Farming out the company

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Small businesses face many hurdles — hiring employees, managing salaries, budgets, health care plans and other benefits. But outsourcing some human resource functions can sometimes save money and time.
Known as professional employment organizations, PEOs reduce the learning curve, said John Gifford, spokesman for Accord, a national PEO with offices in Littleton.
“Especially for new businesses, we offer very specific services to help them get started,” he said. “Now employers don’t have to know about labor laws, taxes, wages and benefits — we handle all that for them.”
Small businesses benefit by being able to pool their employees with companies that use the same PEO. Health insurance costs are spread among a larger group, sometimes lowering employer costs and premiums.
“This just allows the business to be able to address the core competencies of their business, why they opened in the first place,” Gifford said. “We can be their human resource specialist.”
Professional employment organizations are sometimes called employee-leasing or co-employment companies. Business owners put their employees — including themselves — on a PEO payroll and then “lease” them back for a monthly or annual fee.
The PEO takes over payroll and human resources functions such as withholding taxes, paying insurance premiums and administering health care benefits. Using the large pool of employees in a PEO, even the smallest companies can offer additional benefits such as retirement plans, life insurance, health insurance, vision and dental, job counseling and education reimbursement.
“It’s a new model,” said Edie Clark, spokeswoman for the National Association of Professional Employment Organizations. “It’s different from traditional payroll outsourcing, because they take on a larger part of human resources — they can even supply employee handbooks, keep up to date with new laws and regulation and provide less expensive insurance coverage, because it’s coming from a group of employees.”
Clark said that PEOs even file payroll and income taxes under their own tax numbers, relieving businesses of those federal responsibilities.
“Some PEOs have clients around the country,” she said. “That can be helpful if one of their businesses wants to expand to another state. The PEO can help them understand the implications of moving to that state; the federal and state laws they’ll have to comply with.”
According to the Small Business Administration, companies spend between 4 percent and 12 percent of their payroll on human resources functions such as administering payroll. A typical PEO charges between 4 percent and 6 percent, Gifford said.
PEOs were among the fastest growing business sectors during the 19990s, according to the National Association of Employment Organizations, generating about $51 billion in gross revenue annually.
The average client is a small business with 17 employees. But signing on with a PEO might not be for everyone, cautions Barbara Getter, an assistant professor of science and management at Regis University.
“Some companies won’t benefit,” she said. “It’s not a good fit for a company that uses a lot of consultants, because consultants are responsible for their own payroll and insurance. It isn’t a good fit if you have a lot of employees who work on commission. The PEO setup is not equipped for commission employees. But if you just are collecting hours and issuing a paycheck, it’s an awesome idea.”
The SBA said that the number of U.S. laws and regulations governing small business grew about 60 percent from 1980 to 2000, and the owner of a small- or medium-sized business now spends up to a quarter of his time doing employment related paperwork.
Those regulations, Getter said, are one of the reasons small- to medium-sized companies can benefit by using a PEO.
“It can get very complicated,” she said. “Small businesses have to worry about workers’ compensation, they have to worry about OSHA requirements, about benefits. But with the PEO, they can focus on their core competency — and grow their business.”
PEOs handle large sums of money for companies, and in the early days of the business, that led to some unethical practices. But in 1995, the industry created a nonprofit accrediting organization, the Employer Services Assurance Corp. Through a series of ethical and financial guidelines, ESAC can ensure a company’s financial stability and ethical standards.
“We offer a financial assurance program, similar to the FDIC for the banking industry,” said Executive Director Jane McGoggins. “If a company doesn’t perform as a client expects, we can step in and issue surety bonds to cover that PEO’s clients, employees and vendors.”
Only 24 corporations are accredited, which is voluntary, and those companies handle a total of $17 billion in employee wages, McGoggins said.
Accredited companies must provide proof of payroll and workers’ compensation insurance, as well as other financial documents.
“There are several financial requirements, internal audits are required and they are required to send us those audits quarterly, for example,” she said. “As in any industry, there’s the potential for fraud. But we’re working with other groups to prevent that, and make sure the industry is complying with state and federal regulations.”

Guidelines for Selecting a PEO

  • Assess the workplace to determine the human resource and risk management needs.
  • Make sure the PEO is capable of meeting the company’s goals. Meet the people who will be serving you.
  • Ask for client and professional references.
  • Check the firm’s financial background, and ask for banking and credit references. Ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.
  • Check to see if the company is a member of NAPEO, the national trade association of the PEO industry.
  • Investigate the company’s administrative and risk management service competence. What experience and depth does their internal staff have? Do any of the senior staff have professional training or designations? Check to see if the PEO’s risk management services have been certified by the Certification Institute at
  • Understand how the employee benefits are funded. Is the PEO fully insured or partially self-funded? Who is the third-party administrator (TPA) or carrier? Is their TPA or carrier authorized to do business in your state?
  • Understand how the employee benefits are tailored. Determine if they fit the needs of your employees.
  • Review the service agreement carefully. Are the respective parties’ responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?
  • Make sure that the company you are considering meets all state requirements.

Source: National Association of Professional Employment Organizations