Outsourcing HR: Using a Professional Employer OrganizationIn the August 2005 Wells Fargo Business Banking Roundup™ newsletter’s “Outsourcing IT and HR” article, we discussed some of the benefits of finding a partner to handle these functions. In terms of HR, utilizing a professional employer organization (PEO) might be a viable solution for your company.
“Think of the PEO as a contractual relationship in which the PEO acts as a co-employer with you,” says Edie Clark, spokesperson for the National Association of Professional Employer Organizations (NAPEO). “Under the terms of the agreement, a PEO becomes the employer for purposes of payroll, employment taxes at the state and federal levels, securing Worker’s Comp coverage and providing a package of benefits and related services. A PEO is essentially an outsourced HR department.”
The true advantage of using a PEO is that you’re contracting with a company that has expertise you don’t. In addition to the general benefits described above are a variety of services that work to support you as an employer:
- Keeping you in compliance—While PEOs ensure that you keep up-to-date with state and federal taxes, they also help in other areas of compliance. “One example is employment documentation, especially critical now with the focus on immigration,” Clark says. “A PEO is responsible for verifying employment status, checking the documentation of all employees and maintaining records ongoing. With some 60 employment laws on the books, remaining in compliance can be difficult for those businesses tackling HR on their own.”
- Recruiting—PEO services often include the recruiting, screening and background checking—based on your job parameters—of new employees.
- Termination—“This is a very sensitive area,” Clark notes. “A PEO will advise you about the process, both as it affects your organization and as it relates to compliance issues. They’ll even be available to be a part of the event, if needed.”
- Training—PEOs typically offer training on harassment, employee privacy and other key workplace issues.
- Benefits packages—Based on the number of companies they represent, PEOs have volume buying power, giving them access to solid health care plans and other benefits at reasonable costs.
Finding a PEO
So what should you look for in a PEO? Clark and NAPEO offer the following guidelines for companies considering such a relationship:
- Assess your workplace to determine your human resource and risk management needs.
- Make sure the PEO is capable of meeting your goals. Meet the people who will be serving you.
- Ask for client and professional references.
- Check the firm’s financial background, and ask for banking and credit references. Ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.
- Investigate the company’s administrative and risk management service competence. What experience and depth does their internal staff have? Do any of the senior staff have professional training or designations?
- Understand how the employee benefits are funded. Is the PEO fully insured or partially self-funded? Who is the third-party administrator (TPA) or carrier? Is their TPA or carrier authorized to do business in your state?
- Understand how the employee benefits are tailored. Determine if they fit the needs of your employees.
- Review the service agreement carefully. Are the respective parties’ responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?
- Make sure that the company you are considering meets all state requirements.
As far as terms and fees are concerned, they’ll differ by arrangement and company. Clark notes that contracts are generally structured for a year at a time, with rollover provisions after that. The PEO client pays an administrative fee based on payroll.
Some people still refer to PEO arrangements as “employee leasing,” but Clark calls the label a misnomer. “This isn’t leasing. PEOs are service businesses that advise businesses on good employment practices and regulatory compliance,” she says. “Day-to-day employee management belongs to you, but if a PEO finds something egregious happening with regard to an employment issue, it’s their job to resolve the issue.”
To find a PEO in your area, check out the NAPEO’s directory of PEO Members.
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