Small businesses turn to PEO's for help.

California small businesses don't have it easy these days. Over the years, mounting labor and employment requirements once reserved for large employers, are now small business issues as well. Although relatively unknown, for over 20 years many small businesses have turned to Professional Employer Organizations (PEO's) to ease the burden of being an employer, a strategy that benefits both the employer and the employee.

A main reason for the sea change: PEO's simplify the administration for the employer.

A company would normally have to deal with 4-9 different vendors for payroll, workers compensation, and employee benefits. Now it writes one check to a PEO every payroll. "It is the only way for a small business to go. My administration cost since joining a PEO has been reduced considerably and employees get better benefits packages than what I would be able to provide.", states Ash Chawla, Controller for SnF Management.

Functioning as a "shared" employer, PEO's take on the employer risks of their clients as well as assist with human resource needs. The result is usually a reduction in costs and the elimination of employee administration headaches.

Some large business use PEO's however, the typical client size with PEO's nation-wide is 5-100 employees. "We find that companies with 20-100 employees are the perfect size for our product. These companies really need our help to simplify administrative processes and control costs. Larger companies can economically afford to hire internal staff to provide this support internally.", says Jay Cober, President of CPE, (a PEO based in Los Angeles, CA)

PEO's are used by all sorts of businesses from Doctor offices to hotels and restaurants. In fact, currently over 2 million Americans are currently employed in a PEO shared relationship right now, and this has been growing at 20-30 percent per year for the last several years. From a legal point of view the PEO establishes a contractual relationship with the business, and a "co-employment" relationship with the employees. Although the client can terminate the relationship at any point, the relationship is intended to be long-term. The contractual relationship breaks out the mutually agreed upon duties of each party. The client retains daily direction and control of their employees, while the PEO has responsibility for payroll, labor law, employee benefits, 401(k), and human resources.

As a result, the client can focus on its core business instead of the increasing burden of human resources requirements fueled by changing regulations that complicate the employer/employee relationship. The PEO industry evolved 30 years ago to help small businesses gain economies of scale for the purchasing of employee benefits and workers compensation. Today, it has become much more of a partnership to help with the complexities of being an employer. Very few small businesses can currently afford to hire a payroll manager, risk manager, human resources manager, and a benefits manager. Yet, each one these HR disciplines requires years of expertise to avoid problems. PEO's offer the comprehensive expertise to their clients freeing them from the business of employment.

Clients get the services they need to grow their business and receive the benefits that help attract and retain talented people. Professional help is needed to manage a business. As an example, over the last two decades, federal, state, and local regulations have more than doubled to a level, which has outgrown most entrepreneurs' expertise. Just recently legislation was introduced mandating small employers to provide heath insurance to their employees in the near future. PEO's will help reduce the cost of these plans, as well as offer retirement plans, disability insurance, life insurance, dependant care reimbursement accounts, vision care, dental care, and employee assistance plans. For a small business, establishing and administrating these plans prior to a PEO would be cost prohibitive and an internal resource burden. Economies of scale allow PEO's to sponsor and offer these plans at an affordable cost.

PEO's can enhance the profitability of their clients in several ways:

1. Reduced costs associated with high employee turnover by helping retain employees and reduce training costs.

2. Possible reduced healthcare costs.

3. Reduced internal costs of monitoring and complying with employment laws.

4. PEO's specialize in implementing programs that over time can reduce workers compensation costs and unemployment claims.

5. Finally, the reduced opportunity cost of not being able to focus on what makes the company money.

Judging from the success of PEO's to date, the industry will continue to grow at the current rate or better, because business owners want solutions to manage the daily increasing complexities of employment.

Tony Zuanich is an executive with CPE, Inc. A Los Angeles based PEO founded in 1982. He can be reached at [e-mail]