EXHIBIT 10.3

                           EMPLOYEE BENEFITS AGREEMENT

     THIS  AGREEMENT  is made by and between  KANEB  SERVICES,  INC., a Delaware
corporation ("KSI") and KANEB SERVICES LLC, a Delaware limited liability company
("KSL").

                               W I T N E S S E T H

     WHEREAS,  KSL will distribute to its  stockholders one KSL Common Share for
each three  shares of KSI Common  Stock held by KSI  stockholders  on the record
date for the distribution (the "Distribution");

     WHEREAS,  upon the  Distribution,  the Kaneb Services,  Inc. Deferred Stock
Unit  Plan  account  of each  Kaneb  Services,  Inc.  Deferred  Stock  Unit Plan
participant  shall be deemed to be credited with one non-monetary  unit equal to
one KSL Common Share for every three non-monetary units equal to three shares of
KSI  Common  Stock that is deemed to be  credited  to his Kaneb  Services,  Inc.
Deferred Stock Unit Plan account as of the record date for the Distribution;

     WHEREAS,  upon the  Distribution,  the Kaneb  Services,  Inc.  Non-Employee
Directors  Deferred  Stock  Unit  Plan  account  of each  Kaneb  Services,  Inc.
Non-Employee  Directors  Deferred Stock Unit Plan participant shall be deemed to
be credited with one  non-monetary  unit equal to one KSL Common Share for every
three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is
deemed  to be  credited  to his  Kaneb  Services,  Inc.  Non-Employee  Directors
Deferred Stock Unit Plan account as of the record date for the Distribution;

     WHEREAS, upon the Distribution,  the Kaneb Services, Inc. 1996 Supplemental
Deferred   Compensation   Plan  account  of  each  Kaneb  Services,   Inc.  1996
Supplemental  Deferred  Compensation  Plan  participant  shall be  deemed  to be
credited  with one  non-monetary  unit equal to one KSL  Common  Share for every
three  non-monetary  units  equal to three  shares of KSI  Common  Stock that is
deemed to be credited to his Kaneb  Services,  Inc. 1996  Supplemental  Deferred
Compensation Plan account as of the record date for the Distribution; and

     WHEREAS,  after the  Distribution  and through the date the  participant is
paid his entire  benefit  due under the  applicable  plan,  the  account of each
participant in the Kaneb Services,  Inc. 1996 Supplemental Deferred Compensation
Plan, the Kaneb Services,  Inc. Deferred Stock Unit Plan and the Kaneb Services,
Inc. Non-Employee  Directors Deferred Stock Unit Plan shall also be deemed to be
credited with additional  non-monetary  units equal to the cash  distribution(s)
KSL would have paid to the  participant  had he been the owner of such number of
KSL Common Shares equal to the number of non-monetary  units equal to the number
of KSL Common  Shares  deemed  credited to his account  under the plan as of the
record date(s) for the cash distribution(s);

     NOW,  THEREFORE,  in consideration of the promises  contained  herein,  and
other valuable  consideration,  the receipt and  sufficiency of which are hereby
acknowledged by the parties, the parties hereto agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

     Whenever  used in this  Agreement,  the  following  terms  shall  have  the
meanings indicated below or in the recitals above, unless a different meaning is
plainly required by the context.  The singular shall include the plural,  unless
the context clearly indicates otherwise. Capitalized terms that are used in this
Agreement  which are not listed in the  recitals or in this Article I shall have
the respective meanings assigned to them in the Distribution Agreement.

     1.1  "Code" shall mean the Internal Revenue Code of 1986, as amended.

     1.2  "Distribution  Agreement" shall mean the Distribution Agreement by and
          among Kaneb Services,  Inc., a Delaware corporation and Kaneb Services
          L.L.C., a Delaware limited liability company, and the Tax Subsidiaries
          (as defined therein).

     1.3  "KSI Common Stock" shall mean KSI's common stock, no par value.

     1.4  "KSI Company" shall mean any Subsidiary of KSI other than KSL or a KSL
          Company.

