PROFESSIONAL EMPLOYER
ORGANIZATIONS: A VALUABLE RESOURCE

By Bruce E. Katz

It is no secret that among the top expenses for most businesses are those associated with employment. It is also well known that payroll and human resource areas of a company's operation have become extremely complex and wrought with pitfalls for the uninformed and overburdened organization. In addition to administering salaries and benefits, there are state and Federal taxes to pay on schedule, tax compliance matters, and compliance with various employment laws. Unfortunately, many businesses simply do not have the human resource (HR) expertise necessary to efficiently handle these broad and complicated areas. As a result of inadequate controls and procedures, or constantly changing requirements, they make improper payments on their payroll and employment taxes, and risk incurring significant penalties for noncompliance with COBRA, ERISA, and OSHA regulations, as well as those coming from the Equal Employment Opportunity Commission and the Americans with Disabilities Act, Fair Labor Standards Act, and Immigration Reform and Control Acts. Considering the risks, it is understandable why so many companies, small businesses in particular, are outsourcing their employment functions to professional employer organizations (PEOs).

The PEO as a Total Human Resources Management Resource

To appreciate how PEOs serve businesses, it is important to understand the functions they perform for their clients. In effect, PEOs act as the company's human resource and payroll departments. They handle everything from payroll and employee benefits administration to regulatory compliance, including the preparation of all required Federal and state tax compliance and administrative filings. PEOs stay abreast of the latest changes in workplace legislation and know what measures must be implemented to assure its affiliated companies' compliance. When new laws and regulations are implemented, PEOs assume the responsibility to be in compliance. The client companies need not be concerned about any additional eleventh hour compliance and regulatory burdens.

Additionally, PEOs will take an active role in the development of employee handbooks and policies and procedural manuals. Again, the emphasis is on risk management through proper protocol and regulatory and procedural compliance. Some PEOs also assist their clients in employee recruitment, training, performance evaluation, disciplinary actions, and termination decisions. In effect, by performing all of these duties on behalf of its clients, the PEO serves as a co-employer. This is in keeping with current law which recognizes that an employee can have more than one simultaneous employer. By definition, a co-employer shares certain duties and rights with respect to the same group of employees, such as with PEOs, temporary employment agencies, and other staffing firms.

This is not to suggest that the PEO affiliated companies lose their autonomy in directing their businesses' day-to-day operations. On the contrary, PEO client companies manage ongoing production, quality control, sales and marketing, and customer services. They are also responsible for supervision of their workers' daily activities. Furthermore, by freeing their top executives of burdensome and non-revenue producing employment-HR tasks, the PEO enables its affiliated companies to better focus on core revenue producing activities.

Employee Benefits and
Economies of Scale

Employee benefits is another area in which PEOs provide additional value to their clients. Because the PEO is an "employer" to thousands of employees, their benefit programs have the advantage of high volume discounts. When companies outsource their payroll and HR programs to a PEO, not only do they gain significant economies of scale, which allow them to offer benefits they could otherwise not afford with their smaller groups, they also gain a much broader selection. Through the offerings of the PEO, they can now provide their employees with a wide array of options, from health-care plans, prescription cards and life, disability, accidental death and dismemberment insurance to financial options such as 401(k) plans, pension plans, credit union and fitness club memberships, child-care options, and tuition reimbursement programs. These additional benefits might come at little if any additional cost.

It should also be noted that, again because of the economies of scale, the PEO's unemployment, worker's compensation, insurance, and disability rates are much less volatile than the rates of any single small company, for whom one claim can have a major impact. For the same reason, PEOs can negotiate better rates for employee benefit packages. A PEO will remain vigilant and proactive in continually searching out the best rates, which also provides benefit to their clients. An important benefit derived by companies with enhanced employee benefit programs is the ability to attract and retain a higher caliber workforce.

PEO Professional Organizations

Not just anyone can put out a sign and pronounce themselves to be a PEO. There are several criteria used to qualify a PEO. The PEO organization may be a member of the National Association of Professional Employer Organizations (NAPEO), its local state chapter of NAPEO, and the International Association of Professional Employer Organizations (IAPEO). These professional affiliations signify that the PEO adheres to certain standards governing its financial and business practices, standards of conduct, and work ethics. Besides the investment in experienced human resource professionals, there are standards that the association requires its members meet. PEOs who do meet the necessary qualifications are highly competent and capable of assuming the responsibility for other companies' employment related requirements.

An ancillary benefit for companies using a PEO is reduced testing and audit work required in cash, tax liability, salary expense, and employee benefits areas by their independent.

Selecting a PEO

In order for businesses to obtain the optimum benefit from a PEO, it is critical that the right PEO be contracted. In addition to membership in industry associations, PEOs should be selected based on the following criteria:

1. Strong infrastructure consisting of key divisions including accounting, payroll, benefits, human resources, risk management/compliance;

2. Experienced and diverse staff consisting of human resource professionals including certified professional employer specialists;

3. Advanced computerized technologies and experience-rated systems in the administration of professional employer services;

4. Comprehensive services encompassing payroll, insurance and benefits administration, regulatory compliance, and ancillary human resource services;

5. Value-added offerings such as employee handbooks and manuals, training programs, and newsletters;

6. Industry association memberships and participation including audited financial statements and quarterly payroll tax audits;

7. Satisfactory evidence that approved methods are used for funding of benefit plans;

8. Effective internal quality controls and assurance procedures;

9. Proper contractual agreements, particularly indemnification clauses, as well as flexible terms which enable a short-term notice for termination of services; and

10. Proven track record in providing high quality PEO services over an extended period of time. (Client references, in additional to references from financial institutions, should be secured prior to selecting a PEO.)

Many Direct and Indirect Benefits

Professional employer organizations can provide many direct and indirect benefits to their client companies. By outsourcing payroll, employee benefits, and human resource functions, small businesses can focus their energies on the business of doing business, rather than nonrevenue producing administrative duties.

Due to available economies of scale, PEO clients can offer substantially improved benefit packages at little or no additional cost, in order to attract and retain quality employees. Workers compensation and unemployment insurance rates are not affected as dramatically by individual claims. *