Where the Leased Become the Most : Van Nuys-Based Company Prospers by Handling Personnel Chores for Other Firms

Every workday for the last two years, Marc Fetherolf has sat at the same workbench at Modumend Inc. in Westlake Village and used the same soldering tools to repair the same kinds of circuit boards and other computer equipment.

But the 29-year-old technician stopped working for the company 13 months ago. Since then, Fetherolf has been leased to Modumend from the Van Nuys-based National Staff Network, one of the nation’s largest employee leasing companies. NSN, which says it has a payroll of more than 30,000 employees in 20 states, has been a beneficiary of a nationwide boom in employee leasing.

There are now about 250,000 leased employees nationwide, up nearly tenfold in the past two years, according to the National Staff Leasing Assn., a trade group in Los Angeles. And unlike Kelly Services, which supplies temporary office help such as secretaries, leased employees are permanent and full time.

The main worry in the employee-leasing industry is that the new tax bill, which eliminates one incentive for using many leased workers, may slow its growth.

Can Save Money

The lure for using leased employees is simple. It can save companies money and eliminate a raft of bureaucratic chores. Here’s how it works:

A business, such as Modumend, dismisses its workers, then hires them back overnight from an employee-leasing firm. Modumend retains the right to hire and fire staffers. But the leasing firm handles the chores of paying the workers, figuring out related taxes, providing medical benefits and administering and choosing among myriad employee-insurance programs available. Often, employee-leasing companies can get cheaper insurance rates than small companies because they buy in volume.

The only paper work for employers is to fill out time sheets.

NSN Chairman Marvin R. Selter first got in the employee-leasing business in 1972, before most others. He started a Los Angeles firm called Practice Service Corp. That company evolved into NSN, which despite its growth, has only 30 employees at its headquarters.

“Our computer does the work,” Selter said. “If we became more labor-intensive, we’d have the same problems as our clients.”

Neither Selter, who is the sole owner of NSN, nor his son, Stuart H. Selter, director of marketing for the company, would reveal gross sales or profit margins.

Eliminated 1 Job

Modumend President Gary Stouffer said he pays NSN about $15,000 a year for each of his five leased workers, who are paid an annual salary of $12,000. Stouffer said he could have provided similar medical coverage for about the same price that NSN charges, but that by contracting out the work Stouffer was able to eliminate a $20,000-a-year clerical job.

For technician Fetherolf, becoming a leased employee was relatively painless. Modumend did not offer any benefit package for its workers before beginning its arrangement with NSN.

Stouffer was considering adding some kind of benefit plan when he heard an NSN advertisement on the radio and phoned the company. As a result, Fetherolf now has medical, dental and life-insurance benefits. “There’s no difference, except now we have good benefits, and the raises are better,” he says.

Few are Supervisors

The staffers that NSN leases out range from minimum-wage counter clerks to department store supervisors and, according to the company, although most are not in supervisory positions, 40% are college graduates. The leased workers’ median salary is $20,000 a year, NSN says.

The workers receive merit-pay increases based on periodic performance reviews.

Although NSN has grown by leasing employees to small and medium-sized firms, it recently snagged some bigger clients, including Dallas-based Southland Corp., which runs the 7-Eleven convenience store chain, and Hospital Corp. of America, a for-profit hospital chain based in Nashville, Tenn.

Tax Reform Problem

But the federal tax reform represents a potential problem for the industry.

Before the new tax bill, employers could shift the burden of pension plans to employee-leasing firms, then set up more generous retirement packages for regular, unleased managers.

Under new regulations pushed for by the Internal Revenue Service and passed last fall, however, companies that lease more than 20% of their employees must now treat them as their own staffers in setting up pension plans.

NSN’s Selter contends that the industry will do just fine because the change in the law will bring employee leasing back to basics. “I’ve never pushed the pension arrangement as a major advantage,” said Selter. “What I offer is a savings in that I know which plans make sense because I deal with them every day.”

Selter contends that his large employee base enables him to save money because he can shop around for low-cost benefit packages and make economical use of a powerful IBM mainframe computer, which does everything from cutting checks to managing insurance premiums.

Gordon Brown, vice president of the National Staff Leasing Assn., says those in his industry also have boned up on labor law and related issues. “I’ve got to understand the new immigration laws. The average businessman doesn’t want to bother with them,” he said. Brown also heads Woodland Hills-based California Staff Management, another employee-leasing firm, which counts 750 leased employees.

Both NSN and California Staff Leasing bill clients about 30% over gross salaries, which they say is less than the firms would have to pay for similar medical, dental and life-insurance coverage. The employee-leasing companies, which take their fees out of the lump sum payments, say similar benefits and administrative time would cost most companies between 40% and 60% of annual salaries.

Filed Bankruptcy

But the employee-leasing industry has been scarred by some failures. Tustin-based Contract Staffing of America, once an industry leader, filed for Chapter 11 protection from its creditors last September, then closed its doors a month later owing the IRS about $6.3 million.

In early 1984 another big name in the industry, Long Beach-based Paystaff, left 70 client companies responsible for thousands of dollars of unpaid benefits when it shut down abruptly, causing the IRS to file a federal lien against it for more than $400,000.

“A lot of companies saw how lucrative the business could be and were offering pie-in-the-sky deals,” said Selter. “But there’s a shake-out going on, and the bad apples are getting pushed aside.”