Fire them all? - includes checklist for employee leasing

Nation's Business, Feb, 1988 by Harry Bacas

Fire Them All?

All five employees at Al Wittik's Diamond Tires company in Elizabeth, N.J., are on somebody else's payroll.

He leases them from a service and is pleased with the arrangement, even though he once was stuck with a loss when an earlier employee-leasing service went broke.

"That other company owes me $2,000," Wittik says. "But I went back into leasing because I like the concept."

The practice of leasing employees is 15 years old, and the basic process has not changed much: A small employer "fires" his employees, who are then hired by a company in the business of leasing workers. That company immediately leases them to their former employer. That employer still determines who works for him at what wages, who gets promoted, who gets time off and who is fired.

But these employees are paid by the leasing company, which also finances their benefits. In many instances, those benefits are better than those they had while working directly for the company to which they are now leased.

Al Wittik's experience shows how employee leasing has been maturing recently. Although changing tax laws have hit some leasing companies and a few have had financial problems, industry growth is accelerating. Leasing is acquiring credibility, and there are signs it will soon expand beyond the small-business market to serve larger companies.

An industry group formed three years ago, the National Staff Leasing Association, headquartered in Encino, Calif., has grown to 100 members, or about 30 percent of all leasing companies. Executive Director Joseph Honick says the industry "is just beginning to hit the stride of expansion across the country."

Al Wittik is sold. "Leasing was a very good move for me," he says. "First, I don't have to deal with the Internal Revenue Service on payroll taxes; I'm insulated from their incompetence. Second, the leasing company can provide employee benefits that were very expensive for me to buy-- corporate-type benefits such as hospitalization, medical and life insurance, and things which I as a small-business owner could never afford, like education expenses and eyeglasses and dental care.

"The paychecks are issued on time; you don't have to write 25 to 40 checks a month. I phone the service on Monday, after my guys have filled out their time cards, and the service expresses the paychecks to us on Wednesday with an invoice. I send them back one check, usually the same day, and I send it by regular mail."

Al Wittik even leases himself from the service because he wants the same benefits his employees have. After his first service went bankrupt because management controls did not keep pace with its rapid growth, Wittik turned to Employee Leasing of America, a division of Irene Cohen Personnel, a large New York firm that operates several employment and training companies.

The Cohen company had a reputation in personnel work. "We've been in business for 14 years," says Irene Cohen, "but we just started leasing in 1985, when we took over a small leasing company. I had difficulty understanding the business at first, all that tax advantaging and pension-law stuff. I hated it. I thought it was a gimmick, not a human-resource service."

But she became more comfortable with the leasing concept and began seeking ways to make it more effective. "We decided we would offer a business-management service, using the power of group buying to provide the client cheaper benefits.

"The term 'leasing' is a terrible misnomer," she adds. "It ought to be called personnel or benefits administration. But I guess we're stuck with it."

But the industry sees the possibility of image problems beyond terminology. As a result of problems that developed among some of the ocmpanies in the field early, the National Staff Leasing Association requires its members to furnish quarterly audits attesting to their financial stability and prompt payment of taxes.

Carmen Arno, head of Arno & Associates, Los Angeles, who publishes an annual directory of leasing companies, says that the number of leasing companies has dropped in the last year from 350 to under 300, but the number of leased employees has more than doubled --from 120,000 to 250,000. The drop in the number of firms resulted from provisions of the 1986 tax-reform act, which virtually wiped out a former pension "safe harbor" for some leasing-firm clients.

The old tax rules had let high-income professionals shelter large contributions to their own retirement plans from taxes if they leased their office employees from a company that contributed 7.5 percent of salary to employee pensions. Most of the leasing companies that failed had built their business on the limited market of such "safe harbor" clients. Leasing companies that survived offered a wider range of personnel services to clients with other needs.

Now the leasing market is broadening. Though a 50-employee company was once considered the largest that could benefit from leasing, the service is being marketed to companies with as many as 150 employees and to small divisions of major corporations. The latter sometimes have specialized needs.