It may be misunderstood and relatively unknown, but employee leasing is a technique that can save small-company owners time and money

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Tony DiBiasio used to spend 10 to 15 hours a week playing catch-up with personnel-related paperwork. As the president of Spy in the Sky Flying Traffic Watch Co., an airborne traffic-reporting and aviation company in Warwick, R.I., DiBiasio found that deadlines of one sort or another perpetually hovered: payroll taxes to be calculated and filed; health insurance policies to be updated or paid. The constant fear of late payments and penalties was unnerving, he recalls. "Even when I was up to date, I worried about what was in the stack of paper on my desk."

Today DiBiasio no longer sweats about the details of administering payroll and complying with government personnel regulations. In fact, if he (or anyone who works for him) spends an hour a month on these tasks, something's wrong. It's the same company, with many of the same people doing the same jobs, so what happened? Well, last spring DiBiasio decided to lease all 13 of the people who work for Flying Traffic -- including himself -- through an outside contractor.

Although it's been around for several years, employee leasing is still relatively unknown. But it's fast emerging as a way small employers like DiBiasio can not only free up management time, but also obtain major cost savings on health insurance and other benefits. Under a leasing arrangement, the employees still report to the same bosses, who remain in charge of how the business is managed. The big change is that the leasing company assumes such personnel functions as payroll and benefits administration.

Back in the 1970s and early 1980s, some companies used employee leasing as a roundabout way to offer top-of-the-line benefits to owners and other executives; the non-executives, whose employment was shifted to outside agencies, got less (see The Law, "The Pitfalls of Employee Leasing," December 1988, [Article link]). But the Tax Reform Act of 1986 put an end to such practices. Today, estimates Joe Honick, executive director of the National Staff Leasing Association, an industry trade group in Encino, Calif., there are 300 to 400 employee leasing companies doing business in the United States, representing around 700,000 workers. Most, if not all, sell a service to smaller companies that might best be described as an off-site personnel department.

Typically, leasing companies assume responsibility and risk for preparing a company's payroll and paying payroll taxes, along with the various state and federal reporting requirements. Because of the numbers of employees they represent (hundreds, if not thousands), they can hire in-house experts in areas of human-resources management that small companies rarely have. They also provide employee benefits, workers' compensation, and unemployment insurance. And, in contrast to most companies with fewer than 100 employees, they have buying power; for the same dollars smaller employers usually spend on benefits, they can furnish much more comprehensive benefit packages.

Even when DiBiasio had two or three employees back in the late 1970s, paperwork dogged him. But it wasn't until 1986, when he hired five people to handle eight new radio station accounts, that he began toying with ways to unload it. With revenues then of about $700,000, he didn't feel he could justify a full-time bookkeeper at close to $20,000 a year, so he subscribed to a payroll service for about $300 a month. For a while, it freed up time to spend with clients, says DiBiasio. But, unfortunately, not enough.

"I still had to go to the bank every month to deposit my payroll taxes," he says. And he still had to verify all the monthly and quarterly reports and deal with insurance. After months of listening to DiBiasio complain, his accountant suggested that he look into employee leasing.

At first, even though he knew the employees would be the same ones he already had, DiBiasio was concerned that leasing those employees would impinge on his ability to run his business as he wanted. His traffic reports, for example, were offered seven days a week -- beginning before dawn. Would the leasing company restrict when people could work? "I needed total flexibility," he says. After talking to several businesspeople who used leased employees and to the managers of ELC Staffing, in Providence, DiBiasio and his attorney were certain that (1) the idea had merit and (2) that internal control wouldn't be an issue. Confident that he'd retain the freedom to choose who would and would not work for him, he decided to go forward.

DiBiasio's company has been operating with leased employees since April 1, 1989. In some respects, it's like working with a payroll service: every other Monday, ELC calls Flying Traffic's part-time bookkeeper for payroll information -- hours worked, overtime, sick days, vacation time, and so on -- for everyone, including DiBiasio and his wife, who is the office manager. Based on the information it receives, ELC then does several things. First, it calculates and signs the weekly paychecks, which are delivered by courier to DiBiasio's office the next day. It also does the necessary withholding and payments for state and federal taxes, under its own -- not Flying Traffic's -- taxpayer identification number. And it puts money aside for such necessities as workers' compensation and state unemployment insurance -- again, under its own name. For these services, the leasing company (whose name is on the paychecks) charges DiBiasio a monthly fee of about $20 per person. He writes a single check each pay period to cover payroll, service fees, and the various benefits.

