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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Counting Hours in Lease to Own

(Posted March 2, 1999)

Question 11: My business routinely leases employees for several months. If we like them, we hire them. If not, we ask the agency to send us someone else. These are the same temp employees they would use for 1 week assignments while an employee is on vacation, workers the agency has recruited. How do we count their hours of service once we hire them?

Answer: The following answer is drawn from Q 4:37 of my new book, Who's the Employer?

Many employers will lease an employee for several months, or possibly longer, before offering them a permanent position with the company as an employee. This can simplify bookkeeping and reduce an employer's unemployment insurance costs.

If a recipient hires someone who formerly provided services to it under a leasing arrangement, the employee is credited with all hours of service earned while working under the leasing arrangement, whether or not he or she satisfied the substantially full-time requirement. (IRC 414(n)(4).)

Service Credited. Sandy's Sweatshop leases Ellen from a temporary agency for three months. During those three months, Ellen works 500 hours for Sandy. Sandy then hires Ellen directly. Ellen is already credited with 500 hours of service, even though Ellen was not technically a leased employee because she did not satisfy the substantially full-time requirement. Since the employment commencement date is the first day a worker is entitled to be credited with an hour of service, Ellen's first eligibility computation period begins when she started working for Sandy under the leasing arrangement.

Keep in mind that the longer a "temporary" worker stays with a company, the more likely it is that a court may find the company is the true common law employer. The importance of this issue can transcend the importance of the leased employee issues.

Health Plan Coverage. Fancy Tools, Inc. has a good health plan for its employees. The plan document says all employees working more than 30 hours per week participate. Fancy Tools needs a new shipping clerk. They contact Astaire Temps, who sends over Waldo as a temporary clerk. Waldo works there three months. Waldo is just like other Fancy Tools employees, except that Astaire gives him his paycheck. After four months there, Waldo contracts cancer and demands to have his medical costs covered under the plan, on the basis that he is Fancy Tools' common law employee. While that claim might have been rejected out of hand had he worked there only one week, it becomes more credible the longer he is there.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.