Employee leasing arrangements among healthcare organizations are exceedingly common and can be very useful to minimize administrative costs, simplify benefits and payroll administration, and leverage one organization’s management acumen. These arrangements, however, can also be fraught with easily overlooked employee benefits compliance concerns. To minimize these concerns, healthcare organizations should carefully consider the three issues that will be discussed in this series and structure their employee leasing arrangements accordingly. In Part I, we will discuss the potential impact of state-level employee leasing laws on these arrangements, which should be of particular interest to the organization acting as the lessor.

State Employee Leasing Laws — Lessor Beware

A majority of states broadly regulate employee leasing arrangements. These state regulations often require the lessor to register as a “professional employer organization” (PEO), pay certain fees, make annual filings and disclosures, and comply with restrictions on benefits provided to the leased employees. A failure to comply with these regulations can expose the lessor to injunctions barring the leasing arrangement, civil penalties, and even criminal penalties.

The key aspects of these regulations, such as coverage, exceptions, application requirements, and benefit plan limitations, can vary greatly by state. However, there are some common themes that healthcare organizations can address by answering the following questions:

Is employee leasing regulated by the state?

As stated above, most states broadly regulate employee leasing arrangements. Some remaining states regulate employee leasing more narrowly, such as for state disability insurance, unemployment insurance, or workers’ compensation. Lastly, a smaller category of states do not specially regulate employee leasing at all.

If employee leasing is regulated, does an exemption apply?

Even if a state broadly regulates employee leasing, some arrangements are specifically exempt based on their structure or purpose, such as (ranked roughly in order of commonality):

• short-term arrangements;
• other “temporary help” arrangements, including special or seasonal assignments;
• arrangements between organizations that share at least 80% common ownership;
• arrangements where the lessor’s primary business is something other than the business of leasing employees; and
• arrangements where a majority of the individuals providing services to the lessee are not leased employees.

Practice Pointer: If an exemption seems likely to apply, ensure that the employee leasing agreement reflects a structure that satisfies the exemption. For example, if the parties expect the arrangement to be short-term and to qualify for a short-term exemption, the limited duration of the arrangement should be clearly expressed in the agreement and automatic renewals should be avoided.

If no exemption applies, what are the registration requirements?

Most states broadly regulating employee leasing require at a minimum an initial registration and fee payment followed by annual renewals with further fee payments. The registration requirements range from a simple one-page filing with basic contact information to extensive applications with financial disclosures, bonding requirements, personal attestations, and background checks.

Are there limitations on the medical plan that may be offered to leased employees?

Several states that broadly regulate employee leasing place significant limitations on the ability of the lessor to offer self-funded group medical plan coverage to the leased employees. A few states bar the use of a self-funded group medical plan for leased employees. In other states, the compliance burdens make offering such a plan impracticable. For example, some states require the lessor to (1) use a third-party administrator licensed in the state; (2) hold all assets of the plan in trust; (3) maintain sound reserves; (4) submit annual audited financial statements; (5) and/or  generally comply with the state’s insurance regulations.

Often one of the driving forces for an employee leasing arrangement among healthcare organizations is a preference to provide the leased employees with more cost-effective self-funded group medical plan coverage maintained by the larger organization. In states that impose the types of restrictions described above, providing self-funded group health plan coverage may not be possible.

Practice Pointer: In states that restrict or bar the use of a self-funded group medical plan for leased employees, consider the viability of instead offering a fully insured group medical plan specific to these employees.

The two remaining key benefits compliance issues that organizations leasing healthcare employees should consider will be discussed in the forthcoming Parts II and III of this series.