Food Distributor -- September/October 2001

Sharing the Burden of HR and Risk Management
More Small Companies are Using Professional Employer Organizations (PEOs)

By Carole Edwards

It's a familiar argument from third-party providers: "You know food distribution, and we know X. Why don't you do what you do best, and we'll take care of your X?" Food distributors have long heard this refrain from truckers, maintenance experts and technologists of all types.

More and more, "X" is human resources and risk management. Many small companies are outsourcing these minefields to professional employer organizations (PEOs), of which there are several hundred in the United States. The average PEO is growing 35 percent a year in gross revenue, and the PEO industry takes in $25 billion a year - yet the market for PEO services is thought to be only 3 percent penetrated.

PEOs offer two big advantages:

• Economies of scale that enable the food distributor to offer better employee benefits
• Experts are always available on complex, confusing, legally difficult or potentially expensive subjects, such as COBRA, ERISA, workers' compensation, substance abuse and wrongful termination.

"We're the new American mousetrap," said Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations (NAPEO) in Alexandria, VA. "A PEO is the one-stop solution to all of those pesky little problems that have plagued companies for years. We make it possible to share the advantages of large businesses with small companies that have never had them before."

Such as?
In most cases, the PEO becomes the co-employer of the food distributor's workers. Not only does the PEO take over the payroll, but the employees become part of a larger workforce - and, thus, eligible for lower rates on health, disability and life insurance. It also becomes feasible for the company to offer such benefits as vision and dental programs, employee assistance plans, job counseling and educational benefits.

"Only 4 percent of our clients had a 401(k) before they came to us," Yager said. "The best people are often the first to leave. You want to hire the best and keep them." He said NAPEO members employ about 3 million people, or 2.5 percent of the small-business workforce.

PEOs' group buying power is wide-ranging. James Hackney - chief financial officer of Houston-based Lawler Foods and a client of Administaff Inc., a leading PEO - said Administaff operates an eCommerce portal that offers its clients a wide range of products and services from best-of-class providers. "We buy all our computers from Dell through Administaff," he said. (Administaff said it also has relationships in its clients' behalf with American Express, IBM, AT&T and Bank One.)

Lawler, maker of Lawler Cheesecakes, co-employs 200 people with Administaff and is as enthusiastic about the relationship today as when it started 10 years ago.

"Our company has expanded dramatically over the last 10 years," Hackney said. "We don't need to put our resources toward the human resources aspect of our business. We are experts in manufacturing desserts, research and development, and customer support. Those things are going to drive our business in the future."

Saving money indirectly
Yager cautioned that the primary motivation for hiring a PEO should not be saving money, although that is often an indirect result as a company reduces employee turnover and the cost of insurance, recruiting, training and defending against lawsuits. The motivation should be freeing the client to "focus on its business instead of non-revenue-generating business," he said.

Though many PEOs will handle just payroll or staffing, Administaff is typical of PEOs that are interested in more ambitious firms.

"We look for clients with a definitive 'getting better' agenda, and that are in an industry where people are the chief competitive advantage for them," said John Orth, Administaff's vice president of sales. "If their labor force is primarily commodity labor, it may not benefit them to come to us. Our clients can say why there's a business reason for someone to do business with them rather than someone else. Other PEOs take a different cut of the market."

As a vendor, a PEO offers "a check and balance relationship," he said, and has nothing to gain by creating projects, the way an internal HR department sometimes does.

In addition, Orth said, "15 years ago, people thought HR was just processing job applications. Today, with litigiousness and other issues, it's much more than that."

Yager also stressed that point. "One of the first things you should do if you hire truck drivers is run background checks for tickets, drug history, etc.," he said. "If you don't do that, you can be accused of negligent hiring if something happens, but if you don't do it right, you can be sued for invasion of privacy."

"If you have anything to do with motor vehicles, you ought to have a drug testing program," Yager continued, "and if you don't have the right things in your program, you open yourself up to all kinds of problems."

"Negligent hiring and wrongful termination are big sources of litigation. A good drug testing program also gets you discounts in workers' comp and health insurance rates," Yager said.

Meet the Joneses
Food Distributor presented Orth with a hypothetical situation and asked how a PEO such as Administaff might approach it.

