Leasing Employees Cuts Corporate Headaches
Apr. 09, 1989
Undated (AP) _ When Dale Voss bought Noel Ice Co. two years ago, the first thing he did was fire all the employees.
But the cube-making didn't melt down for a minute. Those same employees were back at the freezers of the Nashville-based company the next day, although another company was signing their paychecks.
Noel joined the growing number of businesses leasing some or all their employees, a strategy that can cut costs and eliminate management headaches ranging from payroll deductions to employer-sponsored health insurance.
''Every time I get a little piece of paper from the government about my employees, I can just write 'em back and tell 'em Noel Ice Co. has no employees,'' Voss says.
Employee leasing is now used to staff entire departments, from daycare centers to mail rooms to production lines. It has gained the most popularity among small and medium-sized businesses. But even large corporations are finding it attractive.
At Chase Manhattan Bank, leased messengers deliver up to 1,000 documents a day. Insurance giant Cigna Corp. leases its daycare facility.
The National Planning Association, an economic consulting group in Washington, reckons the number of employees under lease is at least 165,000, but some other estimates range as high as 500,000.
Joseph Honick, executive director of the National Staff Leasing Association, says the number of leasees is swelling by about 30 percent a year, and by the end of the next decade, he projects leased-employee population could exceed 3 million.
Leasing frees companies from the monumental worries associated with employees calling in sick, juggling vacation schedules, providing costly benefits and making social security payments to the government.
''It tightens the line between businesses and their customers,'' Honick said. ''If you're in the business to sell shoes, you're not in business to run a payroll operation.''
In turn, a generation of entrepreneurs who organize the legions of leasees has been spawned - an estimated 400 companies exist solely to lease workers to other companies.
The trend started because ''companies have gotten very hurt in the process of downsizing and upsizing and downsizing and upsizing,'' said Edith Weiner of the New York management consulting firm of Weiner, Edrich, Brown Inc.
''Companies want to keep their constant overhead lower, and they don't really want to have the problem of laying people off,'' she said. ''Sometimes it costs more (to lease), but it gives you more latitude.''
Until the Tax Reform Act of 1986, employee leasing was considered a questionable practice, partly because high-income professionals such as doctors and lawyers used it so they could set up tax-deferred pension plans for themselves while avoiding them for their workers. Once those loopholes were closed, leasing's credibility rose.
Many employers praise the system. ''It saves me time,'' said Van Stewart, president of Auto Rental Systems Inc., a car leasing company with operations in Nashville, Memphis, Dallas and St. Louis, that leases its 37 employees.
''I don't have to spend any time on payroll, I don't have to file (social security) ... I'm writing two checks a month instead of 50 or 60,'' said Stewart. He even gets his own check from the leasing company.
Besides handling payroll, leasing companies can pool groups of employees for cheaper insurance. Noel's Voss said before he bought the company, it had been spending $112 a month per employee to cover health benefits. Now he's paying a leasing concern $87 a month per employee for benefits he says are superior.
While a full benefits package can run as much as 60 percent of an employee's base salary, ''we can bring it in for about 30 to 35 percent,'' said Edward Katz, founder of New York-based Choice Courier Inc.
Katz's messenger service has evolved into a leasing operation with 1,500 employees in nine East Coast cities. He's projecting 30 percent growth this year, to about $40 million in annual revenues.
Like many other leasing concerns, Katz uses plenty of part-time help and scales back benefits like vacation time to save more money. He'll hire, fire, train and maintain a workforce for other businesses.
''The savings for a company is non-calculable,'' said Katz. ''The people we're dealing with are on the bottom two rungs'' of the employment ladder. ''We've got the new wave of immigrants, and we have to train them.''
With expertise in the mailroom, Katz says he can find savings where companies forget to look. For example, his workers transmit documents by facsimile machine to the West Coast after 6 p.m., when phone costs are cheaper. They use lightweight envelopes to slash postage.
To ensure each job is always fully staffed, Katz has a dozen or so workers waiting to be dispatched from a ''bullpen'' when other employees call in sick.
It's hard to find a critic of leasing. Although leased employees don't necessarily have high-paying jobs with generous benefits, they often have better security. If they're on one job and the contract is canceled, their leasing company can shift them to another worksite.
When a leasing company moves in to run an already-functioning operation, those same employees stay on the job, although Honick rejects the characterizati on that they're fired first then rehired.
''They don't write resignation letters,'' he said. ''A leased employee is a regular employee.''
Some say larger corporations have been slow to embrace the concept because they often are bound by strict union agreements. But Honick says a deeper reason is there aren't enough professional, qualified employee-leasing companies to go around.
In the past, leased employees have been relegated to running the company cafeteria or providing janitorial services. But the realm of services leased workers provide continues to broaden.
Cigna Corp. has contracted with the national child-care chain Kinder-Care Inc. to provide a fully staffed daycare center housing 80 children at its headquarters in Bloomfield, Conn. The cost to the company has been minimal, since employees pay for most of the expense.
''If we were operating it ourselves, I don't know what it would cost, but I imagine it would be more expensive,'' said Cigna's director of employee services, Beth Fox. ''We have some operating costs involved in grounds and indoor maintenance, but that's about it. ... We don't need to get involved in any great way.''
Because Cigna provided a building to Kinder-Care, the child-care company was able to offer its services at a discount. An existing space cuts Kinder- Care's capital investment by roughly 25 percent, said Len Kuhn, senior vice president of development at the Montgomery, Ala., company.
Kinder-Care also can provide services cheaper than Cigna could, partly because of economies of scale and Kinder-Care's well-developed daycare structure.
''We have all the programs in place, all the policies and procedures, an understanding of staffing needs, and because we have an established track record and managed our liability very well, we have a significant difference in (the cost of) insurance,'' Kuhn said.
End adv for Sunday, April 9