Chances are, the last thing you want to deal with is the myriad of human resources administrative headaches that running your business entails (i.e. payroll management and writing an employee handbook).
If you don’t want to hire your own in-house HR manager, one solution is to opt for employee leasing. Under this arrangement, you hire a Professional Employer Organization (PEO), a third-party agency, to take care of all those labor-intensive, time-consuming tasks. In addition, in many cases, you can cut your unemployment insurance or workman’s compensation costs, too.
But, because you’ll be handing over significant HR responsibility to your chosen PEO, it’s a big step. “Working with a PEO can be a tricky business,” says Lauraine Bifulco, president of Vantaggio HR, a San Juan Capistrano, Cal., consulting firm. Here’s what you should know:
What they are: PEOs specialize in HR administration, of course. More than that, they become the employer of record with a separate tax ID number. Specifically, you and the PEO act as co-employers. That means the PEO takes care of all the HR stuff, while you supervise employees’ day-to-day tasks. Generally, you can expect to pay the PEO about 2 percent of total payroll, although it can be higher.
But, more than that, PEOs can provide big discounts on the rates you pay for unemployment insurance and workman’s compensation. “Because they work for multiple companies, PEOs can spread the risk and get you better terms,” says Robert Shindorf, director of consulting for the Methodology Group, a management consulting firm in Grand Rapids, Mich.
Some industries benefit more than others. At the same time, the cost advantages of PEOs tend to favor certain businesses, according to Shindorf. For example, take a construction company or roofer that would usually pay high workman’s compensation rates. By being in a pool with other businesses in less accident-prone occupations, that firm’s rates are likely to be lower.
Similarly, such seasonal businesses as landscaping companies will pay reduced unemployment insurance rates if they’re part of a larger group. The upshot: Companies such as professional services firms with lower accident and unemployment rates might be better off not choosing a PEO, according to Shindorf.
Your legal obligations don’t change. Although you and the PEO are co-employers, you’re still liable for any employee misconduct—and you can be sued for discriminatory practices, even if you think the PEO is the one at fault. For example, if your PEO does an inadequate job of responding to a sexual harassment case, a court could find you liable, according to Bifulco. “At the end of the day, legally both parties are on the hook,” she says.
Make sure you’re hiring a PEO with a track record. Any PEO you use will become a significant part of your operations, with critical responsibility for HR processes. And, if a PEO goes out of business without, say, paying your payroll taxes, you’ll be liable for that debt. For that reason, you need to ensure you choose a firm with staying power. To that end, it might be best to consider firms with at least several years in the business. And ask to look at the books of any PEOs you’re evaluating. “They probably won’t let you see them, but it’s worth asking,” says Bifulco. Also, ask for several references.
You could lose your right to certain tax benefits. Technically, your employees are employed by the PEO. That means, you could forfeit the chance to take advantage of some benefits, according to Bifulco. For example, the recently passed healthcare reform bill includes a tax credit for certain small employers with low-wage employees. If you’re working with a PEO, you might not be eligible to receive that incentive.
Consider an Administrative Services Organization (ASO). These firms aren’t in the business of employee leasing. Instead, they just do all the HR tasks. “If you want human resources help and that’s all you want, you might opt for an ASO,” says Shindorf.