HR efficiency without the hassles.

Organizations help handle small business employment benefits

Your business is growing and you're finding that the paperwork associated with managing employees is piling up. You're also concerned about holding on to those employees in today's tight labor market. But staying on top of employment laws and shopping for and administering benefits plans takes time away from your business. What can you do?

Many small businesses are partnering with professional employer organizations (PEOs) to handle payroll, worker's compensation, and employment laws and regulations. And by signing on with a PEO, small business owners find they can get a reprieve from everyday HR duties.

The PEO and the company split the employer's responsibilities. PEOs handle benefits, 401(k) plans, and labor law compliance issues. The small business is responsible for managing daily work assignments and on-site supervision, ensuring production or service delivery, and providing supplies and equipment to employees. Though state rules vary, the IRS generally considers the PEO to be the employer of record responsible for paying trust fund, income, and employment taxes.

The desire to offer his employees better benefits and a safe workplace prompted Ronald Webster, CFO of Fennville, Michigan-based West Michigan Flocking & Assembly, a 105-employee firm that manufactures a special "flock" fiber finish that it applies to car parts like glove compartments and CD trays for decoration and noise reduction purposes, to turn to ADP TotalSource, a Miami-based PEO. By hiring a PEO, the company has enabled employees to become "part of a larger group of employees," says Webster. Being able to offer good benefits gives West Michigan Flocking a better chance of competing for top workers, he says. Because a PEO's workforce is comprised of employees from many client companies, PEOs are large enough to offer a small business' employees competitive benefits.

In addition to administering the benefits package, ADP TotalSource processes the weekly payroll and consults on legal and HR issues. West Michigan Flocking's next step was to tap ADP TotalSource's expertise in developing a safety policy for the company. ADP TotalSource has a full-time safety manager and has helped the company by staging mock OSHA inspection checks and providing advice on structuring a safety committee for the company.

In 1997, PEOs accounted for an estimated 2 million to 3 million employees, up from only 10,000 in 1984. This year, the number is expected to exceed 10 million nationwide, according to the National Association of Professional Employer Organizations (NAPEO) in Alexandria, Virginia.

The average PEO client employs fewer than 20 workers. PEOs are most cost-effective for businesses with fewer than 100 employees. When a company has more than 100 employees, the price of a PEO's services may equal the cost of having a full-time HR staff handle these issues.

But most small businesses just don't have the luxury of hiring a full-time HR staff to provide these services for its employees. Fancy benefits are often out of the question. And many larger companies would rather continue to focus on the company's core business, says Milan P. Yager, executive vice president for NAPEO. Therefore, larger businesses are increasingly seeing the benefit of outsourcing HR duties to PEOs.

Generally a PEO's fee is a percentage of the client company's gross wages, based on the types of employees, ie., managerial, professional, etc., and the number of employees. Fees are negotiated up-front.

When West Michigan Flocking first signed on with ADP TotalSource, it paid an initial per employee fee. The company now pays a set processing and administrative fee on a weekly basis to coincide with payroll.

While there are hi-tech solutions on the market that deal with individual components of the HR process, Yager says that PEOs are "high-touch," and help companies focus on the bigger picture of motivating their workforce and steering clear of legal problems. "The PEO relationship is designed to make the employment world work better for you," he says. "Technical solutions tend to be standardized to carry out routine administrative functions."

For business owners thinking about hiring a PEO, experts offer this advice:

* Make sure the PEO is qualified in the area where you need the most expertise. PEOs have specialized HR expertise in different areas. For example, West Michigan Flocking Assembly (a manufacturing company) is concerned with worker's compensation issues and providing a safe working environment. When it hired ADP TotalSource, West Michigan Flocking was looking for a PEO that had expertise in this area so that it could develop a policy and create an internal safety committee.

* Research credentials. Yager advises checking to see if the PEO is a NAPEO member. The association is the only organization that trains and educates PEOs. NAPEO also offers the following guidelines to companies considering a relationship with a PEO:

* Assess your workplace to determine your human resource and risk management needs. Make sure the PEO is capable of meeting your goals. Meet the people who will be serving you.

* 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.

* Ask for client and professional references. Investigate the company's administrative and risk management service. Have any of the senior staff of the PEO been certified as certified professional employer specialist or received other relevant professional designations?

* Understand how the employee benefits are funded. Are they fully insured or partially self-funded? Who is the third party administrator (TPA) or carrier? If required in your state, is their TPA or carrier licensed?

* Understand how the employee benefits are tailored. Determine if they fit the needs of your employees. 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?

If your state requires a PEO to be licensed or registered, make sure the company you are considering meets all such requirements.

Most important, understand why you're interested in hiring a PEO. Are you interested in being a more attractive employer [to top talent] or are you interested in short-term savings?

For more information:

www.napeo.org: National Association of Professional Employer Organizations.

www.peo.com: An online, searchable database of PEOs located throughout the world.