People Problems? The Answer May Begin with PEO

Not literally, of course. What we’re talking about is shifting the administrative burden to a business services provider known as a professional employer organization (PEO).

When a small business enters a co-employment arrangement with a PEO, the PEO becomes the employer of record and, in effect, leases the employees back to the client. The workers—now drawing their paychecks from the PEO—stay where they are and continue to do what they do. The PEO does everything else: payroll processing, insurance and benefits management, tax payments and reporting, regulatory compliance, workers comp, and other workplace functions.

Time regained

Now the owner can concentrate on the company’s core business without the daily deluge of HR-related tasks (which can eat up, says the Small Business Administration, as much as one quarter of an owner’s precious time). What’s more, the PEO often can negotiate better rates for insurance, benefits, workers comp, and payroll services than the client could obtain on its own.

According to NAPEO, a trade group for the PEO industry, about 700 of these organizations currently operate in the U.S., covering between 2 million and 3 million workers. The average client of an NAPEO member has 19 employees—too few, NAPEO says, to qualify the client individually for certain benefits and protections that it can enjoy through its relationship with the PEO.

PEOs typically charge a fee equal to 3% to 15% of payroll for their services, which include payment of taxes, premiums, etc., from the PEO’S account (with these costs later invoiced to the client). A start-up fee also may be charged.

Besides its primary services, a PEO may also offer may offer safety and risk management, background checks, drug testing, development of employee handbooks and safety manuals, and other HR specialties. It also monitors laws and regulations affecting the client’s operation—a godsend for small firms struggling to stay in compliance.

Letting the PEO do the paperwork recovers staff time and may (although not always) help to reduce the co-employer’s (i.e., the client’s) legal liabilities to its employees. The aggregated purchasing power of these organizations enables them offer to their clients packages of benefits that usually are beyond the reach of small firms. As every employer knows, the competitiveness of the benefits package is the key to attracting and keeping high-value employees.

Understand the implications

It should be clear that a PEO isn’t merely a payroll service, a temp agency, an insurance brokerage, or a recruiter. Nor is it the same as an administrative services organization (ASO), which provides outsourced HR functions but does not create a co-employment relationship. Unlike these entities, a PEO shares legal liability for employment-related risks.

Because the co-employment arrangement fundamentally will change the administrative profile of the business, entering into a contract with a PEO is a major decision. Among other things, co-employment means that the PEO now has a right to direct and control the client’s personnel—including leeway to hire, reassign, and fire.

Is a co-employment contract with a PEO the right remedy for administrative headaches at your company? Many small to medium sized businesses lacking the resources and expertise for in-house HR have found the answer to be yes. But caveats apply.

Bear in mind...

NAPEO recommends these guidelines for companies considering a co-employment relationship with a PEO. Other points to address:

• Working with a PEO does not immunize the client from employee claims such as discrimination and wrongful termination, since the law recognizes workers as employees of both.

• The rates that the client pays for health insurance and workers comp coverage through the PEO will be affected by the amount of risk present in the pools from which the PEO is buying. Premium savings, therefore, are not guaranteed.

• You must still have someone on staff who will be responsible for gathering payroll data and reporting it to the PEO.

• Services to be provided by the PEO should be explicitly spelled out in the contract, as should provisions for exiting the co-employment arrangement.

• Because their paychecks will now be issued by the PEO, employees may need to identify the PEO as their employer on tax returns and loan applications.

The bullet point about paychecks goes to the heart of the before-and-after reality of a relationship with a PEO. Once the co-employment agreement is in place, your workers essentially stop being yours. You can direct their day-to-day production activities as always, but they must accept the fact that their pay and benefits are now in the hands of a stranger—an idea will take some getting used to.

For morale’s sake—especially in closely held firms where family members and others may have many years of service—an owner considering an engagement with a PEO should be prepared to sell the plan internally with tact and sensitivity. That way, there’ll be no reason to greet the new arrangement and its conveniences with anything but a deep sigh of relief.

Resources

The following are links to PEOs or to brokers of PEO services:

http://www.peo.com

http://www.thepeopro.com

http://www.netpeo.com/

http://www.staffmarket.com/

http://www.peo7.com

http://www.gnapartners.com/

http://www.administaff.com/