But there's more to leasing than this. Perhaps the most critical role the leasing company plays is that of buying and administering health insurance. Previously, DiBiasio says he paid around $170 a month for individual coverage through a local health maintenance organization. And somebody in his company had to keep track of forms and other paperwork. With the leasing company, the bookkeeping isn't necessary, and thanks to its purchasing clout, it can provide the same plan for $111. Actually, the savings are even greater: included in this price are employee life insurance, long-term disability insurance, and prescription discounts, benefits DiBiasio didn't formerly offer. For more coverage and added convenience, he saves about $7,000 a year on health benefits. Even with the monthly fee, DiBiasio winds up saving around $4,000 annually.

One additional area where the leasing company can help is in the legal aspects of employment. Last January, for example, DiBiasio decided he wanted to dismiss an employee who wasn't performing. But before he did anything, he called a specialist at ELC to find out the best way to minimize liability. In the end, the employee quit before he was fired. "If there's a question involving personnel law," notes Dennis Iacobbo, president of ELC, "we encourage clients to call us as much as they want." The leasing company won't tell the client not to fire someone, he says, but "we want them to do it right." In the event of a lawsuit, both the leasing company and the client could be implicated as coemployers.

Right now, DiBiasio says he has no plans to offer his workers more benefits. But under the rubric of the leasing company, he easily could. For instance, ELC already provides a dental plan to other client businesses for about $200 a year per person. It's also set up to administer flexible spending accounts, which let employees pay for things like unreimbursed medical expenses and day care with pretax dollars; for this, there would be no additional fee.

If DiBiasio ever should decide to get out of leasing altogether and handle things internally, no problem. He can terminate his contract with ELC with 30 days' notice.

However appealing leasing may be, it isn't without risks. Essentially, attorneys note, you're delegating a vital area of your business to outsiders. What isn't so clear is who's responsible when the leasing company fails, say, to submit payroll taxes (or goes out of business). Will the Internal Revenue Service investigate just the owners of the leasing company? Or will it go after its clients? And what happens to your health insurance? Many industry officials believe that the liability would end with the leasing company, but the courts may rule otherwise. At the very least, you'd have a mammoth headache. (See "Protecting Your Flanks," below.)

DiBiasio acknowledges that there are some unknowns. But, for him, the pluses outweighs the potential minuses. "Today," he says, "I can spend virtually all of my time operating the business and making sales. That's where my efforts are best spent."


PROTECTING YOUR FLANKS

How to limit the risks in employee leasing

For all the potential advantages of employee leasing, anybody considering it should be attuned to the risks. Here are some things to keep in mind when considering a vendor:

* Check references. Before signing up with a leasing company, ask for a list of clients and talk to CEOs and employees at those companies. Find out if they've had any problems (inaccurate or late payments, or disputes over benefits) and how the leasing company has handled them.

* Study the contract. Make sure you and your attorney understand all the costs and fees and who's responsible for what. See to it that you'll be able to get out of the contract.

* Review financials. The last thing you want is a shaky leasing company. Before signing a contract, ask to see financial statements attesting to the company's financial strength. You might also ask to see the company's liability insurance policies and to speak to its bankers. Its unwillingness to furnish information may tell you all you need to know.

* Ask for regular updates. Members of the National Staff Leasing Association are required to submit independent verification every quarter that taxes and insurance premiums are up to date. If quarterly statements aren't often enough, you might ask for more frequent documentation. Or you could have the insurance companies notify you directly of any changes (understanding, of course, that this means more paper).


RESOURCES

More about employee leasing

The Business of Employee Leasing, by T. Joe Willey, $37.50, The Aegis Group, 155 West Hospitality Ln., Suite 215, San Bernardino CA 92408; (714) 381-4800; fax (714) 889-1845.

National Staff Leasing Association, a trade organization representing some 140 employee-leasing companies, 15910 Ventura Blvd., Suite 731, Encino CA 91436; (818) 788-2094.