Outsourcing HR

Dec. 21, 2004
Professional employer organizations ease paperwork burdens.

Among the resources small to midsized employers can tap to help hire and retain employees are professional employer organizations (PEOs). Often referred to as employee leasing, the basic concept is that the PEO leases a company's workers back to it and handles most of the functions normally performed by an HR department. That means payroll, state and federal paperwork, workers' compensation, and benefits administration. For manufacturing firms, it also means someone to figure out the OSHA regulations and how to comply with them. Those are areas that can be financially devastating to a company that doesn't manage them well, says Carlos Rodriguez, president and COO of professional employer organization ADP TotalSource, Miami. "OSHA fines can add up pretty quickly," he observes. The National Assn. of Professional Employer Organizations (NAPEO), Alexandria, Va., estimates that between 2 million and 3 million Americans -- just a fraction of the nation's workforce -- currently are employed in PEO arrangements. The typical company using a PEO has 14 employees, not enough to warrant a full-time HR person, but more than enough to create mountains of paperwork. PEOs generally charge 2% to 5% of payroll to cover their expenses, plus 9% to 20% of gross wages to pay for benefits and to cover their profit, reports the Society for Human Resource Management. Small-business owners have reported saving 3% to 5% of their payroll expenses by outsourcing to PEOs, primarily from lower costs for workers' comp, unemployment, and health insurance. The workers' comp savings don't come from economies of scale alone. Most PEOs conduct an on-site evaluation to spot potential risk areas. They often recommend changes in safety practices that can lower a company's exposure for workers' comp claims. Because they qualify as a large company, PEOs often can obtain lower rates on health insurance, 401(k) programs, and other benefits. Helmac Products Corp., a Flint, Mich., manufacturer and distributor, benefited from the lower-cost health insurance provided by a PEO it contracted with in 1984. "At the time, we were very small, and it was increasingly difficult for us to offer a high level of benefits to our team," says Helmac CEO Nicholas McKay Jr. Today the company has about 250 employees in facilities in Flint, Mich., Toronto, the UK, and Hong Kong. Its PEO handles HR, including payroll, for the company's U.S. employees. "We felt the economies of scale they brought to the table let us continue to provide world-class benefits." McKay recommends making sure the company shares your philosophy toward employees. Also, talk with other clients of the account representative who will be handling your business. Kathryn Cunningham, president of MORESOURCE Inc., a PEO in Columbia, Mo., tells her clients to talk to the people who work with the PEO in state and federal regulatory agencies. Ask for the name and number of the PEO's contact at the IRS, and then ask that person for information on the PEO's last audit period. Also check your state's departments of revenue and insurance on the PEO's handling of workers' comp and unemployment compensation claims. NAPEO has more details and guidelines listed at its Web site www.napeo.org/ind-guidelines.htm.

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