Chapter 1

Introduction

This report presents the results of an exploratory study of the employee leasing industry. It begins with a description of the employee leasing industry, its size and characteristics. It then presents the results of a survey of State Unemployment Insurance (UI) tax administrators on their experience with the industry and their response in terms of administrative handling of leasing companies and taxing and reporting provisions of their laws. It then attempts to determine the implications of the leasing industry on State UI trust funds. Finally, it provides a summary of findings and recommendations for States in accommodating employee leasing for administrative and taxing purposes.

1.1What is Employee Leasing?

A leased employee is a worker who is essentially rented on a long-term basis from an agency that is responsible for employing the worker, paying the salary or wages and taxes, and providing benefits for that employee. An employee leasing company is an organization in the business of leasing employees to client firms. Under a typical agreement, an employer contracts with a leasing company and dismisses some or all of its employees. These workers are then hired by the leasing company and leased back to the original employer, now the client company, on a long-term basis. The leasing company pays both the employees' wages and associated payroll taxes, including UI. It also provides the workers with other fringe benefits. This is done for a set fee (usually a percent of payroll) as stipulated in the leasing contract. The contract can be renewed any number of times.

1.2Purpose of Study

The growth of employee leasing is a recent phenomenon that has attracted the attention of State and Federal officials. Although employee leasing firms claim to provide numerous benefits for their client firms, government officials have expressed concern that the industry may have a negative impact on certain government programs. However, because of the industry's recent expansion, no comprehensive studies have been done on employee leasing. The purpose of this study is to provide a review of the available data and literature on employee leasing, insight on the industry's effect on State UI systems based on a survey of State UI tax administrators, and analysis of State administrative and tax records to test the effects of employee leasing on State UI systems.

1.2.1Assess Industry Size, Growth, and Characteristics

Because this study was concerned with the present and future implications of the employee leasing industry on the UI program, information about the size of the industry and State efforts to regulate the industry also were necessary. The first objective was to review available data on the industry and assemble estimates of the size of the industry. Contact with State government officials and existing surveys provided insight into the efforts that have been made to regulate the leasing industry.

The second major research objective of this study was to estimate the size of the industry, both nationally and by State. Although a consensus exists that the ndustry has grown considerably during the last 10 years, it is difficult to obtain reliable national estimates of the industry's size because data collected on the national level aggregates data on employee leasing firms with data on other types of temporary help firms. Alternative data sources, on the other hand, were either incomplete or unreliable.

To obtain more reliable estimates on industry size, four data sources were used. First, the study reviewed available data sources and the difficulties encountered in trying to obtain estimates on the size of the employee leasing industry when using these sources. The project then assembled estimates of the size of the employee leasing industry, as well as of industry employment. Data on the characteristics of employee leasing firms were also collected.

1.2.2Determine State Legislative and Administrative Responses

The third major research objective of this study was to determine the State legislative and administrative responses to the growth of the employee leasing industry. To accomplish this objective, a survey of State UI tax administrators was undertaken. A number of informal studies have previously been done by various State UI tax offices and the Interstate Conference of Employment Security Administrators (ICESA). The survey undertaken for this study both updates data obtained in previous studies and provides additional data on State legislative and administrative initiatives.

Three tasks were undertaken to accomplish this objective. First, the study reviewed previous surveys on State responses to employee leasing. This involved contacting relevant government officials and researchers to obtain copies of previous surveys and reviewing the surveys. Second, a new survey was prepared and mailed to all State UI tax administrators. Third, the results were tabulated and compared with the findings of earlier surveys to analyze what strategies, if any, State UI agencies have pursued to regulate and monitor the growth of the industry and how these strategies have changed over time.

1.2.3Evaluate the Impact on State UI Trust Funds

The fourth major research objective of the study was to evaluate the impact of the employee leasing industry on State UI funds. Considerable concern has been raised that employee leasing has had an adverse effect on State UI trust funds. In particular, there is concern about the following issues:

Aggregation-Shifting payroll reporting from the client employer to the leasing company can result in several problems. First, State trust funds may lose revenue if employee leasing reduces employee turnover. Each firm that an employee works for in a given calendar year must pay payroll taxes on the worker's wages up to a taxable maximum; however, if workers who previously had worked for more than one employer are employed only by an employee leasing company during the year, this tax collection may be reduced. Taxes will be reduced even if theemployee works for two or more client firms during the course of the year. Second, aggregation into the employee leasing company may result in apparent changes in reported industry employment, such as the decline in manufacturing and the rapid rise in employment services.
Reduced Experience-Rating-Shifting employees from a client firm with a high experience-rated tax rate to the tax rate of the employee leasing firm (a professional services firm) may have a negative effect on payroll tax revenues if the tax rate of the leasing firm is lower than that of the client firm and does not accurately reflect the client firm's layoff experience.
Tax Rate Manipulation-Employee leasing companies may shift employees through successive corporate entities to avoid paying increases in UI payroll taxes when their tax rates increase as the result of the experience-rating system in the State.
Bankruptcy-Financial failure of the employee leasing company may leave outstanding delinquent payroll taxes. It also may mean that any future claims by employees of the leasing company will become ineffective charges.

To assess the impact of employee leasing on the UI system, the project conducted several indepth, State-level analyses. Several States were targeted for indepth data collection andanalysis. Tax rates (and benefit-tax ratios) of firms with groups of leased employees werecompared with tax rates (and benefit-tax ratios) of the client firms to assess whether theseates (and ratios) increase or decrease under employee leasing.

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