Texas Construction Magazine/The McGraw-Hill Companies - November 1997

PEOs Offer HR Relief
Professional employer organizations are gaining ground as an alternative to in-house human resources.

By Jeff Hampton

With construction contractors and suppliers facing ever-increasing competition, many companies are looking at new ways to focus their skills and resources on the art and act of building. One such management tool that is gaining popularity in that regard is the professional employer organization.

A professional employer organization (PEO) is a company that provides payroll services, benefit packages and a variety of other human resource functions in exchange for a contracted fee. The concept is sometimes referred to as "staff leasing," because a client company "leases" its employees from the PEO. This includes full-time and part-time employees, whether they be professionals, skilled tradesmen or nonskilled laborers.

PEOs typically contract with client companies that have 100 employees or less. By pooling the employees of small or mid-sized companies into one group, the PEO is able to offer the employees a better package of benefits than their individual employers might be able to provide. Meanwhile, the employers are relieved of the headaches, liabilities and potential cost inefficiencies of running a human resources department. They are free to focus on their core business activities.
Though PEO’s services may vary, the potential is there to handle all human resource activities, including payroll, medical benefits, life insurance, retirement programs, workers’ comp coverage and claims processing, drug testing, recruiting and screening, hiring and firing, employee training, safety education programs and risk management.

PEOs are catching on

According to the National Association of Professional Employer Organizations (NAPEO), the popularity of PEOs is the result of three primary factors:

During the past 20 years, small businesses have been bombarded with a substantial increase in regulations at the federal, state and local levels.
Business owners are under increasing pressure to attract and retain superior workers with quality healthcare benefits and retirement plans.
Businesses are seeking help in managing and reducing the cost of mandatory benefits like workers’ compensation and unemployment insurance.
As a result of these needs, PEOs have been growing at more than 30 percent annually for the past three years, and Wall Street analysts project this rate of growth can be maintained for five to 10 more years. That growth will be fueled by the presence of nearly 6 million businesses with fewer than 100 employees, which have a combined employment base of more than 52 million employees with an aggregate payroll of more than $1.1 trillion.

NAPEO estimates that PEOs currently manage between 2-3 million worksite employees with annual payrolls of $18 billion. Because that represents just 2 percent of the total employment market, the potential for growth is said to be unlimited.

Milan P. Yager, executive vice president of NAPEO, said that PEOs contract with companies in virtually every SIC (Standard Industrial Classification). Growth is uniform across most of the SICs, but construction and light manufacturing are growing slightly faster than the rest.

"This is primarily because these businesses require their owners to spend as much time as possible on the business of their business, and they’re not really trained to be in the business of employment," he said. "Most people are not trained to be an employer. Construction owners are busy managing schedules and deadlines and they want to focus on the business of doing their business."

Yager said the primary reason that construction companies should and are looking at PEOs is employment stability. "In a tight labor market , the real focus is how you keep a stable labor force, not just how you hire a labor force," he said.

PEOs provide stability by enabling business owners to provide their employees with benefits and services that they would not otherwise be able to offer, he said. "With a PEO, a small business can provide Fortune 100 benefits. A small construction company in Laredo with nine employees can provide the same benefits as Hewlett Packard."

Yager said another point of interest for construction companies is relief from high workers’ comp rates. "The average small business with 100 employees or less pays 40 percent higher workers’ comp rates," he said. "That is because most small businesses are risk takers, not risk managers. We help small businesses manage risk."

Yager said PEOs nationwide have a 90 percent client retention rate. "Once they sign up with a PEO, most businesses will never turn back," he said. "Twenty years from now, this is the way America will do business."

PEOs serve construction clients

One of the largest PEOs in the U.S. is Administaff. Established in 1986 and based in Kingwood near Houston, Administaff has offices in 12 major U.S. metropolitan areas from where it serves over 1,800 client companies with approximately 28,000 worksite employees.

Jerald L. Broussard, senior vice president-business development of Administaff , said that approximately 160 (roughly 10 percent) of Administaff’s clients are construction-related businesses. The minimum size business it typically works with has five to 10 employees, while the average maximum has 100 employees. Of the 29,000 employees Administaff manages for its clients, 98 percent work full-time.

Regardless of the size and type of business, Broussard said Administaff is looking for businesses that "recognize the value of being able to focus on their business" while letting someone else handle human resource functions. He explained that anyone who starts a business to provide a service or create a product eventually "inherits" a second business - an "employer" business. "What we do is separate those back out," he said.

Administaff offers a wide range of services, from basic payroll and benefits to recruiting and job candidate screening and training at all levels, including jobsite safety. "We have as wide a range of services as a client company wants to provide its employees," he said.

