To PEO or Not to PEO

Most entrepreneurs struggle with handling HR issues as their firms begin to grow and they add employees. After all, leaders with creative ideas and a vision for ventures are not necessarily the type to deal with payroll details, insurance and employment law.

One approach to this dilemma is to search out a Professional Employer Organization or PEO - essentially a one-stop shop for employee benefits and HR services. More and more companies are choosing this approach and the number of PEOs is growing at a rate exceeding 20% per year. They must be doing something right.

There are many benefits to using a PEO but don't expect to get the cheapest rates on benefits and other employee services. You'll get a big reduction in the "hassle factor" and save lots of time too. The somewhat higher cost is usually worth it; particularly if better benefits and fewer administrative bungles differentiate you from the competition and help retain your best employees.

When choosing a PEO, you should be looking for a strategic business partner that brings added value to your organization and shares employer responsibilities. While PEOs can be organized in a variety of ways and come with different baskets of services, they all follow a similar concept: co-employment. This means that your company and the PEO employ the people who work for you and share both the responsibilities and potential liabilities that come along with being an employer. Essentially, you are outsourcing your human resources function while maintaining the management roles involved in keeping your business going.

Typically you'll find PEOs writing your employee handbooks as well as administering benefits and workers compensation programs. They will also keep employee files, process payroll, and provide other human resources support such as compliance assistance. They act as an HR "help desk" for employees who have questions or need assistance.

Advantages

A key advantage to using a PEO is economy of scale. Because they represent many companies, they can usually negotiate better deals on health insurance and other benefits. Economies of scale play out in providing HR advice as well. The PEO will likely have more sophisticated specialists in key areas than can be afforded by a small business. Most importantly, they free you from a lot of grunt work so you can concentrate on growing your business rather than dealing with paperwork.

Disadvantages

With a PEO even you are not legally an employee of your company. To begin, you will need to terminate all your employees and have them rehired by the PEO. Your paychecks will carry the name of the PEO and your employees will probably need to name the PEO as their employer on income tax returns or when applying for loans. This can cause confusion and considerable concern among your employees. Make sure you carefully communicate these details when you transition to a PEO and when you hire new employees.

While you decide how much your employees will be paid, you will lose some flexibility regarding health insurance and other benefits. Thoroughly research the PEO's offerings to make sure they are competitive with what you have currently. Otherwise you may have a bunch of de-motivated employees.

How to choose one

The best source for finding PEOs is usually personal referral. Make sure you get lots of references and talk to as many existing clients as possible. Ask them for a list of clients, not just references. The National Association of Professional Employer Associations (NAPEO) is a voluntary governing body for the industry. They have an independent accreditation program through the Employer Services Assurance Corporation. There are 27 states that have some type of registration or licensing plan for PEOs. Even though some of the certifications are voluntary, best to stay away from non-certified PEOs. If you are looking for the best risk management services, choose a PEO that has a Workers' Compensation Risk Management Certification as well.

There are many websites that can provide more information about PEOs. Here are just a few: www.napeo.org, www.certificationinstitute.org, and www.peo.com. These and other websites will help you find PEOs by ZIP code and provide excellent check lists for the selection process.

Susan T. Gauff is Founder/CEO of Predictive Hiring Partners, Inc., a consulting firm that provides small and medium-sized organizations with cost-effective tools, techniques and training to hire right the first time, every time. For further information visit the website http://www.predictivehiring.com call 803-831-2371 or e-mail susan@predictivehiring.com

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