Risks and Benefits of Outsourcing Employees

Many businesses have concluded that they should keep in-house only core functions that are critical to their differentiated competitive advantage, while outsourcing support activities like IT and HR to specialized providers. This has led to the emergence of the “Professional Employer Organization.” The PEO is a business that provides resources that function like a pool of employees but are on the books of the PEO.

Employee outsourcing may give rise to complex issues under tax and benefit laws. If service providers are misclassified as independent contractors rather than employees, the recipient business may be responsible for tax withholding, FICA, FUTA, state unemployment taxes and worker compensation contributions. Moreover, depending on the terms of the recipient’s benefit programs, misclassified individuals may be eligible for costly retroactive inclusion in benefit plans. Additional issues arise if a business obtains the services of “leased” employees such as from a PEO. Businesses that have a retirement plan and want to lease employees should consult tax and benefits counsel before outsourcing arrangements are finalized.

Intellectual property guarantees are likely to need attention if the outsourcing provider is foreign-based. Laws vary widely from country to country, and some provide less protection than under U.S. law. It’s especially important to determine whether the service provider has any of your competitors as clients. In any case, the recipient should have a strong non-disclosure agreement in place to protect business plans, products or services under development and other confidential information.