Broussard said the four main concerns that a company typically has when considering a PEO arrangement are credibility, control, loyalty and cost.

Starting with credibility, Broussard said "the industry certainly has developed over the past year-and-a-half, where virtually every publication has recognized it as one of the fastest growing businesses in the country." Business professors at Harvard and other prestigious universities have identified PEOs as a "way of the future" for small companies, he said, and many of the businesses themselves, including Administaff, are publicly traded on the U.S. stock exchanges.

As for control and loyalty, Broussard said companies that contract with PEOs actually gain more of both. "The client is positioned as being a hero for making the decision and thus providing their employees with a much greater benefits program," he said. With benefits administered by a PEO, the client company has more time to recruit better people, develop those people and keep those people.

Broussard said some PEOs position themselves as a cost-saving business. "Our clients say that it really is a breakeven situation for them," he said. Considering the freedom that comes with letting someone else handle human resources, "it’s simply a better way of doing business," he said.

Broussard said he expects Administaff will continue to experience growth from all sectors of business, including construction-related companies.

A new player in the arena is Turner Personnel Services (TPS), a PEO formed in April by Turner Industries, a Baton Rouge, LA based construction company with offices in Beaumont and Houston.

Stephen Toups, executive vice president of TPS, said companies that contract with TPS will benefit from Turner’s economies of scale. "Were able to say, ‘We’re already providing human resources for our own 10,000 employees, and we can handle yours also.’"

While Turner Industries’ knowledge of the construction industry may be a benefit for construction-related companies, TPS is targeting companies in all industries. Toups said that whether or not a company chooses to contract with TPS depends more on the attitude of the owner.

"Some say, ‘I’ve been doing (human resources) for 20 years and I want to continue doing it, because I don’t want to lose control.’ We say, ‘You’re not losing control; your gaining flexibility.’"

Toups, who has worked with PEOs in the region and comes from a financial services background, said TPS will contract with companies of any size, but the typical client will have 25 to 40 employees.

Client likes PEO support

In March 1998, S.S. Smith & Sons Masonry, Corpus Christi, will celebrate its fourth anniversary with Administaff. Judy Smith, a secretary with the company, said the relationship has been good for S.S. Smith and its approximately 85 employees. Administaff handles payroll, workers’ comp, safety management and helps with hiring.

"I like the arrangement personally because I’m the one who does payroll," she said. She explained that she adds up the total pay due to employees and transfers the appropriate amount to Administaff. The PEO performs all the necessary tax withholding and issues checks to all full time and part time employees. "If child support needs to be taken out of a check, they do that," she said.

"We get workers’ comp cheaper through them than we could on our own," Smith continued. "They’re such a big company, they’re able to get better rates."

Administaff handles the company’s safety management program, which includes performing jobsite inspections and recommending solutions if a concern is raised by OSHA. If a hearing is required, the Administaff safety manager will go with the company representative to the hearing. If drug screening is warranted, the PEO does that.

Smith said her company still handles health insurance in-house for full-time personnel, but Administaff provides other options that employees can take advantage of individually, such as a 401 (K) plan. "I’m a member of their credit union," she said.

Choosing a PEO

NAPEO believes that sound, effective regulation is in the best interest of the business community, the public and the industry itself. Today, 15 states license or regulate PEOs, including Texas.

"Texas has a good licensing law, and that should provide confidence to companies looking at PEOs in the state," said NAPEO’s Yager.

NAPEO also promotes ethics and standards in the industry by offering the Certified Professional Employer Specialist (CPES) designation to individuals who wish to demonstrate their commitment to professionalism. In addition, NAPEO supports the Institute for the Accreditation of Professional Employer Organizations (IAPEO), an independent accrediting body to promote tough and effective self-regulation.

So how does a company go about evaluating and choosing a PEO? NAPEO offers the following guidelines.

Assess your own workplace to determine your own human resource needs.
Make sure the PEO’s service can help meet your goals and is easy to work with.
Check the firm’s financial background - 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.
Ask for client and professional references.
Investigate the company’s administrative competence - what experience do they have?
Understand how the employees’ benefits are funded - are they fully insured or partially self-funded? Who is the third party administrator or carrier? If required in your state, is their TPA or carrier licensed?
Understand how the employee benefits are tailored - do they fit the needs of your employees?
Review the agreement carefully and try to get a provision that permits you to cancel at short notice - say 30 days.
If your state requires a professional employer organization or staff leasing firm to be licensed or registered (which Texas does), make sure the company you are considering meets all such requirements.

Reprinted with permission of Texas Construction Magazine/The McGraw-Hill Companies