Ending the Paper ChasePosted on Tuesday, October 1st, 2002 by Mel Duvall
and owner, Health Partners New England
Enmeshed in red tape, small-business owners are reaching out to HR consultants to cover areas such as benefits and payroll. The payoff? You can focus on doing what you do best: making money for your company.
In February of 2000, Michael P. Krupa suddenly went from being the employee of a healthcare system in Westwood, Mass., to being the owner of a business with about 20 employees. Krupa, a clinical psychologist by trade, was the successful bidder on a contract to take over the mental-health unit of a regional hospital in Stoneham, Mass.
In addition to dealing with the increased business the contract would bring, Krupa was obligated to assume the role of employer of record for the medical unit’s existing staff. “Overnight, I suddenly had a small team of nurses, mental-health workers, physicians and clerical staff—all on my payroll,” he says of his group. “I needed help, fast.”
That’s when Krupa discovered an industry that has sprung up specifically to serve the needs of small- business owners in similar situations. As a result, he was able to outsource all of the human resources and payroll functions for his company, Health Partners New England, to a local Professional Employer Organization (PEO). Instead of worrying about 401(k) programs, healthcare and dental benefits, and filling out the numerous forms required by state and federal agencies, Krupa could hand those functions over to the PEO and concentrate on running his new business.
“Initially, I just assumed I’d have to hire an HR person and take on the work,” he says. “But when I learned more about the services that a PEO could provide, it seemed like an ideal solution.”
He isn’t alone: The PEO industry, virtually unheard of a decade ago, today “co-employs” an estimated 3 million workers. With an annual growth rate of 30 percent, PEOs are expected to co-employ 10 million Americans by 2005, according to the National Association of Professional Employer Organizations (NAPEO). Although offloading HR functions is the most obvious benefit, Milan Yagar, executive vice president of NAPEO, says other factors are even more important.
“The average entrepreneur doesn’t mortgage his home to launch a business because he wants to become an employer,” says Yagar. “At the same time, we train doctors how to be great doctors, but we never give them training in how to be good employers.”
Cutting Through the Red Tape
Without question, there has been a steady increase in the rules governing the operation of a small business: Between 1980 and 2000, the number of laws and regulations specifically concerning policies and practices grew by 60 percent.
According to the United States Small Business Administration (SBA), the annual cost of adhering to regulations and filling out the paperwork required by various government agencies amounts to some $5,000 per employee for businesses with fewer than 500 workers. Many of the regulations require the business owner to file multiple reports under threat of fines for noncompliance, even if the breach was unintentional. It’s no wonder the SBA estimates that small-business owners spend up to a quarter of their time on employment-related issues.
In addition, business owners have had to deal with the increasing costs associated with the threat of lawsuits. For example, the number of sexual harassment cases filed with the Equal Employment Opportunity Commission more than doubled between 1991 and 2000, from about 6,900 to nearly 16,000 a year. And it’s estimated that for every case filed, 10 or more were settled in-house.
PEOs have alleviated many of these burdens by essentially taking on the role of employer of record. Although business owners can outsource just one or two functions to a PEO, such as payroll, they are increasingly using PEOs to handle employee relations—from record keeping and legal compliance to training, health and dental plans, retirement and pension plans, and even the messy arrangements associated with firings or layoffs (the business owner can decide how much he or she wants to be involved). This leaves the small-business owner free to concentrate on core functions such as sales and customer service.
John Walker, president and CEO of EnerVest, a Houston, Texas–based independent oil and gas firm, uses Administaff (www.administaff.com), a PEO in Houston, and has seen the benefits. “Outsourcing our human resources functions frees us from having to support a large corporate infrastructure,” he says. “For a small or medium-size company, it makes all the sense in the world.”
The Price Tag
Of course, the biggest question for any business owner considering a PEO relationship is cost. Evidence suggests that PEOs can save a business owner money because they are able to aggregate costs. However, most PEO operators shy away from that selling point, feeling they bring more than that to the table.
Carl Kleimann, president of First Odyssey Group, a PEO based in Euless, Texas, says that before entering a PEO relationship, a business owner may provide few benefits to his or her employees. However, because a PEO can offer a range of benefits, from 401(k) plans to health and dental, business owners may decide to sign up for those offerings. In that situation, a PEO will not save a business money, and may even increase costs. The payoff comes in improved employee satisfaction and loyalty.
One rule of thumb is that a PEO will charge an annual administration cost of almost $1,000 per employee. That doesn’t include the cost of the plans the business owner might opt to offer his or her employees. Other PEOs charge on a percentage basis, usually 3 percent to 5 percent of gross payroll.
By way of context, the average salary at a small business is estimated to be $25,000 to $30,000, though that figure varies widely depending on line of business and region. Many business owners don’t have a full-time HR person and handle the responsibilities themselves, so bringing on a PEO will register savings in time more than money.
“What we prefer to say is that we offer a small-business owner a value-added proposition,” says Kleimann. “They are able to offer their employees much better benefits than they would be able to on their own, without the burden of administration.”
Robert Burbidge, president of Genesis Consolidated Services, a PEO based in Lexington, Mass., says business owners also have to realize that there’s more involved than just handing over various HR functions. Before offering a small-business operator an insurance policy, for example, the PEO must go into the workplace and ensure that proper practices are in place. “It really is a partnership, and there’s a certain amount of education that has to take place,” he notes.
Entering into a PEO relationship isn’t without risk. During the recent downturn, a number of PEOs went out of business, leaving their small- business partners in the lurch. Krupa, of Health Partners New England, says some PEOs also can be a bad fit, and he’s speaking from experience: Krupa switched PEOs after his employees complained of being disappointed with the delivery of services. He now uses Genesis, and is much happier with the results.
“My employees work in the healthcare industry,” he says, “so their expectations, particularly when it comes to benefits, are quite high.”
Mel Duvall has been a writer and editor at Interactive Week and Financial Post.