August 30, 2014

Lease-a-Worker

Barbara Miracle | 6/1/1995
"It was practically impossible for us to keep up with the rules and regulations," says Wayne Voegele, business manager for Orlando's Stanford Orthopaedics. So, six years ago, Voegele decided to take his 16 nurses, physical therapists and clerical workers off Stanford Orthopaedic's payroll and to lease those same employees.

Voegele, who now leases his employees from Human Resource One (HR1), a Maitland company that handles payroll processing, benefits administration and regulatory compliance, says, "It has taken a tremendous burden off my shoulders."

Welcome to the world of employee leasing, one of the fastest-growing industries in Florida and the nation. In 1993, Florida's 114 employee leasing companies reported a total payroll of $1.36 billion, a 130% increase from 1991, when the state began licensing the industry. Florida is the headquarters for four of the nation's largest employee leasing companies, ranked by number of employees, according to a report by BT Securities Corp., a subsidiary of Bankers Trust New York Corp. Even Governor Lawton Chiles has an interest in employee leasing, as a part owner of a company owned by longtime friend Wilbur Boyd.

The National Assn. of Professional Employer Organizations (NAPEO) says 2,178 leasing companies leased 1.6 million workers in 1993. Though Florida's Department of Business and Professional Regulation does not keep statistics on the number of employees leased in Florida, the largest company in the state (as well as the nation), Bradenton-based Staff Leasing Inc., reports more than 60,000 employees - almost double the work force of Walt Disney World - at 5,800 companies across the nation.

Employee leasing firms, or professional employer organizations as they prefer to be known, often are confused with temporary staffing companies. The difference is that leasing companies are designed to be the long-term employer of a business' work force. They generally do not have the expense of recruiting workers; they hire a business' existing employees.

Here's how employee leasing works: Leasing companies contract with small and medium-sized businesses to employ all or part of the company's permanent work force in a co-employment arrangement. The leasing company takes over the human resource function, assuming responsibility for payroll, health insurance and other employee benefits, workers' compensation and regulatory matters. The client business retains day-to-day management control over its workers.

Clients pay the leasing company a lump sum each month, covering payroll, health insurance, workers' compensation, other benefits and an administration fee of about 2% to 5% of the business' payroll. The leasing company, in turn, pays the client company's workers and covers their health insurance and workers' comp premiums.

Why has Florida become a hot spot for employee leasing? Partly, it's the nature of Florida's economy with its abundance of small, recently established service businesses. Employee leasing companies cater to businesses with five to fifty workers. In most cases, leasing wouldn't make economic sense for large companies, the majority of which already have human resource staffs in place and the leverage to cut deals with insurance companies.

Florida's laws and regulatory environment also are attractive to employee leasing companies. In the mid-1980s, the state's leasing companies banded together and, along with other business groups, successfully fought for repeal of the state's sales tax on services. Later, employee leasing companies got a law changed that allowed the leasing company to file unemployment tax reports under their own state unemployment tax number, rather than the client's number. Also, the workers' compensation "exclusivity" provision was extended to both the leasing company and the client business, thereby protecting the client business from liability in a workers' compensation suit.

From the perspective of a small business, employee leasing offers an inviting alternative. It's a way to pass the administrative work onto others and focus on the core business, whether it be serving meals, dry cleaning clothes or making widgets. Employee leasing companies pay the bills, keep up with state rules and regulations and deal with employee illness, injury and grievances. "I'm able to call them and dump the problems in their lap," says Glenn Buck, in-house accountant for Environmental Biotech Inc., a Sarasota company that leases its 23 workers from Bradenton-based Professional Employee Management.

Employee benefits
But some questions of responsibility remain unsettled. If an employee grievance results in a lawsuit, for example, it's unclear who is legally liable - the employee leasing company or the client business - if a judgment is made against the company. To avoid such sticky situations, leasing companies try to mediate disputes early on and avoid going to court.

For the employee, a leasing firm likely will offer a more comprehensive package of benefits, including the choice of several health-care plans, credit unions and tax-deferred savings plans.

Do workers sense they are part of a disposable work force? Most employers say no. "It's invisible to the employee," says Buck of Environmental Bio-Tech.

Leased employees seem to concur. Jeff Gunther, general manager of Sloppy Joe's at Orlando's Church Street Station, didn't know what to expect when his boss, Millennium Group President Mark Gibson, decided to lease his services through HR1 in Maitland. "My initial reaction was hesitation. I didn't understand the leasing program," says Gunther. But when he learned he'd get a better rate on health insurance, among other benefits, he warmed to the idea. Sloppy Joe's bartender Greg Kidd says he liked the idea from the start, citing the automated deposit of his paycheck into his bank account as his favorite perk.

Marc Geiger, a sales representative in Jacksonville for Tampa-based Florida Marketing Associates North which contracts with Professional Employee Management, says, "I particularly appreciate the fact that someone from outside our own company will explain benefits. The nice thing is that it frees up our boss. I see no downside to it."

