Tame Your Business:
The Benefits of Employee Leasing

Overburdened by piles of employment-related paperwork, many small businesses – and some larger ones – are increasingly eager to turn accounting, recordkeeping, human resources and other essentially “non-core” functions over to third parties.

As a result, employee leasing companies are flourishing. Among these providers, which go by various names, including administrative services organizations and administrative employers, the professional employer organizations (PEOs) are perhaps the most common and the best known.

Whatever it calls itself, an employee leasing company typically transfers employees of a client company to its own corporate payroll. It then “leases” these very same employees back to their original employer, usually for an indefinite period. The employees keep their jobs just as they were before, but now they officially work for the leasing company, which generally does not intervene in a client firm's core business.

Improved Health Benefits?

While such arrangements reduce an employer’s paperwork, they may also provide improved benefits for employees. That’s because leasing company clients are typically small businesses that can’t afford a wide range of health and other benefits. Without such agreements, these employees probably would not have federal protection under workplace legislation such as the Consolidated Omnibus Budget Reconciliation Act, the Age Discrimination in Employment Act and the federal Family and Medical Leave Act. Nor would they have access to healthcare coverage and other benefits that many leasing agencies can offer because of their increased buying power.

In addition, because workers technically are the leasing agency’s employees, it assumes responsibility for personal injury and workers’ compensation claims. It may arbitrate employee-company disputes and may also be called upon to terminate employees, if necessary.

Client Responsibility

Some workplace responsibilities remain with the client business, however. For example, using a leasing agency does not necessarily relieve the client from its obligation to employ only legal workers. Because of this, companies using employee leasing firms may want to play it safe and collect a federal government Form I-9 – affirming that an individual is eligible to work in the U.S. – from all workers, even if the leasing company has already required employees to complete the form.

Strange as it may seem, if you were to turn most company administrative functions over to a leasing firm, you may actually increase your control over your company’s key operations.

With so many personnel functions now the responsibility of the leasing firm, you are free to focus on helping your business flourish. Another positive factor is that your former employees, once they’re settled into the new arrangements, may well have increased access to benefits that in turn motivate them, increase their loyalty and help you retain your top performers.

Making Your Business Work Harder for You

If, like so many small business owners, you’ve put your all into your company and are now finding that much – very likely, too much – of your wealth is tied up in it, you may want to consider “monetizing” your business.

Tapping into the value of your company can provide liquidity, diversify your holdings and, potentially, enhance your wealth.

While the most straightforward way to get cash out of your business is to sell it outright, you may prefer to retain your involvement and control.

Lifestyle Decisions

Your decision on whether to monetize and how to go about it depends on whether you want to maintain an interest in your business, retire, move on to a new chapter of your life or transition your business to family members. But whatever your ultimate goal, reducing the percentage of your wealth that's concentrated in your company will have the effect of making you less dependent on its performance and can help protect your assets from legal problems and taxes.

One situation that is fairly common, is that your business may have excess capital but not a lot of cash. If that’s the case – and if your company’s balance sheet is strong enough to persuade a commercial bank to make what is essentially a personal loan – recapitalizing can be as simple as borrowing money to finance a stock buyback. If your company owns an appreciated asset such as real estate that is not essential to your business, you might also consider mortgaging it to finance the recapitalization.

Distributing excess cash or accumulated capital as bonuses or dividends can also pay off. But pay strict attention to tax issues related to your company’s business structure, reasonable compensation guidelines and state laws.

Recapitalization Downside?

If your goal is to tap into your assets immediately while aiming for a larger payout later, you may want to take a more formal road to recapitalization by bringing in outside investors who will contribute new equity capital to your business.

The downside of such a move is that the capital infusion is usually accompanied by new business partners with whom you may be unfamiliar and to whom you are, nevertheless, now accountable. In addition, their business and monetary timeline may differ from yours. In other words, if you choose this course, investigate the likely scenarios thoroughly before you make any commitments.

Similarly, you may want to consider a management buyout – assuming you can find a team that is familiar with your kind of business and not only capable of running it but also willing to assume and service new debt. In addition, the team also may need to put up personal assets as collateral and/or personally guarantee business debt, while you may need to take back some paper.

Value of an ESOP

Another option – perhaps the most popular among eligible companies – is to establish an employee stock ownership plan (ESOP), which gives your staff a stake in your privately held company while enabling you to retain control. Under certain circumstances, you also may be able to defer, or even eliminate, capital gains taxes on stock sold to an ESOP.

One of the requirements is that you reinvest the sale proceeds into qualified replacement property (QRP) – typically the stocks or bonds of domestic operating companies – within a window that opens three months before the sale and closes 12 months after it. However, you may then use that property as collateral for another investment. (In a more complex, leveraged version of this strategy, an ESOP loan can either be made directly to an ESOP trust, or it can be made to the company, which in turn makes a “mirror” loan to the ESOP.)

ESOP transfers, management buyouts and even relatively straightforward sales can become complicated, so make sure you have the legal, tax and financial guidance you need before moving forward.

If you’re at a stage where the idea of monetizing your business seems a wise course to explore and you’d like to make sure you are aware of all your options, as well as their benefits and constraints, don’t hesitate to call.

Loyalty Doesn’t Necessarily Mean ‘Forever’

Neither employee loyalty to a firm nor a company’s lifelong commitment to its employees is a matter of forever in the new American workplace. Not so many years ago, employees were content to work for a company for life, viewing the employer as a cradle-to-grave caretaker. In turn, the company gained a lifetime of loyalty. No more.

While times have changed, employers needn’t give up on the idea of employee loyalty. It just may have to be earned in a different way.

Experts in management say that today’s employees are more likely to be loyal to their careers than they are to the company. They don’t expect to work for the same company forever, yet the best of them don’t really want to change jobs every two or three years just to advance their careers. In fact, people tend to produce their best work when they are loyal to a company; that’s what employers like to see. The key is to recognize the true nature of the company’s needs.

The best alignment of interests occurs when employers facilitate employees’ developing expertise to spur their professional development — that in turn allows the company to cope with its trickiest challenges.