St. Louis Small Business Monthly - September 1999

Professional Employer Organizations Eliminate the Headache of Human Resource Functions

The PEO Industry Is Growing At A Rate of 30% Annually
Dan Lauer is on a mission. As president and founder of Haystack Toys, he is launching both a company and a nationwide event. He is searching for the next toy to hit the market in the fashion of a Hula-Hoop or Slinky craze, and he's doing it by orchestrating The Great American Toy Hunt. His seven-city tour will let the toy industry and consumers know that the company is serious about discovering ingenious products through the inventor community. "It's like finding a needle in a haystack," says Lauer, "but I'm having great fun doing it."

In recent months he's been approached by Time magazine, Forbes, Reuters, USA Today and CNN, each interested in his story.

His personal goal is to take his company from five to 500 employees. But with his focus on finding that needle in the haystack, he needed help finding and attracting the right employees and keeping them motivated for the mission.

"As a true start-up company, I knew I did not yet have the systems in place to increase staff. But when your business is on the upswing, you either move fast or you miss opportunities. I chose to move fast. I had heard about the Professional Employer Organization (PEO) industry as an innovative way to outsource your employer-related responsibilities. It sounded like an efficient method of doing business. While I'm focused on growing my business, they're taking care of daily administrative responsibilities like payroll, benefits, employment taxes, workers' compensation claims and coverage, government compliance and a host of other personnel matters," said Lauer.

By establishing a co-employment relationship with a client company's employees, including the business owner, the PEO assumes or shares many of the responsibilities of being an employer. Many owners state that their companies could not have grown as quickly without the help of a PEO.

The PEO industry is growing at a rate of 30% annually, a rate industry analysts expect will continue for the next five to 10 years. Each year, many new entrepreneurs enter the marketplace with expertise in their chosen field, but with no training on how to be an employer. According to the U.S. Small Business Administration (SBA), an owner must spend 7% to 25% of his or her time handling employee-related paperwork. Combine these issues with the growing burden of government regulations and you can see why more owners are choosing to outsource their human resource function.

Besides the administrative relief, another huge advantage of using a PEO is the improved benefits available to employees. Many owners have difficulty providing simple health insurance, not to mention dental, vision, an EAP, credit union or a retirement savings plan. Most small or medium-sized businesses cannot obtain such benefits on their own, but find they need them to compete with larger firms in today's tight labor market. With a PEO, you become part of a group that employs thousands of employees, so the employees may have access to big-company benefits in a small-business setting. A PEO helps level the playing field.

The National Association of Professional Employer Organizations offers the following guidelines to companies considering a relationship with a PEO:

Assess your workplace to determine your human resource and risk-management needs.
Make sure the PEO is capable of meeting your goals. Sales brochures and fancy proposals are easy to print. Meet the people who will be serving you.
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.
Ask for client and professional references.
Check to see if the company is a member of NAPEO, the national trade association of the PEO industry. Visit the NAPEO website, www.napeo.org, for a directory of PEO members.
Investigate the company's administrative and risk-management-service competence. What experience and depth does their internal staff have? Have any of the senior staff of the PEO been certified as a Certified Professional Employer Specialist (CPES) or other relevant professional designation?
Understand how the employee benefits are funded. Are they fully insured or partially self-funded? Who is the third-party administrator (TPA) or carrier? If required in your state, is their TPA or carrier licensed?
Understand how the employee benefits are tailored. Determine if they fit the needs of your employees.
Review the service agreement carefully. Are the respective parties' responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?
If your state requires a PEO to be licensed or registered, make sure the company you are considering meets all such requirements.
For more information about Administaff, call 800-465-3800 or visit the company's web site at http://www.administaff.com.