     1.5  "KSI Deferred Compensation Plans" shall mean the Kaneb Services,  Inc.
          Deferred  Stock  Unit  Plan,  the Kaneb  Services,  Inc.  Non-Employee
          Directors  Deferred Stock Unit Plan and the Kaneb Services,  Inc. 1996
          Supplemental Deferred Compensation Plan.

     1.6  "KSI  Employee  Benefit  Plan" shall mean any  employee  benefit  plan
          (within the meaning of section 3(3) of the Employee  Retirement Income
          Security Act of 1974, as amended) or compensation  arrangement that is
          now or was previously  maintained,  sponsored or contributed to by KSI
          or a KSI  Company,  including  (but not limited  to) the KSI  Deferred
          Compensation Plans, the Kaneb Services, Inc. Health Benefits Plan, the
          Kaneb  Services,  Inc. Group Life & Accidental  Death &  Dismemberment
          Insurance Plan, the Kaneb Services,  Inc. Group  Supplemental  Death &
          Dismemberment   Plan,  the  Kaneb  Services,   Inc.  Group  Long  Term
          Disability  Benefit Plan, the Kaneb Services,  Inc.  Flexible Spending
          Account Plan, the Kaneb Services, Inc. Non-Employee Directors Deferred
          Stock Unit Plan, the Kaneb Services,  Inc. Severance Benefits Plan and
          the KSI Savings Plan.

     1.7  "KSI Option Exercise Price Adjustment Factor" shall mean, with respect
          to a given KSI  Option,  a  fraction,  the  numerator  of which is the
          original  exercise  price for the KSI  Option and the  denominator  of
          which is the  closing  price of a share of KSI Common  Stock (with due
          bill  attached)  on the  NYSE on the  last  trading  day  prior to the
          ex-distribution date.

     1.8  "KSI  Option"  shall mean an option to  purchase  shares of KSI Common
          Stock that was granted by KSI prior to, and is  outstanding as of, the
          record date for the Distribution.

     1.9  "KSI  Savings  Plan"  shall  mean the  Kaneb  Services,  Inc.  Savings
          Investment Plan.

     1.10 "KSL Common Share" shall mean a Common Share of KSL, as defined in the
          KSL Limited Liability Company Agreement.

     1.11 "KSL Company" shall mean any Subsidiary of KSL.

     1.12 "KSL  Employee"  shall  mean a  common  law  employee  of KSL or a KSL
          Company.

     1.13 "KSL  Employee  Benefit  Plan" shall mean any  employee  benefit  plan
          (within the meaning of section 3(3) of the Employee  Retirement Income
          Security Act of 1974, as amended) or compensation  arrangement,  other
          than a KSI  Employee  Benefit  Plan,  that is now, is hereafter or was
          previously  maintained,  sponsored or  contributed  to by KSL or a KSL
          Company,  including (but not limited to) the KSL Savings Plan, the KSL
          Health  Plan,  the  Kaneb  Services  LLC 2001  Incentive  Plan and any
          welfare benefit plan  established by KSL or a KSL Company  pursuant to
          Article IV of this Agreement.

     1.14 "KSL Former Employee" shall mean was previously,  but is not as of the
          Distribution Date, a KSL Employee.

     1.15 "KSL Health Plan" shall have the meaning set forth in Article IV.

     1.16 "KSL Savings Plan" shall have the meaning set forth in Article V.

     1.17 "KSL Option" shall mean an option to purchase KSL Common Shares.

     1.18 "NYSE" shall mean the New York Stock Exchange.

                                   ARTICLE II

                    NONQUALIFIED DEFERRED COMPENSATION PLANS

     2.1  Statement  of  Amounts  Credited.  After the  Distribution,  KSI shall
furnish to KSL a statement that indicates the number of non-monetary units equal
to one share of KSI Common  Stock  deemed to be credited to the accounts of each
participant and former participant under the KSI Deferred  Compensation Plans as
a result of the  Distribution.  From time to time  after the  Distribution,  KSI
shall furnish KSL an updated statement that indicates the number of non-monetary
units equal to those number of Common Shares deemed  credited to the accounts of
each  participant  and former  participant  under the KSI Deferred  Compensation
Plans.

     2.2  Notification of  Distributable  Events.  KSI shall notify KSL when the
benefits of the participants and former participants who were employed by KSI or
any KSI Company become  distributable in the form of KSL Common Shares under any
of the KSI Deferred Compensation Plans.

