Contracting out the human resources function of your small business can be a key to faster growth — if done well.
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For many small-business owners, the human resources function, which entails everything from payroll and compliance to policies, is one of the most begrudged tasks. But because this area is so infused with regulation, it is also one of the most important to get right.
In the modern age, outsourcing the HR office to a professional consultancy is growing in popularity. But getting the right mix of expertise, benefits and cost savings requires careful planning. And with the growing cost of employment, staffing a company today costs considerably more than it did even 10 years ago.
Professional employer organizations (PEOs) provide HR services to small-business clients, paying wages and taxes and ensuring compliance with state and federal laws. Many also offer employees 401(k) plans, health and dental coverage, life and accident insurance policies, and other benefits not typically available to employees of small businesses.
Because of the convenience and popularity, the National Association of Professional Employer Organizations (NAPEO) estimates that between 2 and 3 million people are covered by PEO arrangements nationwide.
The statistics make a compelling case for the practice. NAPEO reports that employment at small businesses using PEOs has grown 7 to 9 percent faster than small businesses overall. In addition, these PEO-enhanced companies have 10 to 14 percent lower employee turnover, which contributes to the fact that they are 50 percent less likely to go out of business than their HR in-sourced counterparts.
The reasons for this aren’t entirely clear; but when small businesses struggle with everything from patents to building a customer base to accounts receivable, creating a good HR department is something that, while necessary, isn’t always the most immediate concern.
Most small-business owners understand that great benefits attract great employees, and keeping them happy and productive is essential for a business to thrive. PEOs can offer the tools to let business owners focus on their core competencies.
Don Rider, president of ECB Services in Pensacola, has offered PEO services since 2008. He says companies like his work well for small businesses in a variety of fields, but mainly for those that have lots of turnover — think restaurants — or professional services, such as dental or medical practices.
“With a PEO, a small business can rent an entire HR company for a fraction of the cost of doing the same thing in-house,” Rider explains.
“Many small businesses want to offer a great benefits package to their employees, but they simply can’t afford to do so on the open market. With a PEO, the administrative fees often pay for themselves in just the benefit-cost savings alone.”
PEOs are able to offer these packages in what’s known as a “co-employment” arrangement, also known as “employee leasing.”
ECB Services offers a wide array of services to its 20-plus company roster, including payroll, worker compensation insurance and group benefits that include life and accidental death policies, major health insurance, vision, disability and cancer policies.
Perhaps one of the most important — and overlooked — benefits of a PEO is the HR management/expertise that comes with the arrangement.
Rider points to the new federal overtime rule that, if it survives a court challenge, reclassifies a large portion of small-business employees. Understanding the intricacies of such a law and applying it to complex employee structures is not something that amateur HR practitioners — even if they are business owners — should attempt.
Having a PEO allows the small-business owner to lean on the considerable expertise of a “rented” HR department for implementation, reclassification and communication with employees.
Leasing Your Own Employees
The notion of “leasing” your own employees that you hire, train and work alongside every day can sound foreign. But the co-employment model simply means that a PEO is the employer of record for your company.
And the arrangement isn’t the same as a temporary staffing company, Rider says.
“The PEO arrangement isn’t temporary — it’s for a long time,” he explains. It’s not the same as “renting an employee for a day.”
ECB Services officially employees about 4,000 personnel across more than 20 companies, in locations spanning Louisiana, Texas, Florida, Mississippi and Alabama. To manage these co-employees, Rider maintains a staff of 25 HR administrators in his PEO, who provide as much or as little of the actual HR function as needed through the company’s back office in Pensacola.
By combining thousands of employees who are actually working at other companies, Rider is able to create a large employer pool that allows him to provide Cadillac benefits to the entire group.
For instance, a 10-person small business in his PEO is able to provide the benefits package of a Fortune 500 company to its employees, including dental and vision insurance, major medical coverage, dental and life insurance, accidental death policy, workers comp insurance, a 401(k), disability coverage and cancer policies. All of this is administered through a dedicated HR professional who takes care of the tax and workers comp payments, audits, etc., through an electronic/paperless interface with 24/7 access for all employees.
Rider’s company offers this at a fraction of the cost these small businesses would pay on their own — $75,000 per year saved for a 10-person business in Texas last year, for instance.
“Because of our size through the co-employment arrangement, we can purchase dental insurance, for instance, for about 30 percent less than an individual can buy on the open market,” he says. “And our policies come with no qualifications or minimum participants for our companies.”
Making It Your Own
It’s easy to see the financial and coverage benefits of a PEO, but what about the loss of an “inside person” for HR issues?
PEOs offer the ability to customize an HR handbook that gives small-business owners the control over traditional decisions, such as leave policies, benefits, grievance procedures, etc., but with the added benefit of expertise from a professional HR practitioner who can see across a wide range of industries and counsel these decisions.
For ECB Services, the client companies are usually in the five to 300 employee size range, Rider says. To keep grievances at bay and prevent their spread, Rider advocates taking care of them quickly and efficiently. The dedicated HR contact at the PEO is the “HR person” for client companies and develops a close relationship with staff and owners alike.
Like ECB Services, PEOs are at the top of their game with regard to HR trends nationwide. Government compliance and Affordable Care Act reporting, paperless payroll and work/life balance are not only buzzwords in the industry, but important topics trending for businesses of all types in 2016. And today’s workplace is segmented not just into blue- and white-collar these days, but also so-called “gray-collar” service and light manufacturing industries that have unique needs with regard to pay, drug testing, employee screening, training and more.
Most companies in a co-employment arrangement hire their own employees but use the PEO for the on-boarding and payroll setup. This can be done onsite with the dedicated HR representative or in a completely virtual environment, based on location and the small-business owner’s preference. Day to day, the HR expert is typically available by phone, video chat or email for management and employees alike.
PEOs can solve many problems for small-business owners, but there are a few precautions.
A PEO may not be the best arrangement for very large companies or those that work with unions, for instance. However, Rider says even those companies can benefit by using a PEO as an HR consultant for hiring, planning and benefit programs.
Experts warn that carefully negotiating the PEO contract is the most important aspect of the deal. Ensuring that the PEO is financially sound and has a good track record is of utmost importance.
Martin Summers, an insurance agent with Black Bear Insurance in Lake Mary, points out that when a PEO becomes the employer of record for tax and insurance purposes and the business leases the employees from the PEO, there are very important considerations to reflect on.
PEOs are an unregulated industry, so they are able to add administrative charges to policies and even change coverages over the course of the contract. They are also under no obligation to give notice before policy cancellation, as are traditional insurance carriers.
If the PEO goes bankrupt, your company could be left in a sticky situation and potentially behind on payroll and insurance payments, not to mention any claims and tax payments that aren’t up to date.
For high-risk employers, it’s important to understand that the workers comp policy is in the name of the PEO and not the policyholder company. This can mean that only leased employees are covered — not temporary labor, uninsured subcontractors, independent contractors and volunteers, for instance.
Rider cautions that small-business owners should only consider working with PEOs that are voluntarily accredited by Employer Services Assurance Company, which provides a $15 million insurance policy to protect PEO clients. Only 20 percent of PEO companies are accredited nationwide, but accreditation can mean the difference between success or failure for the PEO relationship.
Finding the right balance of benefits, efficiencies and access is crucial for today’s small-business owner with regard to employee relations. Always make sure your company is shielded from exposure in a PEO contract, and check the financial history of any company you consider for HR outsourcing.
“Venture capitalists say business owners don’t need to worry about HR,” Rider says. “Use a PEO and focus on what you do best.”
With careful selection and implementation, this may be the best HR advice yet.