Employers are required to submit the quarterly wages of all of their covered employees to the State UI administrative offices. Since UI taxes are levied individually on each employee's wages up to a maximum, the State collects wage records for every covered employee in the State. Generally, each UI wage record contains an employer identification number (EIN), an employee Social Security number (SSN), and the wages received by the employee from the employer for a given year and quarter. Cases in which an individual receives wages from multiple employers for the same year and quarter would appear as multiple wage records collected by the State from each of the individual's employers.
Using all of the UI wage records collected from every employer, it is possible to examine an individual's employment and earnings history. It is a relatively straightforward matter to track an individual's SSN either forward or backward through time to discover from which employers that individual received wages for each year and quarter. It is the ability to track individuals from one employer to the next that makes it possible to use UI wage records to identify employee leasing firms and their client firms.
When employees are leased, the leasing firm becomes the employer of record and is responsible for the payment of payroll taxes. Thus, upon an employee being leased, the EIN associated with that employee's wage record will change from the client (old) firm to the leasing (new) firm. Changes of employees from one EIN to another can also occur as the result of employee turnover and firms going out of business as well as buyouts, partial purchases, and divestitures that may or may not be captured by successorship rules. As a result, identifying firms engaged in employee leasing requires the use of additional selection criteria.
Using wage records to identify firms engaged in employee leasing is, in essence, a two-step process. First, it is necessary to identify those occurrences in which it appears likely that one firm begins to lease its employees from another firm. Then, criteria must be established to determine exactly which firms are engaged in employee leasing.
Employee receiving wages from every firm in the first quarter of 1994 (the base period) were tracked by their SSNs from the first quarter of 1994 backwards in time to determine at that point (the transition period) they began working for that particular firm (their base period).1 In order to simplify the process, only the first quarter of each year was used for comparative purposes.2 For each SSN, the first incident of their receiving wages from a firm other than their base firm (their transition firm) was noted and its EIN was recorded. The SSN was then removed from searches in earlier time periods. In this manner, the SSNs were traced to their most recent previous employers and the EINs of the previous firms were recorded.
Every incident in which a worker's SSN switched firms was noted and considered a changeover. Most changeovers were individuals changing jobs or, less frequently, successor employers. Therefore, not all changeovers were considered leasing occurrences. First, all changeovers from a transition firm with a SIC code of 7363 (Help Supply Services) to any base firm with a SIC code of 7363 were removed from consideration. Then, depending upon the employment of the transition firm in the transition period, the changeover was required to meet one of the following criteria:
For transition firms with at least 500 employees, at least 2 percent of the transition firm's employees had to be involved in the changeover.
For transition firms with fewer than 500 employees, at least half of the transition firm's employees had to be involved in the changeover or the number of employees in the changeover had to be at least a certain minimum, depending upon the year of the changeover (see Exhibit 1).
| Exhibit 1 Department of Labor Minimum Size Requirements of Changeovers for Transition Firms with Fewer than 500 Employees, by Transition Period |
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| Transition Period | 1990:1 | 1991:1 | 1992:1 | 1993:1 |
| Min. No. of SSNs in Changeover for Leasing Occurrence |
5 | 6 | 7 | 8 |
duration than other contingent work arrangements (the most notable being temporary help) but also takes into account the normal turnover within the workforce.
In cases in which the transition and base firms had identical SIC codes, the changeover had to constitute at least 25 percent of the transition firm's workforce to be considered a leasing occurrence. This screen was applied to all changeovers regardless of the employment level of the transition firms in order to reduce the number of successorships and takeovers mistakenly classified as leasing occurrences.
