Juggle No MorePosted on Thursday, June 1st, 2006 by Nate Hardcastle
Professional Employer Organizations can make HR a snap
The managers of Irish wind-farm company Airtricity expected challenges when the firm established its first U.S. division in July of 2004. But the company’s business manager, Nicole Herbert, found that running human resources for the firm’s five-employee, Chicago-based office was more daunting than she had anticipated. The work included tasks such as navigating fluid payroll laws, finding the right financial-services firm to run the company’s 401(k) plan, and—worst of all— negotiating with medical insurance carriers. “Human resources took about a quarter of my workweek,” says Herbert. “I spent most of that time trying to learn the American health care and payroll system while juggling three or four benefit providers. It was extremely frustrating.”
Herbert decided there must be a better way. A colleague told her about Administaff, the country’s largest professional employer organization (PEO), in January of 2005. Herbert learned that PEOs provide comprehensive human resources services for small businesses. The organizations employ a clever business structure to align their interests with those of their clients: A PEO becomes the legal employer of its client’s staffers, and effectively leases those employees back to the client. The change is only technical—business operates as usual—but the PEO becomes legally liable for adhering to laws governing payroll, insurance, and other human resources functions. “Co-employment can create a win-win-win situation for a small business, its employees, and their PEO,” says Administaff CEO Paul Sarvadi. “It can relieve small businesses’ compliance headaches, give employees access to topquality benefits and provide the PEO with the economies of scale necessary to make a profit.”
Herbert met with Administaff representatives and signed up immediately. “They offered exactly what we were looking for,” she says. “It was perfect: A single company could provide expertise in handling payroll and taxes, health insurance, our 401(k) plan, recruitment, and everything else that we needed from a human resources standpoint.”
Herbert’s time spent on human resources plummeted to “roughly zero.” That freed her to manage Airtricity’s rapidly expanding U.S. operations. The company has more than quintupled its U.S. employees since mid-2004, and has added offices in New York and Texas. “We’re trying to grow a business,” she says. “We don’t want to spend all our time working on human resource issues.”
Get the HR monkey off your back
Nicole Herbert’s story isn’t unusual. Managing human resources for a small business can make anyone feel like a stranger in a strange land. Most small businesses don’t have the time—much less the resources, expertise or bargaining power—to stay on top of the ever-changing maze of personnel laws while crafting competitive benefits packages.
PEOs’ best-known services include payroll, health insurance (the organizations typically represent thousands of employees, so they can negotiate good rates), worker’s compensation, 401(k)s, and other benefit plans. In fact, however, those offerings only scratch the surface. PEOs also can help with management training, policy development, employee handbooks, OSHA compliance, workshops on issues such as sexual harassment and workplace safety, leadership development seminars, headhunting services, guidance for compensation plans and employee evaluations… the list goes on and on. “Most small-businesspeople probably aren’t aware of all the HR consulting services that PEOs offer,” says Monette Galello, vice president of Burlington, Massachusetts PEO Genesis Consolidated Services. “Those services can boost productivity, protect small businesses and their employees from various risks, and help small firms compete with big corporations for employees.”
PEOs typically charge a fee of about 3% of payroll, or a flat rate of around $1,200 per employee (on top of your firm’s payroll taxes). Many PEOs also turn a profit on the insurance plans they provide their clients (which nonetheless tend to be cheaper than the small businesses would find on their own). Some PEOs charge extra for seminars or other special services.
Those charges represent good value for many small businesses. That’s because PEOs’ economies of scale allow them to provide high-level professional services for a fraction of the amount they would cost most small firms operating alone. The Small Business Administration estimates that a company with ten employees might spend between 8% and 12% of its total payroll to implement a full HR program— far more than the typical cost of partnering with a PEO.
PEOs’ professional expertise and benefits packages also may boost workplace morale and help attract new talent. Most important, handing off HR responsibilities to a PEO can free your firm’s employees to do the jobs they were hired to do. And since the PEO becomes legally responsible for compliance with the plethora of human resources regulations, small business owners can stop lying awake worrying about how regulations they don’t know might hurt them. “Working with a PEO helps our employees feel that we’re taking care of them,” says Melissa Hopkins, coowner of 50-person Massachusetts manufacturing company Brockton Plastics. “And as an owner, having another set of eyes on our business gives me tremendous peace of mind.”
Is a PEO right for your firm?
Many, but not all, small companies can benefit from working with a PEO. Consider the following issues:
Your firm’s current and future size. The smallest firms—those with, say, fewer than ten employees—generate less revenue for professional employer organizations. PEOs compensate by charging them higher fees. Even so, a very small firm with big expansion plans might benefit from a PEO’s capacity to handle human resources problems that accompany rapid growth. Larger firms may find that they can negotiate lower rates with PEOs, but some companies with several hundred employees might find that it’s worthwhile to develop an in-house HR department.
The nature of your workforce. The more complex your human resource needs, the more likely that a PEO will earn its fees. A law office probably will take full advantage of a PEO’s benefits packages, workplace training, and other services— but a small deli probably won’t. And PEOs may be less of a bargain if you employ large numbers of temporary or seasonal workers. Such workers generally don’t require the kinds of services a PEO can provide—but PEO fees don’t always reflect that fact.
Your company’s pay structure. If everyone at your firm makes a modest income, a PEO fee based on a percentage of your payroll might work well. But companies in which some employees might receive big payouts—for example, medical practices, law offices or software-development firms—should ask for a flat fee. Likewise, if your firm offers potentially large bonuses, you’ll want to make sure that your PEO won’t take 3% of them—so ask if the PEO will do special payroll runs for a one-time charge.
How the PEO handles unemployment tax. Your firm is legally required to pay unemployment taxes on just the first $8,000 or so of each employee’s salary, depending on the state—so make sure that the PEO will adjust its charges when salaries reach that threshold.
Your state. Not all states officially recognize PEOs’ co-employment arrangement. Ask the agency that governs employment issues for your state whether your firm’s employees would legally become employees of the PEO. If not, the PEO may not be liable for your firm’s compliance with workplace laws.
The strength of the PEO’s personnel and finances. Be sure the PEO has the resources and expertise to meet your needs. In particular, make sure that the PEO’s worker’s compensation insurer has a high credit rating. It’s also a good sign if the PEO is a member of the National Association of Professional Employer Organizations (NAPEO) and accredited by the Employer Services Assurance Corporation (esacorp.org).
Hiring a PEO doesn’t mean you can wash your hands of all human resources concerns. Get your PEO’s promises in writing, and make sure the firm follows through on them. Meet with your PEO representative regularly to discuss your current and future human resources needs, and inquire about services the PEO can provide to meet them.
Still, managing your relationship with a PEO is not nearly as demanding as handling HR yourself—so you can get back to running your business. “We’re a small company,” says Melissa Hopkins of Brockton Plastics. “We don’t have people on staff that went to school for human resources. Hiring a PEO allowed us to focus on what we do best.”