A PEO Can Be Good For Business.

More than ever before, top financial managers in corporate America are turning to outsourcing as a way to control costs and improve efficiency. Bottom-line-conscious executives are finding that outsourcing can cover a broad range of business operations, not just production-related areas. Payroll and human resources are two areas in which companies have traditionally maintained close internal control. But, over time, businesses have begun to outsource payroll to service bureaus and turn over more employee-related responsibilities to professional employer organizations (PEOs). Financial executives whose employees do not presently use PEOs should understand how they work -- and how to select the right one -- so they can decide whether a PEO is a good route to take for their company.

PEOs specialize in human resources (HR) management. They can handle a wide variety of functions and tasks -- including payroll and related tax management, benefits design and administration, and compliance with state and federal workplace legislation. PEOs also take responsibility for developing and administering lawful employment policies and procedures, employee recruitment and disciplinary actions, background checks and drug testing, record-keeping, unemployment, workers' compensation and claims administration. They also help establish viable risk management and safety programs, and much more.

PEOs aren't new. It's estimated that there are more than 2,000 across the country, covering some 2 million employees, with collective payrolls of $18 billion. Not surprisingly, most are in place at small to mid-sized companies that don't have the infrastructure and resources of huge multinationals.

The advantages of using PEOs cut across industry lines. With the number of employees working for PEOs projected to grow at 30% per year, more and more top business managers are recommending that their companies consider using PEOs as their HR departments. The reasons for these decisions are many and varied. Business executives know that workforce-related matters take up an inordinate amount of time -- time that would be better spent in a productive capacity.

Managing complex issues like payroll and tax reporting, loss-control and safety, on-the-job injuries and workers' compensation, regulatory compliance, and employee health and retirement benefits programs can drain a small or medium-size company of valuable resources. The drain is significant: The Small Business Administration estimates the annual cost of regulation, paperwork and tax compliance for companies with fewer than 500 employees at about $5,000 per employee, versus $3,400 for larger companies. Many companies have engaged the services of PEOs in an attempt to drive those numbers down.

PEOs have professionals on staff who stay abreast of the ever-changing laws governing employer-employee relations. Their diligence in ensuring their clients' lawful workplace practices -- through record-keeping and documentation -- allows business executives to focus on day-to-day operations and overall profitability. Specifically:

* The Internal Revenue Service acknowledges that the PEO may be the employer for federal income and unemployment taxes. The PEO will maintain employee pay records, pay the employees and make tax deposits for FITW, FICA, Medicare, and federal and state unemployment. The PEO is also responsible for making all voluntary and court-ordered payroll deductions and must submit 940s, 941s, state unemployment reports and W-3s, and issue W-2s at the end of the year. (The PEO is solely responsible for paying the employees and making the tax deposits, whether or not the company actually pays the PEO.)

* The PEO is responsible for maintaining all employee files, ensuring that the client is complying with state and federal laws without discriminating, issuing an employee handbook of policies and procedures, handling unemployment and claims, providing assistance with training, job descriptions and performance reports, hiring and terminations, and more. Extensive background checks, drug testing, profiling and other services may also be available or included.

* Risk management, safety and loss-control programs are generally provided. Workers' compensation is provided to ensure that an injured worker receives the best care and can return to work as soon as possible. Customized employee safety manuals and training programs also may be offered. This is typically a 24/7 program, so the PEO is always only a phone call away in case of an injury or other emergency. It is the company's responsibility to make sure this program is in place and being complied with in the workplace.

* Perhaps the single most attractive advantage to affiliation with a PEO is the ability to offer employees Fortune 100-type benefits at considerably lower cost. Managed care health plan options, prescriptions, dental, vision, life and accidental death & dismemberment, short- and long-term disability and additional supplemental plans have become extremely important to a company's ability to attract and retain high-quality employees, especially in today's tight labor market.

PEOs virtually always offer employees a Section 125 "Cafeteria Plan," which allows workers to pay for out-of-pocket health plan premiums, health expenses and child care tax-free. Furthermore when an employee authorizes a tax-free wage reduction under a Section 125 plan, the company also saves its portion of the related payroll taxes: FICA, Medicare and unemployment. Most PEOs also offer a 401(k) plan designed specifically to fit the company's needs.

Whether you are a small employer with 10, 20 or 100 employees, or a medium-size employer with 500 to 1,000 employees or more, engaging a PEO can free up management resources that would be better directed at production, sales, customer service and receivables -- the income-producing side of the business. According to the Department of Labor, a PEO can perform its administrative duties at a cost of one-third to two-thirds what the average business would spend to perform the same services.

For one company, a manufacturer of sophisticated satellite equipment with 50 employees, the decision to engage the services of a PEO was driven by both cost containment and the desire to satisfy employee needs. The company was able to offer a better benefits package and a higher level of HR service -- all at significant savings. Company executives then found that they had more time to focus on critical operations -- time previously spent on payroll, benefits and compliance issues. Where the company's vice president of finance had previously spent considerable time trying to understand employee benefits regulations, employment law and related subjects, his time is now free to focus on corporate finance issues.

PEOs can also be a blessing to foreign companies with U.S.-based subsidiaries. One German-owned but U.S.-based company was frustrated that it did not have enough U.S. employees to find a high-quality, cost-effective benefits plan. It found that management was bogged down with paperwork related to regulatory compliance. Since hiring a PEO, it has attained a level of insurance and benefits typically reserved for much larger companies. More importantly, top management is free to concentrate on revenue-related matters rather than administrative tasks.

A tremendous amount of paperwork is generated for every individual a company employs, ranging from payroll and benefits records to performance evaluations and proof of regulatory compliance. Most business executives recognize that their time is a valuable commodity, and that their energies should be directed at core business operations. By outsourcing the HR functions to a PEO, they can concentrate on making their businesses grow.

Dave Anderson is a regional sales manager with PeopleWorks (www.peopleworks.net), one of the nation's leading professional employer organizations. PeopleWorks is headquartered in Little Rock, Ark., and has offices throughout the South and Midwest.

RESOURCES:

Many PEOs belong to the National Association of Professional Employer Organizations (NAPEO), 901 N. Pitt St., Suite 150, Alexandria, Va. (www.napeo.org). In addition, industry information and links to relevant sites are available at www.peo.com.

Criteria To Look For In Selecting A PEO

* Assess and establish the company's HR, risk management and other needs.

* Ensure that the PEO is capable of meeting your company's goals -- meet the people.

* Ask for banking and credit references. Ask for client and professional references. Ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.

* Find out how the employee benefits are funded: Are they fully insured? Self-funded? Who is the third-party administrator or carrier? Are they licensed?

* Check the competence of the PEO's staff, i.e. risk management and HR staff certifications.

* Do the employee benefits fit the needs of the employees (and the company)?

* Review the service agreement carefully. Is it complete? Are there any guarantees? What provisions allow the client or the PEO to cancel the agreement?

* If required, is the PEO licensed or registered by the state? Ask for proof.

* Is the PEO a member of NAPED, the national trade association of the PEO industry? NAPEO members are required to operate with integrity and adhere to the highest ethical and quality-of-service standards.