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June
2006 Issue
PEOs Growing As Smaller Firms Outsource Non-Essential Functions, Allow Economies Of Scale To Work In Benefits Area
Learning from their bigger brethren, smaller firms are beginning to outsource functions not key to their main line-of-business.
One major function increasingly outsourced is the management of employees. At a rapidly rising rate, smaller companies are turning to Professional Employment Organizations (PEOs) to manage the employment process.
However, for many companies, the process has not been all positive and the number of firms left with high unpaid payroll taxes rose in the 1990’s and into the first years of this century. There has been a spate of state regulatory actions which has lessened this trend and for many firms, the process has had a positive effect on the bottom line.
Along with telecommuting, PEO usage is expected to reduce overhead costs by 9% by the end of 2010, according to surveys by this publication.
Essentially, PEOs serve as an off-site human resources department for small and mid-sized businesses by managing such functions as payroll and tax filing, unemployment and workers’ compensation claims, benefits and regulatory compliance. Full-service PEOs provide a broader range of services, including recruiting, interviewing, training, policy development and compensation analysis. Although fees vary, PEOs typically charge a fixed percentage of a company’s payroll for their services.
Rapid Growth
Nationally, it is estimated that 800 PEOs are responsible for generating more than $43 billion in gross revenues (wages and taxes). PEOs operate in every state, and the industry is growing more than 25 percent annually. Outside the Southeast and Southwest, using PEOs has not grown as rapidly as proponents would hope. While there are more than 75 licensed PEOs in Florida, there are less than 20 in New Jersey. According to a New Jersey PEO, Extensis, the PEO model is expected to gain wider acceptance in the East as more employers come to understand the benefits of the relationship.
The State of New Jersey has passed legislation (S-1466) recognizing the legal status of PEOs and regulating the industry. Under that legislation, PEOs in the state must be licensed, have a minimum net worth, certify quarterly unemployment tax payments and provide evidence of workers’ compensation coverage.
Aa reported by Extensis and the National Association of Professional Employer Organizations (NAPEO), a PEO contractually assumes substantial employer rights, responsibilities and risks by establishing an employer relationship with the client’s employees. Under this “co-employment” structure, the PEO has sole liability for filing state and federal payroll taxes, sponsoring benefit plans, providing workers’ compensation coverage and paying wages out of its own account. The client and the PEO share such responsibilities as hiring and firing, regulatory compliance and employee relations. The business owner, however, maintains complete control of the company’s core operations and strategic business decisions. The PEO simply frees the business to concentrate on generating revenue.
Saving Time
With federal laws and regulations regarding employment policies and practices up by more than 60 percent since 1998, business owners now spend up to 25 percent of their time handling employee-related paperwork and complaints, according to the U.S. Small Business Administration. Not only are human resource issues taking up more time, but businesses also face the continually growing threat of employee lawsuits and actions. Between 1991 and 2000, the number of sexual harassment cases filed with the Equal Employment Opportunity Commission more than doubled, increasing from 6,900 to 16,000 a year.
Extensis argues that PEOs help to alleviate the administrative burden by taking care of such tasks as:
- Administering payroll and related tax filings,
- Processing unemployment and workers’ compensation claims,
- Sponsoring and administering health and 401(k) plans, and
- Ensuring compliance with COBRA, FMLA, ADA, FLSA and other employment statutes.
Economies of Scale
Perhaps most compelling in today’s economy is that a PEO relationship allows small employers to purchase Fortune 500 benefits at a significantly lower cost. On their own, small companies have little leverage for purchasing benefits or for limiting increases in insurance costs. They also often are unable to gain access to a broader set of products and plan designs. By pooling their clients’ employees, PEOs can negotiate lower rates, manage on-going increases, and tap into a broader range of benefit plans. A PEO partnership can provide:
- HR support: Most small businesses have no HR support.
- Superior benefits: Small businesses can obtain big-company benefits.
- Expertise: Small businesses gain access to tax, labor law, benefit and workers’ compensation experts.
- Reduced risk: Risks are shared by the PEO.
Extensis is one of New Jersey’s largest professional employer organizations. For more information, go to www.extensispeo.com, or call 888-473-6398.
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