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The Costco Connection - July 1999
Good Help, Few Hassles
Professional Employer Organizations Provide Workers - And More -
For Small Businesses
By Alan S. Horowitz
Small-business owners know that growing their
businesses usually means hiring employees. And hiring employees
means doing tax withholding forms and payroll, setting up benefits
and pension plans – and other headaches – all while trying
to run the business. Instead of hiring employees, one answer may
be to lease them from a professional employer organization (PEO).
The workers are actually employed by the PEO, but work for the small
business.
PEOs, which have been around since the 1970s, are really an upgraded
version of the employee leasing industry. The emphasis, however,
is on a long-term relationship versus temporary workers. The PEO
industry refers to the relationship between it and its client companies
as "co-employers."
Through a PEO, the small business outsources
many of its human-resources functions. The PEO handles payroll,
employee benefits, regulatory compliance, tax collection and payments,
workers’ compensation and personnel management.
PEOs are not all alike. Some offer bare-bones
services, such as health-care benefits and payroll processing, while
others provide more extensive services, which might include recruitment
and screening and a variety of training (leadership, safety). You
can usually pick and choose which services you want and the services
are sometimes included in the overall fee. According to the National
Association of Professional Employer Organizations in Alexandria,
Va., 2 million to 3 million Americans are currently co-employed
with a PEO, and the industry is growing 20 to 30 percent per year.
Companies in virtually every industry and geographic area are candidates
for using a PEO. In terms of size, PEOs are best suited for companies
with about five to 500 employees.
According to Louis Basso, president of The Alcott
Group (a Costco member), some businesses are not well suited for
using PEOs, however. These include seasonal businesses, whose employees
generally do not receive much in the way of benefits; companies
in financial trouble that might, for example, try to stretch their
cash flow by not paying taxes on time; and companies that tend to
not follow the letter of the law, such as not paying time-and-a-half
for overtime work – PEOs are sticklers for following the rules.
Benefits
The benefits of PEOs can be significant. Stefan Cattaneo and Andrew
Musci, owners of Altel Systems Inc., a Brewster, New York-based
audiovisual contracting firm with 20 employees, signed up with the
Alcott Group, a PEO in Farmingdale, New York, in 1991. Why? "It
eliminated the burden of doing payroll every week," notes Cattaneo,
a Costco member. "More important, it gave us the opportunity
to give employees health benefit packages that a small company couldn’t
offer."
It is hard to overestimate the value employees
may place on benefits. John Anderson, owner of 35-employee Denver
West Glass Inc., in Denver, Colorado, says he has an employee with
serious vision impairment who requires $1,000 eyeglasses. Unable
to afford such eyeglasses and lacking vision insurance, the employee
bought cheaper eyeglasses that did not have the proper prescription.
As a result, he suffered frequent headaches. When Denver West Glass
signed up with Administaff, Inc. of Kingwood, Tx., employees received
vision insurance and this employee was now able to afford eyeglasses
wit the proper prescription. "His headaches went away,"
comments Anderson. "Talk about employee loyalty."
Costco member Jean Rice, president of Action
Healthcare Management Services in Phoenix, an independent health-care
management company, has been an Administaff client for three years.
She likes the PEO relationship because it puts her human resources
functions in the hands of a company that specializes in HR while
allowing her to focus on her business. "It (the PEO relationship)
lets me do what I need to do, which is selling and making sure my
clients’ needs are met."
She deals with such professionals as physicians
and nurses, and being competitive against larger companies requires
her to offer extensive benefits packages. With her PEO, she can
do this; without it, her company could not afford such benefits.
PEOs can afford to offer rich benefits packages
to smaller businesses because of their economies of scale. Warnke
Tools Industries Inc. of Oxford, Michigan, which is in the automotive
tooling business, uses the services of The Vincam Group, which is
part of ADP TotalSource, a PEO headquartered in Georgia. "They
offer a 401(k), vision and dental insurance that we couldn’t
offer as a small company," says President Bob Warnke.
Anderson, of Denver West Glass, says using a
PEO helps with his employee relations. "Let’s say there’s
an issue with insurance or garnishment or other personal issues
with employees. These issues can be addressed through a separate
entity (Administaff) and don’t affect my relationship with
my employees."
PEOs also provide expertise small companies
may not otherwise be able to afford. "We have, on staff, legal
and medical benefits folks, and safety engineers," notes Thomas
Hall, president of ADP TotalSource. "We have a critical mass
so we can afford experts."
Last year, Warnke was faced with his first OSHA
inspection in 22 years. He had Vincam send over someone knowledgeable
in OSHA inspections to help him prepare for it.
A PEO may also help a business improve in certain
areas, such as recruiting. "In recruiting," notes Paul
Sarvadi, president and CEO of Administaff, "small businesses
are not systematic and strategic enough. They typically do what’s
urgent and can’t do what’s critically important for the
long haul."
The same holds true for training. Sarvadi observes
that small businesses often promote good employees to supervisory
positions without giving them any training in being a supervisor.
A PEO can bring professional skills to a company’s recruiting
efforts while training new supervisors.
Cost
For their services, PEOs usually charge between 2 and 4 percent
of payroll. Anderson considers this cost effective. "I have
35 employees and only on secretary. No one does payroll. I was able
to eliminate an entire position from my structure (by using a PEO),"
he says.
"They’ve (Alcott) saved us a tremendous
amount of workload," says Cattaneo of Altel. "Before,
payroll would take a whole day. Now we just send a fax and we have
the checks the following day."
There are some potential downsides to using
a PEO. Warnke says you have to be a watchdog because PEO costs may
creep up over time. In fact, with any type of outsourcing arrangement,
you should manage the relationship – and not just hand over
responsibilities and assume everything is under control.
Admits Anderson, "You do give up some control."
But he is comfortable with that: "To be able to turn over a
whole arm of your company is refreshing."
He likes the absence of hassles, such as no
longer worrying about getting out a weekly payroll.
A contract with a PEO usually runs one year,
with renewals automatic, though either party can usually terminate
the arrangement with a 30-day notice.
Is a PEO right for you? The best way to tell
is to ask a few PEOs to make a presentation to explain their services
and costs. Then compare these to what you are now doing. If you
are efficient now, a PEO may not be warranted. But if human-resource
issues such as recruitment, training and bookkeeping now get short
shrift because your don’t have time for them, or if you cannot
afford an adequate benefits package, a PEO is certainly worth considering.
If you go with a PEO, be sure it is financially strong and offers
the services you need.
"I’m surprised more people aren’t
doing it (using PEOs), particularly smaller companies," says
Cattaneo. "I think they’d really be doing themselves a
favor if they’d check it out."
Alan Horowitz is a freelance business and technology
writer based in Salt Lake City and the author of The Unofficial
Guide to Hiring and Firing People (Macmillian).
Reprinted with permission of The Costco Connection
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