     2.3  Issuance  of KSL  Common  Shares.  As  soon  as  practicable  after  a
notification  has been delivered to KSL pursuant to Section 2.2 above, KSL shall
cause to be issued directly to the participant or former participant that number
of KSL Common Shares equal to those number of non-monetary units deemed credited
to his account under the applicable KSI Deferred  Compensation  Plan as a result
of the  Distribution,  as  adjusted  under the  antidilution  provisions  of the
applicable KSI Deferred Compensation Plan.

     2.4 Quarterly Cash Distributions.  Immediately prior to the date KSL pays a
quarterly  cash  distribution  to the  owners of KSL  Common  Shares,  KSL shall
calculate  and  pay  to  KSI,  with  respect  to  each  participant  and  former
participant  in the KSI Deferred  Compensation  Plans who was employed by KSI or
any KSI Company,  the aggregate  amount of the cash  distribution KSL would have
paid to him had he been the record owner of the  aggregate  number of KSL Common
Shares equal to those number of  non-monetary  units then deemed credited to his
accounts under the KSL Deferred Compensation Plans.

     2.5  Deductions.  The parties agree that neither KSL nor any KSL Company is
entitled to deduct any amounts  paid under or with  respect to either of the KSI
Deferred  Compensation  Plans,  other than amounts paid under or with respect to
the  portion  of the  applicable  KSI  Deferred  Compensation  Plan  that  is in
consideration of services performed for KSL or a KSL Company.  KSL hereby agrees
that it shall not  attempt to claim  federal  income  taxation  deductions  with
respect to KSL Common  Shares that are issued by KSL pursuant to this  Agreement
to current or former  employees of KSI or a KSI Company who are  participants or
former  participants  under either of the KSI Deferred  Compensation  Plans. The
parties agree that pursuant to section 83(h) of the Code,  KSI or a KSI Company,
as appropriate,  shall be entitled to claim federal income  taxation  deductions
with respect to KSL Common Shares that are issued to current or former employees
of KSI or a KSI Company who are participants or former participants under either
of the KSI Deferred Compensation Plans pursuant to this Agreement.

                                   ARTICLE III

                        OPTIONS TO PURCHASE COMMON SHARES

     3.1 Grant of KSL  Options.  (a) Upon the  Distribution,  KSL will grant KSL
Options under the Kaneb  Services LLC 2001  Incentive  Plan,  the terms of which
plan shall be substantially  similar to those set forth in Exhibit A hereto,  to
persons who hold KSI Options.  Except as specified in this  Agreement,  each KSL
Option granted to a KSI Option holder in compliance  with this  Agreement  shall
contain  provisions  that are  substantially  similar to the  provisions  of the
holder's KSI Option.

          (b) The  exercise  price  for  each  KSI  Option  will be  reduced  in
     accordance with the following formula. The per share reduced exercise price
     shall be an amount equal to the result of (1) the opening  price of a share
     of KSI Common Stock on the NYSE on the  ex-distribution  date multiplied by
     (2) the KSI Option Exercise Price Adjustment  Factor.  The number of shares
     subject  to  the  KSI  Option  will  not  be  changed  as a  result  of the
     Distribution.

