PEO vs. Employee Leasing: Differences, Pros & Cons

From the 1970s to the 1990s, employee leasing (also called ‘staff leasing’) was the dominant HR outsourcing solution in the US: As of 1994, there were reportedly 1400 employee leasing firms in the United States, handling payrolls in excess of $17 billion. By contrast, the dominant HR solution in 2022, Professional Employer Organizations (PEOSs), number only 487 according to the latest industry statistics.

Here we take a deep dive into this important concept of employee leasing, explain how it differs from PEO and the pros and cons of employee leasing as an HR solution. This will make it clear why the employee leasing model has been superseded by the PEO business model. 

What is employee leasing?

Employee leasing means that the workforce of one company (the client company) are officially employed by a second company (the employee leasing company), who then leases those employees back to the client company. This leasing may be on a short-term, or longer-term basis. 

Employee leasing, also known as ‘staff leasing’, is not a new concept. While it’s not clear exactly when the first employee leasing arrangement was created, they became normalized in the United States in the early 1970s (for a detailed history of the concept, check out this informative analysis from the Florida Association of Professional Employer Organizations (FAPEO)). 

Due to concerns about their activities (more on this below), employee leasing firms became regulated through federal US laws in the 1980s, and have subsequently been regulated in various state laws (see, for example, the Illinois Employee Leasing Company Act). 

Employee leasing companies should not be confused with temporary employment agencies (‘temp agencies’): Temp agencies only assign staff to client companies on a short-term or project basis, whereas employee leasing companies can provide long-term employees. Germany has a similar concept known as ‘labour leasing’ (Arbeitnehmerüberlassung), where employees can only remain in a leased arrangement for 18 months maximum. 

What does an employee leasing company do? 

The exact services provided by an employee leasing company depend on the legal agreement between the client company and the employee leasing company, as well as state or federal laws that apply. However, commonly they: 

• Process payroll for all leased employees
• Withhold income taxes, and process employment or payroll taxes
• Provide and manage employee benefits, including health insurance, pension/401K and workers’ compensation
• Ensure payroll and tax compliance in relation to leased employees. In this respect they are the Employer of Record or EOR for the leased employees. 

Are employee leasing and PEO the same thing? 

Often the term Professional Employer Organization (or ‘PEO’) is used interchangeably with the term ‘employee leasing’. For example, the IRS website treats them as identical. So too does the National Council of Compensation Insurance (NCCI). 

However, employee leasing and PEO are different when it comes to day-to-day operations. The key is to recognize that the employees of an employee leasing firm are more fundamentally tied to that company, than a PEO is to its employees. It is sometimes said that the leased employee is simply a ‘borrowed servant’ in the client company. In practical terms, this means that an employee leasing company could re-assign an employee to a different client company, without any change in the underlying contract. 

By contrast, while a PEO serves as the legal employer or ‘Employer of Record’, the contract between the PEO and the employee usually ends at the completion of their work for the client company: There is no sense in which the employees are merely ‘leased out’ by the PEO. 

What are the key differences between employee leasing and PEO?

So if employee leasing and PEO are not the same thing, what exactly is the difference?

• In an employee leasing arrangement, the employee leasing company retains more control. The employee leasing agency negotiates with the client company on the time, place, type of work and working conditions of the employees. In a PEO agreement, these are usually set by the client company, with the PEO only having responsibility in relation to payroll, HR and compliance.
• Employee leasing means more flexible employment contracts. In employee leasing, the leased employee can switch to another client company, while on the same employment contract. PEO employees, by contrast, usually have their employment terminated when they stop working for the client company. 
• Employee leasing empowers employees. In employee leasing, employers (often) choose their assignments. In a PEO arrangement, there aren’t multiple assignments to choose from. The employee remains working for the one client company for the duration of their employment contract. 

What are the pros and cons of employee leasing?

Employee leasing, like PEO, has its upsides and its downsides. We consider each in turn. 

The benefits of employee leasing

Benefits of employee leasing include: 

• Reducing the administrative burden on businesses. Employee leasing companies first became popular with medical offices and other small professional practices, which may have little admin and HR staffing capability. It is often easier to outsource this take than manage it yourself
• The industry expertise of employee leasing companies. An employee leasing company specializes in payroll, HR and compliance so they are less likely to make mistakes than other companies. 
• Better benefits packages. Smaller businesses often struggle to compete with larger ones when it comes to acquiring and managing employee benefits. An employee leasing can ‘pool’ all the employees they lease out for the purposes of employee benefits, such as health insurance or pension plans. This means that they can often provide improved benefits at a lower cost per employee. 

The downsides of employee leasing

Alongside the pros, employee leasing arguably has some cons, including: 

• Loss of control. Some aspects of a leased employee’s job are managed by the client company, some aspects by the employee leasing company. Ultimately, this means that a client company, as the ‘onsite boss’, often won’t have the control it might like over employees. 
• Compliance risk. As both the client company and the employee leasing company may meet the definition of ‘employer’ depending on the law/regulations in question, it can be unclear who has what obligation. For example, does the client company still count as an ‘employer’ under workers’ compensation policies? Is the client company still the employer under occupational health and safety (OSH) legislation? While law changes over the years have helped eliminate some of this uncertainty, risk still remains. 
• A historically poor public image. Employee leasing, in its earliest forms, was known as a way to reduce pension entitlements, and to artificially reduce workers’ compensation rates. As a result, many inquiries, reviews and reports were conducted by governmental and quasi-governmental bodies. In the words of one such report by the New York State Inter Agency Task Force on Employee Leasing, “The growth in employee leasing …. has led to the realization that the practice is not without serious risks to the state’s workers as well as to the client companies who choose to lease their work force.” While the industry has changed significantly since then, primarily due to increased regulation and government oversight, for some client companies the stigma will remain.