The hypothetical company, Jones Food Distribution, was started by Grandpa Jones as a butter and egg business in 1948. He delivered the products himself to small grocery stores. His children took over in the 1960s and '70s, built a nice warehouse and modernized the fleet. But they still handled everything in-house. The company now has 100 employees, and the grandchildren are taking over. They all have business degrees from the local college. They want to grow the business in what they know is a competitive environment.

"When the children took over, they probably had a 'don't screw up what Dad gave us' agenda," Orth said. "They were not going to change anything unless it cost less money. Not until the grandchildren took over was this company a good prospect for Administaff."

"As a new generation comes in and begins to apply new practices, they certainly could go out and build an HR department themselves," Orth said. "The difference is, the day they hire an HR person, that person begins to build a queue of projects. We have already developed policy and procedure manuals, job descriptions, etc., and can modify them for the client. We won't start to build things that cost them more money."

"The new management team, the grandchildren, is high on intelligence and ambition, but low on experience. They have a resource issue in front of them: They are smart enough to either become HR experts, or become experts in running the business their grandfather started."

"We start with a human capital index study for any client with more than about 75 employees. We would meet with Jones top people, and do an analysis, treating human assets like other assets in the company."

"Then we would sit down with the Watson Wyatt people" - HR consultants - "and look for a way to apply our services to the company's needs. For example, we might find that they have a training issue, or holes in their liability coverage or efficiency in the way they bring people through the door. Perhaps they need to apply a pre-employment screening test. In a food distribution business there could be some real safety issues."

Two kinds of training
"Clients continue to do industry-specific training on their own," Orth said. "But Administaff University provides training in areas that transcend the type of business the company is in, such as personal management skills."

"There is a real enhancement on the revenue side by having the right people do things the right way," Orth said. "On the expense side, if you want to become an insurance expert and go out every year and analyze your 401(k) and other plans, you can do that. You can analyze your own noncompliance with federal regulations. Our value proposition addresses a way to make money vs. a way to save money. We want to be an investment, rather than an expense."

What can a company expect to pay for all this? Hiring a PEO typically costs from 4 to 10 percent of the payroll, Yager said. Orth said Administaff "allocates a per-person fee that typically ends up being 3 to 6 percent of the payroll."

But Hackney said there are "so many intangibles that you just can't calculate into the value" of the service. "A lot of companies that don't use PEOs just don't understand what additional value and expertise they can bring," he said. "A couple of years down the line, I don't want to see someone suing us. That hasn't happened, and I think it's because we have Administaff to advise us."

"It makes us feel very comfortable to have experts at hand when a problem arises," he said. "If you have one or two HR people internally making all the decisions, you're forced to depend on their knowledge and information, and you're going to pay for your mistakes. When I call Administaff I have thousands of people backing me up."

Carole Edwards is a freelance writer based in Falls Church, VA.

Guidelines for Selecting a PEO
1. Assess your workplace to determine your human resource and risk management needs.
2. Make sure the PEO you are considering can meet your goals. Sales brochures and fancy proposals are easy to print. Meet the people who will be serving you.
3. Check the firm's financial background; ask for banking and credit references. Ask for proof that payroll taxes and insurance premiums have been paid.
4. Ask for client and professional references.
5. Ask whether the company is a member of the National Association of Professional Employer Organizations. About 80 percent of PEO services are provided by NAPEO members.
6. Investigate the company's administrative and risk management service competence. What experience and depth does its staff have? Do any of the senior staff have professional training or designations?
7. Find out how the employee benefits are funded. Are they fully insured or partially self-funded? Who is the third party administrator (TPA) or carrier? If it is required in your state, is their TPA or carrier licensed?
8. Find out how the employee benefits are tailored. Do they fit your employees' needs?
9. 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?
10. If your state requires a PEO to be licensed or registered, make sure the company you are considering meets all such requirements. As of May 2001, the states that require licensing are Arkansas, Florida, Illinois, Kentucky, Maine, Montana, New Hampshire, New Mexico, Nevada, Oregon, South Carolina, Tennessee, Texas, Utah and Vermont. Rhode Island requires registration only.

Source: National Association of Professional Employer Organizations

Reprinted with permission from Food Distributor magazine, a publication of Food Distributors International, Falls Church, VA.
September/October 2001