          (c) The per share  exercise  price  applicable  to a given KSL  Option
     granted  as  required  under this  Agreement  shall be equal to (1) the KSI
     Option  Exercise  Price  Adjustment  Factor  applicable to the holder's KSI
     Option  multiplied  by (2) the opening  price of a KSL Common  Share on the
     NYSE on the ex-distribution  date (or, if there is no trading in KSL Common
     Shares on the NYSE on the  ex-distribution  date, on the next date on which
     there is such  trading).  The number of KSL Common Shares  subject to a KSL
     Option shall be such number as is  necessary to produce an intrinsic  value
     (determined  as of the  ex-distribution  date, or of there is no trading in
     KSL Common Shares on the NYSE on the ex-distribution date, on the next date
     on which there is such trading) that,  when added to the intrinsic value of
     the adjusted KSI Option (determined as of the ex-distribution date), equals
     the  pre-distribution  intrinsic value of the KSI Option  (determined as of
     the last trading date prior to the ex-distribution  date).  However, no KSL
     Option  shall  provide a person a right to  purchase a fraction  of one KSL
     Common  Share.  For  purposes of this  Section  3.1,  the  pre-distribution
     intrinsic  value of a KSI Option shall be (1) the closing  price of a share
     of KSI  Common  Stock  (with  due  bill  attached)  on the NYSE on the last
     trading day prior to the  ex-distribution  date multiplied by the number of
     shares  of KSI  Common  Stock  subject  to the KSI  Option,  minus  (2) the
     original  exercise  price  for a share of KSI  Common  Stock  under the KSI
     Option  multiplied  by the number of shares of KSI Common Stock  subject to
     the KSI Option.  For purposes of this  Section  3.1, the  post-distribution
     intrinsic  value of a KSI Option shall be (1) the opening  price of a share
     of KSI Common Stock on the NYSE on the  ex-distribution  date multiplied by
     the number of shares of KSI Common Stock  subject to the KSI Option,  minus
     (2) the KSI Option  Exercise  Price  Adjustment  Factor  multiplied  by the
     number  of  shares of KSI  Common  Stock  subject  to the KSI  Option.  For
     purposes of this Section 3.1, the  post-distribution  intrinsic  value of a
     KSL Option shall be (1) the opening price of a KSL Common Share on the NYSE
     on the  ex-distribution  date multiplied by the number of KSL Common Shares
     subject  to the  KSL  Option,  minus  (2)  the KSI  Option  Exercise  Price
     Adjustment  Factor multiplied by the opening price of a KSI Common Share on
     the NYSE on the ex-distribution date multiplied by the number of KSL Common
     Shares subject to the KSL Option.

          (d) 15 days  prior to the  record  date for the  Distribution  all KSI
     Options,  other than KSI Options held by persons  employed in KSI's Dallas,
     Texas headquarters, shall become fully exercisable.

          (e) A KSL  Option  that KSL grants  pursuant  to this  Agreement  to a
     person who is not  expected  to perform  services  for KSL or a KSL Company
     immediately  after the  Distribution  shall provide that such KSL Option is
     fully  exercisable  at all times prior to its  expiration  and shall expire
     upon the earliest to occur of (1) 365 days  following  the  ex-distribution
     date,  (2) 90 days  following  the date on which the person is no longer an
     employee or a director of KSI or a KSI Company,  or (3) the  expiration  of
     the person's  general term  specified in his KSI Option.  A KSL Option that
     KSL grants pursuant to this Agreement to a KSL Employee,  KSL director or a
     KSL Former Employee shall be exercisable under substantially the same terms
     as were  applicable  to such  person's KSI Option and shall expire upon the
     earlier to occur of (1) the expiration of the general term specified in his
     KSI Option  (determined prior to the adjustments to the terms made pursuant
     to the following paragraph) and (2) 90 days following the date on which the
     person is no longer an  employee  of KSL or a KSL  Company or a director of
     KSL. A KSL Option that KSL grants pursuant to this Agreement to an employee
     of KSI who is expected to perform services for KSL or a KSL Company but who
     will not be a KSL  Employee  or a  director  of KSL  immediately  after the
     ex-distribution date shall expire on the same terms as are applicable under
     the person's KSI Option.

     A KSI Option that was  granted to a person who will be a KSL  Employee or a
director of KSL immediately after the  ex-distribution  date but not an employee
or a director  of KSI shall  expire  upon the  earliest to occur of (1) 365 days
after the Distribution Date, (2) 90 days after the date on which he is no longer
a KSL Employee or a KSL director or (3) the  expiration of the person's  general
term specified in his KSI Option.  Persons who will be KSL Employees immediately
after  the  Distribution  will not be deemed to have  incurred  terminations  of
employment for purposes of their KSI Options as a result of the  Distribution to
the extent that they continue to be employed by KSL or any KSL Company following
the Distribution.

     3.2 Issuance of KSL Common  Shares.  KSL shall issue KSL Common Shares upon
the exercise of any KSL Option granted pursuant to this Agreement.