Employee leasing got its start in California in the 1970s, and the industry has been fighting an uphill battle for respect ever since. Substantial cash flow and a lack of regulation lured unscrupulous operators. There have been notorious scam artists and spectacular business collapses. "Our industry five years ago wasn't creating the fraud, it was attracting the fraud," says Kirk A. Scoggins, president and CEO of TeamStaff Cos. in Tampa and president-elect of NAPEO.

Florida's most infamous employee leasing scandal was Tampa-based Action Staffing, once the nation's largest employee leasing company with 11,000 employees in 35 states. Started in 1986, Action's downfall began in 1990 when it started a self-insurance health-care fund. Action went bust in 1992, leaving businesses scrambling to get insurance coverage and millions of dollars in unpaid insurance claims. Former chairman David Miller was sentenced to 20 months in prison and fined $40,000 for filing fraudulent tax returns.

In 1991, Florida became the first state to regulate and license employee leasing companies. "This got the 'not ready for prime time' players off the street," says Barry Byrd, president of HR1 and vice-chairman of the seven-member Board of Employee Leasing Companies, which operates under the state's Department of Business and Professional Regulation.

Has regulation cleaned up the industry? Apparently not completely. In fiscal year 1994, ended last June 30, the Florida Department of Business and Professional Regulation received 73 complaints against licensed practitioners, up from 57 in 1993. Of the 73 complaints, 62 were found to be worthy of investigation. Five leasing companies were put on probation and there were five reprimands, but there were no license revocations, suspensions or fines. In addition, there were 15 complaints against employee leasing companies operating without licenses.

To protect businesses and their employees against failures like Action Staffing, the state doesn't allow employee leasing companies to self-insure for health insurance. And beginning in 1994, leasing companies with over $2.5 million in Florida payroll must submit audited financial statements on a quarterly basis.

For the business owner interested in checking out a potential leasing company, however, getting financial information is difficult. Financial statements filed with the state for any regulated business are confidential. Also, virtually all employee leasing companies operating in Florida are privately held. Some companies do choose to disclose some or all financial data. "I think the better companies are going to want their clients and prospects to have access to their financial information," says H. "Britt" Landrum, Jr., president of AmStaff in Pensacola and chairman of the Board of Employee Leasing Companies.

A look at those financial statements may be troubling to potential clients. Employee leasing companies trumpet impressive sales growth and figures that put them in the top tier of Florida business. But the nature of employee leasing is that only a fraction of revenues are retained after payroll costs, insurance premiums and other benefits are paid. "The profit margin is very low - 0.5% to 1% of revenue is very good. If you make more than 1% you are doing very, very well," says M. Marc Moore, president of Payroll Transfers in Tampa, which to its credit releases financial information in an annual report, most recently showing $1 million in 1993 net income on sales of $174.7 million. AmStaff's Landrum concurs that margins are a problem, saying, "Early on, we were seeing margins around the country of 5% to 8% above cost. Now we are seeing 1% to 3%."

Florida requires a company to have a net worth (assets minus liabilities) of at least $50,000 to get an initial license. But to renew a license, a company need only show a positive net worth, even if that is only $1.

So for firms looking to work with an employee leasing company, the rule is buyer beware.

"Get a list of references and not just one or two; do your homework," says Bill Morris, president of Tampa-based Strike & Spare Fun Centers, operator of six bowling centers on the west coast of Florida.

Next up for employee leasing in Florida, as well as the nation, is consolidation. "In a few years, maybe five or ten years, there will be only ten or so leasing companies in the country," says Celeste D. Dockery, president of Professional Employee Management, which is based in Bradenton.

To fund expansions, larger employee leasing companies are dabbling with the idea of a public offering. Both the Vincam Group and Staff Leasing acknowledge they are considering initial public offerings in the next several years.

Professional Employee Management, is taking a different route - franchising.

Given the nationwide trend to outsourcing, it's likely that employee leasing companies will continue their rapid expansion. Which means that more and more Florida workers, for better or worse, will have to think twice when asked, "Who do you work for?"

Helpful Hints In Selecting An Employee Leasing Company

1. Assess your company's human resource needs.

2. Check out the employee leasing company's license at the Board of Employee Leasing Companies, Department of Business and Professional Regulation, Northwood Centre, 1940 North Monroe Street, Tallahassee, FL 32399-0767. Tel. 904-922-2971.

3. Is the employee leasing company adequately covered for health and workers' compensation insurance?

4. How is the employee leasing company staffed? Does it have the expertise and experience to meet your needs? Make a personal visit to its offices.

5. Will the employee leasing company save you money? How will it assist you in complying with employment laws?

6. Check the firm's banking and credit references. Have its payroll taxes and insurance premiums been paid fully? (Florida-licensed employee leasing companies can show a quarterly statement verified by a certified public accountant.)

7. Get professional references. Is the company a member of the National Association of Professional Employer Organizations (NAPEO)?

8. Carefully review the service agreement. Can it be canceled on short notice, say 30 days?

Sources: NAPEO; H. Britt Landrum, Jr., chairman of the Florida Board of Employee Leasing Companies.

Tags: Florida Small Business, Politics & Law, Business Florida

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