PEOs remove business burden, create HR challenges

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Small-business owners spend 40 percent of their time shifting through the maze of government regulations, the morass of health care and pension benefits, and the labyrinth of employee training and payroll issues.

But it doesn’t have to be that way.

In the past 30 years, a small industry has grown from performing those onerous tasks for small-business owners — and now is entering what many analysts call its “golden age.”

Professional employment organizations, or PEOs, take on the responsibilities that cause headaches for business owners, instead leaving them in the driver’s seat to move companies forward.

“Why did you start business? To deal with health care benefits? Pensions? Payrolls?” asked Pat Cleary, president and CEO of the National Association of Professional Employer Organizations. “No, you got in business to make widgets or doughnuts or to run a Jiffy Lube. You created something — like software or technology. That’s why these organizations are taking off.”

There are about 700 PEO companies in the United States, and many of them work for companies with 20 or fewer employees. The companies handle all administrative details: regulations, job training, safety development workshops, payroll, benefits and pensions.

“The arc of federal and state regulation is only going one way,” Cleary said. “And it isn’t down.”

The complexity of those regulations is also trending upward, he said. That’s why groups like the National Federation of Independent Business say that only 27 percent of their members offer pension plans — because they’re too difficult to handle.

“But if you have a PEO, you have a pension plan, you have benefits,” Cleary said. “It allows you to compete with bigger companies.”

Small businesses can benefit from outsourcing human-resource functions in other ways too, said Byron McCurdy, CEO of Aspen Resource Partners in Colorado Springs.

“We have payroll and time technology available online that small businesses just can’t afford on their own,” he said. “For instance, we have technology that will allow HVAC (heating, ventilation and air conditioning) employees to clock in and out via their cell phones. It’s very sophisticated, and it’s something smaller businesses couldn’t afford.”

Aspen Resource Partners has nine employees and about 80 small-business clients in the Colorado Springs area. They not only provide online payroll technology, they also have online webinars and training for employees.

McCurdy says he definitely sees an uptick in the number of businesses interested in outsourcing human-resource functions. It’s one reason why the 30-year-old company is merging with a Texas firm that has more than 1,200 employees.

“Bigger, national companies are moving into Colorado Springs, and competing with them is getting tougher,” he said. “It’s why we decided to merge with the Resourcing Edge. It’s a regional company, but they have better technology and more resources. We feel like the marketplace is more competitive, so that’s why we’re doing it.”

But the company’s focus will still be local, he said. They’ll still provide legal advice and other local services. They’re happy to do the hiring — and even the firing.

“I’ve found that we can go in and mediate — I have experience doing that — to stop legal action from taking place,” he said. “We have an attorney available if it comes to that. But in my experience, mediation works. We’ve only had one case go to court, and we won, because we make sure the employer has his ducks in a row before he fires anyone.”

Legal and regulatory issues can be a heavy burden, Cleary said. But it’s one burden PEOs are able to handle much more easily, because it’s all they do.

“PEOs are growing because it takes the regulatory burden away,” he said.

‘What small business doesn’t want that? What business owner says, ‘I’d rather muddle through that myself?’ No one.”

PEOs structure their costs in different ways. Aspen Resource mostly charges a percentage of payroll, McCurdy said. Other companies charge on a per-employee basis.

But McCurdy says he can be flexible.

“We can offer services a la carte,” he said. “If a business just needs payroll or just needs benefit plans. But we can do the whole gamut if we need to.”

Even larger companies are getting outside help with human-resource functions, something that is changing the future of the industry, says Don Warrick, professor of management at the University of Colorado at Colorado Springs.

“And people in the field have to be prepared to take on that changing role — or they’ll get left behind,” he said. “I’ve been talking about this for years.”

He’s also written books about the leadership role that human-resource professionals should take in their businesses.

“PEOs are a good option for smaller organizations,” he said. “But larger organizations need HR people to take on a different role. And they’ll either be a hero or a goat for the future of the organization — depending on how willing they are to take on that role.”

Warrick says human-resource professionals risk losing jobs to the PEOs if they fail to become the companies’ visionaries — providing healthy work environments, strong growth, and good hiring and management techniques.

“They have to re-invent themselves,” he said. “They want to have a different perspective. It’s not all bookkeeping; they need to be skilled in creating healthy, efficient, productive work environments.”

Human-resource professionals who can’t adapt to the new way of thinking might get left behind, Cleary said.

“To some, PEOs could be a threat. No company with 20 employees will hire them. But in large companies, they often work with the PEOs, providing vision while the PEO does the paperwork,” he said.

In light of the changing environment, successful human-resource professionals will learn more about leadership, about organizational development and about how to create a high-performance workplace.

“Those are the skills that are extremely valuable,” Warrick said. “Typically, these days, the paperwork and regulations are outsourced.”

And while that’s good news for the PEO businesses, it can mean navigating new waters — both for businesses and human-resource staff.

“You have to assess the realities of the workplace,” he said. “You have to be skilled at training leaders, at building healthy organizations, skilled at coaching a team, facilities meetings. Human-resource people can’t be stuck behind a desk, doing paperwork. They have to facilitate meetings, create teamwork, improve a company’s processes and its culture.”

Fortunately, while full-time HR staff are busy dong all of that, PEOs are handling the sticky paperwork, navigating regulations and legal issues and handing benefits and payroll information.

“That’s the goal,” said Cleary. “The paperwork is only getting more and more cumbersome. There are never going to be fewer government regulations, it’s never moved that way. As long as that’s the case, PEOs will be a solution for small businesses.”

40 percent

Amount of time spent on human resource tasks by small business owners

700

Number of professional employer organizations in U.S.

2 – 11 percent of payroll

Cost range to hire professional employer organizations

$81 billion

Gross revenues for professional employer organizations

$34,000

Average salary for HR professionals in PEO company

One Response to PEOs remove business burden, create HR challenges

  1. Great information and well laid out.

    HROplus, as a referral agent to the PEO industry, recommends that if you are a small business considering PEO, that you get at least 3 proposals and that they are from PEO’s that are licensed and registered within your States of employees.

    Kristian Svindland
    October 26, 2012 at 9:27 am