     3.3  Deductions.  The parties agree that neither KSL nor any KSL Company is
entitled to deduct any amounts with respect to the KSL Options granted  pursuant
to the  Distribution  Agreement except to the extent that the KSI Option that is
substituted in part by such KSL Option was granted in consideration for services
performed  for KSL or a KSL  Company by the  optionee.  The  parties  agree that
pursuant to section 83(h) of the Code,  the  employer(s)  for whom services were
performed in consideration  for the granting of a KSI Option that is substituted
in part by a KSL Option  shall be  entitled to claim a federal  income  taxation
deduction with respect to the exercise of the KSL Option.

                                   ARTICLE IV

                   ESTABLISHMENT OF KSL WELFARE BENEFIT PLANS

     4.1  Adoption  of  the  KSL  Health  Plan.  Effective  no  later  than  the
Distribution  Date, KSL shall adopt or cause its  Subsidiaries  to adopt a group
health  plan for the benefit of KSL  Employees  and their  dependents  (the "KSL
Health  Plan")  which is  substantially  similar  in all  respects  to the Kaneb
Services,  Inc. Health Benefits Plan.  Effective as of the Distribution  Date or
the earlier  effective  date of the KSL Health  Plan,  KSL shall permit each KSL
Employee who  participated  in the Kaneb  Services,  Inc.  Health  Benefits Plan
immediately  prior  thereto and his eligible  dependents to be covered under the
KSL  Health  Plan.  The terms of the KSL Health  Plan  shall  credit to each KSL
Employee,  for the 2001 calendar year,  with any duplicate  deductible  payments
incurred  during the 2001 calendar year under the Kaneb  Services,  Inc.  Health
Benefits Plan and shall waive any preexisting  condition  restrictions that were
waived or satisfied under the Kaneb Services, Inc. Health Benefits Plan.

     4.2  Adoption  of  Life  Insurance,   Accidental  Death  and  Dismemberment
Insurance and Long-Term  Disability  Benefit Plans.  Effective no later than the
Distribution  Date, KSL shall adopt or cause its  Subsidiaries  to adopt for the
benefit of KSL Employees life insurance,  accidental death and dismemberment and
long-term  disability  programs  that are  substantially  similar  to the  Kaneb
Services, Inc. Group Life & Accidental Death & Dismemberment Insurance Plan, the
Kaneb Services, Inc. Group Supplemental Death & Dismemberment Plan and the Kaneb
Services, Inc. Long Term Disability Benefit Plan.

     4.3 Adoption of Medical Expense Reimbursement Plan. Effective no later than
the  Distribution  Date, KSL shall adopt or cause its  Subsidiaries to adopt for
the benefit of KSL Employees a medical expense reimbursement plan that satisfies
the requirements of section 125 of the Code and is substantially  similar to the
Kaneb Services, Inc. Flexible Spending Account Plan.

                                    ARTICLE V

                                KSL SAVINGS PLAN

     Effective as of June 1, 2001, KSL shall adopt the Kaneb Services LLC 401(k)
Savings  Plan,  the terms of which shall be  substantially  similar to those set
forth in Exhibit B hereto (the "KSL Savings  Plan").  To the extent  required by
KSI,  KSL shall take such  actions as are  necessary to cause the trustee of the
KSL Savings  Plan to accept a transfer of assets from the trust  funding the KSI
Savings Plan that are  attributable to the account balances of KSL Employees and
KSL  Former  Employees.  KSI and KSL shall  cooperate  to  ensure  that any such
transfer  satisfies the  requirements of section 414(1) of the Code dealing with
trust-to-trust  asset  transfers and section  411(d)(6) of the Code dealing with
the  preservation  of optional  forms of payment.  The parties agree that no KSL
Common  Shares and no shares of KSI Common Stock shall be  transferred  from the
trust funding the KSI Savings Plan to the trust funding the KSL Savings Plan.


                                   ARTICLE VI

           TERMINATION OF PARTICIPATION IN KSI EMPLOYEE BENEFIT PLANS

     6.1 Termination of  Participation  in the KSI Employee  Benefit Plans Other
Than  the  KSI  Deferred  Compensation  Plans.   Effective  no  later  than  the
Distribution Date, KSL shall take such actions as are necessary to cause KSL and
its Subsidiaries to terminate KSL's and its  Subsidiaries'  participation in all
KSI Employee  Benefit Plans other than the KSI Deferred  Compensation  Plans and
the KSI Savings Plan.

