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Leasing Do's & Don'ts

There's lots of talk about employee leasing these days...but almost no awareness of the giant hole which can suck unwary employers as well as managed care entities into very serious legal problems. There is rarely mention of the very touchy employee benefits legal status relating to employee leasing. Most people who decide to use leased employees think they are having their cake (the employees are "theirs") and eating it too (avoiding human resources & employee benefits hassles). Government would never let anything that logical & easy to happen! There are laws and more laws! The official IRS definition of "leased employee" is in IRC 414(n)(2)(B), but other agencies seem to use different definitions. There is great confusion in government over the issue of leasing, and virtually impossible to get a firm answer consistent for all applicable agencies.

The easiest way to understand leased employees is to view it like a rented car. You can steer the car, but there is never any question over who actually owns the car...over who decides when to buy & sell it, fix it, its cost, etc. The lessor is the owner. Vocabulary check: "Lessor" = the firm renting out the worker. "Lessee" = the firm acquiring the worker to be in their office.

Too many people who "lease" employees...especially firms that convert from traditional employer format to leasing...think of the employees as "theirs". Also, for other business reasons, the "leased" employee is even given various attributes of being a regular employee of the employer. There are all kinds of reasons & formats.

If a "leased" employee is not absolutely positively clearly an impersonal "leased" item (like the rented furniture), then the business acquiring workers is probably going to be considered an "employer". If the business is considered an "employer", then all kinds of reporting & taxes take effect. Also, the lessor's health coverage plan for the various "employers'" workers is then considered a MEWA (Multiple Employer Welfare Arrangement) instead of a single-employer plan for the lessor company for its own employees. About 30 states prohibit or limit self-funded MEWAs, so the health plan (which often sparked the decision to lease) suddenly becomes illegal in many states. (A true clear leasing arrangement is considered a single-employer plan for the lessor company employees. Thus, the lessor firm plan is covered by ERISA preemption from state benefit laws. However, there's talk in DOL & Congress of classifying all or most leasing benefit plans as MEWA-like.)

If the line between "employee" status and "leased" is not crystal clear, an lessee firm acquiring workers can find himself hit with "employer" laws such as COBRA, MSP (Medicare, Secondary Payor), FMLA (Family Medical Leave Act), and a whole alphabet of other acronyms. IRS leased employee regulations can be read to say that leased employees who are covered under the group health plan of the business acquiring (leasing) the workers must provide COBRA.

A new wrinkle (and pitfall) is when medical plans "lease" merely health coverage for their employees. All or some of the other attributes of employment (compensation package, hiring, employee taxes, pension, etc.) remain with the employer. In those cases, the "lessor" of medical coverage is actually, technically, selling a form of insurance (and usually without registration or license to be in the business of insurance). State Insurance Commissioners are starting to take notice with alarm at the booming number unlicensed unregulated sources of health coverage from such "leased" coverage as well as from provider-owned entities such as PHOs who sell coverage directly to employers & individuals. So, expect a crackdown on "illegal insurance".

The reverse of that kind of arrangement is also popping up...in which the business "leases" (acquires) the employees for all purposes...except considers the workers his "employees" for purposes of having a health or pension plan. This strategy is often because the boss would otherwise not be eligible for a plan himself (he doesn't lease himself) or needs employee participation to take advantage of 401(k) or other profit-sharing plans under the IRS discrimination testing rules.

So, whether to lease or hire employees is not as simple & isolated as the decision whether to buy or rent the office car or furniture. Don't be misled by common sense or what merely seems to make business sense! There are dozens (hundreds?) of other laws and regulations to consider vis a vis each situation...and more limitations probably coming. The arrangement must be crystal clear who is the worker's true legal "employer", and that status must be consistent over the worker's total employment arrangement.

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