April 29, 2003

Is a "professional employer organization" in your future?

Source: "National Public Accountant, The"

Publication date: 2003-04-01

Arrival time: 2003-04-29

Most small business owners don't have the human resource training, payroll and accounting skills, knowledge of regulatory issues, or background in risk management, insurance and employee benefit programs to be a good employer. They need to (and usually prefer to) focus their time and energy on the "business of the business"-serving food, giving financial advice, or selling cars- and not on the business of employment.

Managing employees today is a costly and potentially dangerous proposition. Failure to comply with laws such as EEOC, ADA, COBRA, OSHA, INS and others could prove very costly. A small business owner could possibly lose his business as a result of a legal action for wrongful discharge. Most studies indicate the cost of"employment" ranges between 6 and 16 percent of your payroll.

No business owner is in business to write checks, file tax reports, shop for employee benefits, deal with workers' compensation claims and audits, or answer unemployment claims. Time devoted to these activities not only detracts from the operational aspects of your business but, worse than that, generates no profit.

WHAT IS A PEO?

The PEO concept is really quite simple. Its origin can be traced to members of the accounting profession who wanted to provide relief for many of their small business clients who spent a great deal of time dealing with administrative challenges such as payroll and payroll related taxes, ongoing tax penalties, and unemployment plans and workers compensation coverage.

For a fee, a Professional Employer Organization (PEO) assumes responsibility and liability for the "business of employment," including risk management, human resources, labor law compliance, payroll, and employment taxes. The Client Company manages product development and production, marketing, sales and service. The PEO and the Client Company contractually allocate some and share other traditional employer responsibilities and liabilities. Thus, both the PEO and the Client Company enjoy an employment relationship with the workers.

A PEO offers a much wider selection of benefits often at considerably lower cost due to the large numbers of employees in its pool. PEOs and their clients enjoy the economies of scale usually reserved for only the largest employers.

If you use a PEO, the PEO Company contracts to provide your company with employees (employee leasing), who are the same employees you currently have. Your existing employees are converted, on paper, to the PEO's payroll, which becomes the employer of record for taxes, insurance, etc. The PEO is then responsible for the following:

* Preparation and Disbursement of Payroll

* Collection and Deposit of Payroll Taxes

* Human Resource Management

* Comprehensive Employee Benefits and Administration, including group medical, 401 (k) plans and 125 cafeteria plans.

The Client Company makes only a single payment per pay period, called "lease expense," to the PEO. The cost is typically the same or less than what the Client Company would spend for these services by itself.

PEOs offer worksite employees more and better benefits than they likely would receive from a small business. The cost for an individual small business to establish and administer dental, medical, vision, life insurance, employee assistance programs and other special human resource initiatives can be prohibitive. Due to economies of scale, PEOs can sponsor and offer these benefits at attractive prices.

ADVANTAGES OF A PEO

For Employers:

* Reduce payroll, insurance, tax, employee benefits and other administrative costs.

* Free up time to spend running the business instead of on administrative tasks.

* Reduce legal and regulatory liability on employee issues.

* Control costs and manage the risks of workers' compensation, unemployment claims and health insurance.

* Attract and retain more qualified employees by offering better benefits.

* Increase employee satisfaction.

* Improve cash flow and predictability of expenses.

* Lower costs of employee benefits through the advantage of volume purchasing.

For Employees:

* Access to better health care and retirement benefits.

* Prompt, accurate payroll.

* comprehensive benefits packages previously unavailable.

* professional assistance with employment related problems.

* Extended statutory protection.

* Smoother claims processing.

* Increased job security (in the event the employer lays off employees, the PEO is often able to transfer the employee).

GUIDELINES FOR SELECTING A PEO

The National Association of Professional Employer Organizations offers the following guidelines to companies considering a relationship with a PEO:

1. Make sure the PEO you select has the full range of services you need now and in the future. Be sure it offers the broadest range of products and services in the industry, and is backed by the most committed and experienced staff of PEO professionals. Sales brochures and fancy proposals are easy to write. Meet the people who will be serving you.

2. 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. It is critical that the PEO you choose be financially stable. Your business depends on their ability to make all payments, from payroll to tax submissions, without delay.

3. Are the employee benefits fully insured or partially self- insured? Who is the third party administrator or carrier? If required in your state, is their third party administrator or carrier licensed?

4. Make sure the PEO is current on all facets of the industry and is committed to outstanding business and ethical practices. Check to see if the company is a member of the National Association of Professional Employer Organizations, the national trade association of the PEO industry.

5. Investigate the company's administrative and risk management service competence. What experience and depth does their internal staff have? Do the senior staff have professional training and designations?

6. What do clients have to say about their PEO's service commitment and professionalism? Ask for client and professional references.

7. Review the service agreement carefully. Are the respective parties' responsibilities and liabilities clearly defined? Under what conditions can you or the PEOS cancel the contract?

8. Make sure the company you are considering meets all state licensing and/or regulatory requirements. According to the National Association of Professional Employer Organizations, the following states have licensing or registration requirements: Arkansas, Florida, Illinois, Kentucky, Louisiana, Maine, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia and Washington. Other states have certification requirements.

MY OBSERVATIONS ON PEOs

Preparing payroll for a client and printing payroll checks is not a good revenue source for our firm. Because we give our clients personal service and help them correct errors, we spend considerable time doing payroll. Because our firm does all the accounting and tax work, we may do payroll just to keep the client happy. It is a relief when we can discuss outsourcing payroll to a PEOS in the hopes that it will at least diminish, if not eliminate, our non-billable time.

Directing your clients to a PEOS is a win-win situation for everyone. You perform a valuable service for your client, obtain better benefits for their employees and simplify your life. You still do the accounting and tax returns for the client but you have eliminated the petty details of payroll and deadline pressure. You have a happy client and you have time to find more lucrative areas to grow your practice.

If you use a PEOS for your own firm, you pay a monthly fee. If you decide to become an agent for a PEOS, you can expect to earn anywhere between 112 of 1 percent to I percent of each firm's payroll per year. For example, on a $500,000 payroll, you can expect a commission of $2,500 at ½ of 1 percent to $5,000. You have performed a valuable service for your client, provided them with a firm expert in various areas of human resource management, and simplified your professional duties.

Whether you are signing a contract to use a PEOS for your own firm, or you are signing a contract with a PEOS to be its agent and recruit small businesses, read the contract carefully. Better yet, have an attorney review it. Before you jeopardize your client or yourself, check the contract, check the rates, and check the limitations and exclusions. For example, one contract I looked at specified that, as an agent, I would have had to recruit so many clients. Another contract would have limited my ability to sign as an agent with any other PEOS in the entire U.S. for three years after our contract was terminated.

It is extremely important to check referrals. Speak with clients who have used the PEOS. Ask for a list of current and past clients. Find out how any problems were resolved. Remember, if you refer a client to a PEOS, and the PEOS performs poorly, you either will lose the client or have to spend extra time cleaning up any messes that were left. Don't risk messing up a win-win situation for your firm and for your clients.

Harold F. Krieger, Jr., is NSA President, 2002-- 2003.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of the society.

Copyright National Society of Public Accountants Apr/May 2003

Publication date: 2003-04-01

© 2003, YellowBrix, Inc.