     6.2 Termination of  Participation in the KSI Deferred  Compensation  Plans.
Effective  immediately upon the expiration of the compensation deferral election
period during which the Distribution  occurs, KSL shall take such actions as are
necessary  to  cause  KSL  and  its  Subsidiaries  to  terminate  KSL's  and its
Subsidiaries' participation in the KSI Deferred Compensation Plans.

     6.3 Termination of  Participation  in the KSI 401(k) Plan.  Effective as of
June 1, 2001,  KSL shall take such actions as are necessary to cause KSL and its
Subsidiaries to terminate KSL's and its  Subsidiaries'  participation in the KSI
Savings Plan.

                                   ARTICLE VII

                          EMPLOYEE BENEFIT LIABILITIES

     KSL and its  Subsidiaries  shall be  exclusively  liable for any  Liability
relating to any KSL Employee  Benefit Plan.  Further,  KSL and its  Subsidiaries
shall be  exclusively  liable for any  Liability  relating  to any KSI  Employee
Benefit Plan to the extent that the Liability  relates to a KSL Employee,  a KSL
Former  Employee or a dependent or beneficiary of a KSL Employee or a KSL Former
Employee.

                                  ARTICLE VIII

                                  MISCELLANEOUS

     8.1  Notification  of Issuance of KSL Common  Shares.  Promptly  after each
issuance of KSL Common Shares pursuant to this Agreement,  KSL shall furnish KSI
a notice that lists the date of the  issuance,  the  recipient and the number of
KSL Common Shares issued to each recipient.

     8.2  Incorporation  of  Certain  Distribution  Agreement  Provisions.   The
provisions  of Article VII of the  Distribution  Agreement are  incorporated  by
reference  herein and such  provisions  shall be deemed to have been  separately
stated in this Agreement;  provided, however, that there shall be no requirement
that copies of notifications be sent to counsel for any of the parties.

     8.3 Amendments to and Adoption of KSL Employee  Benefit  Plans.  Nothing in
this  Agreement  shall be  construed  to prevent  KSL or its  Subsidiaries  from
adopting  employee  benefit  plans  after  the  Distribution  Date  that are not
described  in this  Agreement.  Further,  nothing  in this  Agreement  shall  be
construed to prevent KSL or its Subsidiaries  from amending any employee benefit
plan  described  in  this  Agreement  that  is  sponsored  by  KSL or any of its
Subsidiaries  after the  Distribution  Date if the  amendment is effective on or
after January 1, 2001 or is required by applicable law.

     8.4 Notifications to the Trustee of the Trust Funding the KSI Savings Plan.
For so long as KSI  Savings  Plan  assets are  invested  in KSL  Common  Shares,
whenever KSL files  preliminary or final proxy  solicitation  materials with the
Securities and Exchange Commission,  KSL shall cause a copy of such materials to
be simultaneously  sent to the trustee of the trust funding the KSI Savings Plan
or the trustee's designee.  Further, if KSI Plan assets are then invested in KSL
Common Shares,  upon the  commencement  of a tender offer for KSL Common Shares,
KSL shall  notify each KSI  Savings  Plan  participant,  former  participant  or
beneficiary  of the  tender  offer  and  utilize  its  best  efforts  to  timely
distribute  or cause to be  distributed  to each KSI Savings  Plan  participant,
former  participant or beneficiary the same  information  that is distributed to
other  holders of KSL Common Shares in  connection  with the tender offer,  and,
after  consulting  with the trustee of the trust  funding the KSI Savings  Plan,
shall  provide  and pay for a means  by  which  each  such  participant,  former
participant or  beneficiary  may direct the trustee of the trust funding the KSL
Savings Plan whether or not to tender the KSL Common Shares  credited to his KSL
Savings Plan account.

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed effective as of the 28th day of June, 2001.


                            KANEB SERVICES, INC.


                            By:              //s//
                                       William H. Kettler
                                       Vice President


                            KANEB SERVICES LLC


                            By:               //s//
                                       Howard C. Wadsworth
                                          Vice President