Early Beginnings: The Rise of Employee Leasing in the 1960s–1970s
The concept of employee leasing emerged in the United States during the late 1960s and early 1970s as businesses sought new ways to reduce administrative burdens and control rising employment costs. Instead of managing payroll, benefits, and compliance in-house, some companies began transferring their employees to a third-party entity—an “employee leasing firm”—which would then “lease” the workers back to the business.
This arrangement allowed smaller companies to access benefits and HR services typically reserved for larger organizations. Employee leasing firms would pool employees from multiple businesses, giving them leverage to negotiate better health insurance rates, retirement plans, and workers’ compensation coverage.
Expansion in the 1980s: Growth and Regulation
The 1980s saw explosive growth in employee leasing. Thousands of firms entered the market, catering to industries like construction, hospitality, and healthcare—sectors that had complex compliance and labor needs.
However, with rapid growth came challenges. Some employee leasing firms engaged in questionable practices, such as failing to pay employment taxes or mismanaging benefits funds. This led to lawsuits and scrutiny from the IRS, Department of Labor, and state governments.
In response, regulators began clarifying the rules around co-employment and liability. The National Association of Professional Employer Organizations (NAPEO) was founded in 1984 to bring legitimacy and standards to the industry.
The Shift to the PEO Model in the 1990s
By the 1990s, the term Professional Employer Organization (PEO) started to replace employee leasing. The rebranding was more than cosmetic—it reflected a change in the business model. Unlike the old employee leasing concept, PEOs established a co-employment relationship:
- The client company managed day-to-day work and operations.
- The PEO handled payroll, benefits administration, HR compliance, and risk management.
This model emphasized partnership rather than “leasing,” helping the industry gain credibility. The Small Business Efficiency Act (SBEA) of 2014 further cemented PEOs’ legitimacy, creating a federal framework for Certified PEOs (CPEOs) with clear guidelines on tax responsibility and compliance.
Employee Leasing Today: A Legacy That Evolved
Today, the term employee leasing is largely outdated, replaced by the more accurate and respected PEO model. Modern PEOs serve hundreds of thousands of small and mid-sized businesses across the country, offering access to Fortune 500-level benefits, compliance expertise, and cutting-edge HR technology.
While the early employee leasing industry had a mixed reputation, it laid the foundation for what is now a thriving, highly regulated industry that supports nearly 5 million worksite employees in the U.S.