Administaff - Outsource Your HR Headaches

The Edward Lowe Report -- December 2001

Outsource Your HR Headaches
A Professional Employer Organization Can Alleviate Aggravating Paperwork and Benefit Worries

By T.J. Becker

Regulatory paperwork, tax compliance and other human-resource-related chores consume a big chunk of an entrepreneur's time - between 7% and 25%, according to the U.S. Small Business Administration. What's worse, these tedious tasks don't generate revenues. That's why more small- and mid-sized business owners are turning over their HR headaches to a professional employer organization (PEO). Currently about 80,000 U.S. companies are PEO clients. Among services rendered include:

Design and administration of employee benefits.
Payroll processing.
Employer-related government compliance and reporting.
Recruiting and selection assistance.
Risk management.
Workplace-safety assessment.
Employee training and evaluation.

Depending on what services you sign up for (and your company's size, location and past experience with claims), PEOs bill a percentage of your gross payroll - typically 2%-6%.

Besides freeing up time and energy, business owners say PEOs give them more bang for their buck regarding employee benefits. Because insurance premiums are based on thousands of employees instead of a few, PEOs enable their clients to offer a wider selection of benefits, often at a lower cost.

"The bulk-buy concept is wonderful," says Tom Hopcroft, founder of Mass eComm, a Boston-based trade association for e-commerce companies. "We only have three employees, and yet I can offer them everything from Blue Cross Blue Shield health coverage to movie tickets bought with pretax dollars."

Recruiting muscle
PEOs can help small companies wield more recruiting muscle.

"I wanted to launch a firm based on best practices, and a PEO also allows you to act like a big company when you're not," says Dan Lauer, founder of Haystack Toys, a St. Louis-based marketer of innovative toys. Launched in 1999, Haystack has 10 employees and generates more than $3 million in revenues.

"Because we were in a high-profile, Internet-driven industry, it was tough to attract talent when I started this company," says Lauer. "But our 401(k) program and benefits stack up against any large company." And that's important, he adds: "Many people are willing to join a young company, realizing that the venture ultimately might not work out. But no one wants to worry about having doctor bills paid or getting prescriptions filled."

At Lauer Toys, his first company, Lauer handled HR himself and found it a nuisance - even with only three employees. When Lauer launched Haystack Toys, he immediately signed on with Administaff, a Houston-based PEO.

"A PEO gives you peace of mind," says Lauer. "I don't want to mess with the government and do anything wrong. HR requires expertise in a very complicated area - one that is not our core competency. With a PEO, I don't have to divert scarce resources; instead I can focus on revenue-generating activities."

Legal eagles
Hopcroft feels similarly. Although he's an attorney, tax issues and HR compliance are not his specialty. "I'm a huge fan of outsourcing. I think people should figure what they like to do and outsource everything else," says Hopcroft.

PEOs stay on top of changing regulations regarding employer-employee relations. Typically there's a legal hotline for clients to call.

"There's really a double benefit here," adds Hopcroft. "Because PEOs work with hundreds of other companies, they can give you a broader perspective. Not only do they say, 'Here's what's legal,' but they can say, 'And here's what most people do.' "

PEOs also provide recruiting assistance. When Hopcroft hired an office manager, his PEO, Silicon Valley-based Execustaff, prescreened candidates and sat in on interviews. "There are a whole slew of questions that you're not allowed to ask, such as 'Where do you live?' " Explains Hopcroft. "This may sound like innocent social chitchat, but if you ask it and then don't hire the person, you could be handing the candidate ammunition for a lawsuit."

According to the National Association of Professional Employer Organizations (NAPEO), based in Alexandria, Va., the average PEO client company has 16 employees, and industries range from manufacturing to service.

Many experts agree that a PEO is especially beneficial for companies with 10 to 100 employees; however, larger companies also outsource their HR.

Barbara Mulkey, founder of her own Raleigh-based engineering firm, joined a PEO about a year ago. Mulkey's company currently employs 145 people in three locations and has been growing 40% annually for the past two years.

"We had reached a point where we needed to either hire a full-time professional HR person or outsource," says Mulkey. "The PEO that we're using likes its clients to sign on for two years. But because we weren't sure how our needs would change, we negotiated a one-year contract with an option to renew."

So far, so good, says Mulkey. Like Hopcroft, she particularly values the legal expertise her PEO provides: "They can answer a lot of questions that otherwise we would have to consult an attorney [for]. And often these are small things that you might be tempted not to call the attorney for. So by answering these questions, we feel like our PEO is lowering our liability day to day."

But the jury is still out regarding how long Mulkey will continue to outsource HR. Even though her PEO has been good about returning calls, it's still off-site. "Anytime something is under one roof, it's simply more convenient," says Mulkey. "It's a little different picking up the phone than being able to walk into someone's office."

Sources: Todd Aidman is an attorney specializing in labor and employment law at Ford & Harrison (www.fordharrison.com) in Tampa, Fla. Marc Moore, president of the National Association of Profes-sional Employer Organizations (www.napeo.org) and co-founder of Payroll Transfers, a Tampa, Fla.-based PEO that he sold to investors in 1996. Paul J. Sarvadi, president and CEO of Administaff Inc. (www.administaff.com), a PEO based in Houston. Stephen M. Toups, co-founder of Turner Profession-al Services (www.turner-peo.com), a PEO based in Baton Rouge, La.

Picking a PEO
Currently there are about 2,000 PEOs, and the industry is growing annually between 20% and 30%, according to the National Association of Professional Employer Organizations (NAPEO). When shopping around, consider:

How long has the PEO been in business? Are they large enough to handle your business? Or do they have so many clients that you'll be just another number? What track record does the PEO have with companies similar to your size and industry?
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.
Understand how employee benefits are funded -- are they fully insured or partially self-funded? Are they backed by a reputable insurer?
Understand how benefits are tailored. Do they fit the needs of employees?
Ask for client and professional references.
Visit their offices. Are these people you'd like to have working for you?
Carefully review the service agreement. Are both parties' responsibilities and liabilities clearly laid out? What guarantees are provided? What allows you or the PEO to cancel the contract?
If you're in a state that requires registration or licensing, make sure your PEO is current. Also see if they belong to NAPEO because the national organization helps members stay current with industry issues and requires them to comply with a code of ethics.

Co-employment: Who's the boss?
When a company becomes a PEO client, their relationship with employees is known as "co-employment." Entrepreneurs then share certain employer responsibilities and liabilities with the PEO. In a sense, employees are working for two firms.

According to NAPEO, the PEO assumes responsibility and liability for the "business of employment," such as risk management, personnel management, human-resource compliance and payroll and employee tax compliance. The client company handles daily operations such as production, marketing and sales. Each party has the right to hire or fire an employee, but the PEO typically has the final word. Because co-employment reduces a client's liability, PEOs want some way to manage the risks that they assume.

In the IRS's eyes, the PEO is the employer of record and responsible for paying trust funds, income and employment taxes. However, states' rules vary; check your state's position.