Using this methodology, the study identified leasing occurrences in all four States. A substantial portion of the identified leasing occurrences involved a relatively small percentage of the transition firm's workforce. Although a "traditional" leasing arrangement is one in which all of the employees from one firm (the client firm) are transferred to another firm (the leasing firm), many leasing arrangements include only part (a division or specific sector) of the client firm's workforce. An example of such as arrangement is one in which a hospital (or other large firm) decides to lease out its cafeteria workers or other service workers. Also, due to the natural turnover in the workforce, the likelihood of identifying a leasing occurrence in which all (100 percent) of the employees fro the client firm were subsequently leased decreases as the time between the leasing occurrence and the base period increases. For example, a firm with 100 employees and ten percent turnover each year will appear to have 110 employees, of whom only 90 could have changed over during the year, 81 in the year prior, etc.
The second step in the use of UI State wage records to identify employee leasing firms involves setting criteria by which base firms can be classified as leasing firms and by which their client firms can be identified. Depending upon the purpose of identifying leasing firms, the criteria can be set to identify as broad a range of firms as desired; i.e., one could define the criteria stringently, thereby reducing the number of firms identified as leasing firms, or loosely, thereby increasing the possible number of firms identified as leasing firms. The more stringent the criteria, the more confident one could be that all of the base firms identified as leasing firms were, in fact, engaged in employee leasing. On the other hand, a State that wanted to administratively identify leasing firms might use a loose definition and then follow up to identify successors, partial divestitures, etc.
The criteria used to identify leasing firms in this study were based upon the following factors:
The base firm's SIC code
The number of clients identified for the base firm; i.e., the number of different transition firms from which employees moved in a leasing occurrence.
The number of leasing occurrences for the base firm
The percentage of the base firm's workforce made up of employees involved in a leasing occurrence (i.e., those employees who had changed from a transition firm to the base firm)
Base firms with a SIC code of 7363 and at least three leasing occurrences involving four or more employees and at least three client firms were classified as leasing firms.
Base firms with all other SIC codes were required to have at least three client firms and, depending upon the number of leasing occurrences involving four or more employees, a specific percentage of their workforce made up of employees involved in al leasing occurrence (see Exhibit 2) to be classified as leasing firms.3
Many employee leasing firms are classified in the 7363 SIC code (Help Supply Services). As a result, it was necessary to apply different criteria to base firms in the 7363 SIC code to ensure their appropriate classification as employee leasing firms. Man 7363 firms do provide both temporary help and employee leasing services and, due to the size of their temporary help workforce, would have a relatively small percentage of their workforce made up of leased employees. Non-7363 employee leasing firms, however, are more likely specialized employee leasing firms, such as those providing truck drivers, surgical nurses, specialized professional services, security guards, or food service workers. As a result, a higher percentage of their workforce is composed of leased employees.
This kind of analysis does have limitations. First, the criteria that are set for both identifying potential leasing occurrences and identifying leasing firms are extremely important in determining how many base firms are identified as leasing firms. As mentioned earlier, these criteria can be set to "capture" either more broad or more narrow ranges of firms, depending upon the use to which the list of identified firms will be put. The criteria chosen for this study, for example, automatically exclude the smallest leasing firms (i.e., fewer than about 25 employees). This was though appropriate since the economics of employee leasing requires a large number of leased employees.
| Exhibit 2 Unemployment Insurance Service Department of Labor Percentage of Workforce of Leased Employees Required for Non-7363 Base Firms |
|
|
Number of leasing occurrences Involving four or more employees |
Required percent of workforce made up of leased employees |
| 3 | 50% |
| 4 | 40% |
| 5 | 30% |
| 6 | 20% |
| 7 or more | 10% |
including Oklahoma, keep firm successorship data in their UI files.4
Despite these limitations, using UI wage recrds remains a plasible method for Sttes to identify leasing firms. States have the ability to track employees both forward and backward through time, thus allowing them ore options with which to identify potential leasing occurrences. In addition, States have the ability to audit firms and to look much more closely at firms' operatoins and backgrounds, which can provide invaluable information about whether a particular employer is engaged in employee leasing. Finally, interstate cooperation allows States to identify those leasing firms operating across State borders.