How to choose the right Professional Employment Organization for your business Featured

8:00pm EDT June 30, 2012
How to choose the right Professional Employment Organization for your business

Dealing with the daily responsibilities of running a business can distract an owner from the big picture. To take some of the burden off of CEOs running small and mid-sized companies, Professional Employment Organizations offer services that handle outsourced aspects of daily business, including recruiting, payroll, workers’ compensation, risk and safety management, and training and development.

However, selecting the right PEO for your company requires thoughtful consideration. And J. Richard Hicks, CEO of HR1 Services Inc., says that working with a PEO requires cooperation and commitment.

“This is really a partnership to help streamline and make your company more cost and time efficient. You need to work closely with your vendor and treat the relationship like a partnership to make it work for you,” Hicks says.

Smart Business spoke with Hicks about what to look for when choosing a PEO.

How does a PEO work?

A business and a PEO establish a three-way relationship — a co-employment arrangement — among the PEO, the client company and the company’s employees. This means the PEO co-employs your work force and becomes a legal employer responsible for such functions as payroll, recordkeeping, benefits and services, and participation in hiring, evaluation and firing. This frees up business owners to focus on the core operations of their business.

What do companies need to understand about the co-employment relationship they establish when working with a PEO?

The co-employment relationship allows your employees to participate in the PEO’s benefit programs, as well as its risk management programs. The employer retains control of the workplace, but when it comes to government compliance, the PEO takes those burdens off its hands.

What differentiates one PEO from another?

PEOs can be grouped by the range of services that they provide. Some could be considered turnkey and take care of the company’s employees from top to bottom. Others simply provide payroll and workers’ compensation services.

Every company has its own specific needs. Generally, the more people you employ, the more important HR functions become. Conversely, fewer employees mean fewer stresses exist on that aspect of your business, and all you would likely need to outsource are a few administrative services.

There are also PEOs that specialize in certain industries and you want to work with one that has experience relevant to yours. When you evaluate a PEO, ask whether it’s done work with companies in your field because that experience helps with the back end legal responsibility and mitigates your exposure. A PEO will never completely remove your legal exposure, but it will greatly reduce your risk.

Does hiring a PEO mitigate any legal risks associated with the services it provides?

It does mitigate them, but they never go away completely. An example of some items that will go away when you enter into a co-employment relationship with a PEO are 401(k) fiduciary requirements, health care fiduciary responsibilities in terms of COBRA administration and workers’ compensation liabilities.

Working with your PEO can also help protect you from many types of employee lawsuits. While the arrangement doesn’t prevent a lawsuit from being filed against your company, having a relationship with a PEO can greatly increase your protection.

Companies should make sure that their PEO has employers’ liability insurance, as well as errors and omissions coverage in suitable amounts that cover its entire block of business. You should also look into what resources it has available in terms of legal counsel.

How can a company rate a PEO’s affordability?

Look at your business and the issues you’re having with running it, specifically with issues such as all forms of insurance administration, insurance procurement, employee administration and federal, state and local compliance. Brainstorm those items out, pencil in who is doing that work and how often it’s being done. Typically when you’re looking at a company with about 35 employees, the person doing most of that work is the owner or CEO. Even if he or she doesn’t do it all, that person is involved in a lot of it. As a result, your cost for handling those issues increases dramatically, both with the owner’s time and with opportunity costs in terms of the time lost pursuing company growth.

The best way to evaluate the savings impact of a PEO is to look at the cost of employing someone to do that job, including salary, continuing education, vacation, coverage for when that person is on vacation and turnover cost, as well as any software or hardware expenses associated with a new position and new full-time employee.

When you hire a PEO, you’re hiring a team of experts, not just one person. The organization will have experience across a broad range of areas, and it never calls in sick, goes on vacation or asks for a raise every year.

How can a company determine which PEO is right for it?

The most important thing when choosing a PEO is to find a company that believes in doing business the way you do business — that treats employees the way you do. You should feel confident that you can reach the right person within the PEO to get a problem resolved. It comes down to finding people you want to do business with and who treat employees the way you want them to.

It’s not for every company, but if you have fewer than 200 employees, a PEO is something you should consider.

J. Richard Hicks is CEO of HR1 Services Inc. Reach him at (800) 677-5085  or RHicks@HR1.com.

Insights Outsourcing is brought to you by HR1