Paul Fridrich offers the employees of CyberCopy, his four-location reprographics firm in southern California, many of the benefits large employers provide, including a 401K plan and health/dental/vision insurance. But Fridrich doesn’t spend much time on the paperwork for these benefits – or any of the other typical human resources functions – because it’s all handled by a professional employer organization (PEO).
“It was one of the best decisions I have ever made to sign up with them,” Fridrich says of the PEO he uses, Insperity. “They run all of our HR administration issues…and the fees Insperity charges my company add up to what we save on the health/dental/vision coverage alone.”
PEOs differ from typical payroll providers and other HR management companies in that they legally become the employer of a client’s employees. The client retains all the normal employer rights and responsibilities, such as directing the employees’ work and making hiring/firing decisions, but the “co-employer” arrangement allows the PEO to secure much better insurance, retirement, and other benefits than a small client could get on its own.
PEOs typically run several core HR functions, depending on the client’s needs. Payroll administration and employee benefits support are the most common functions a PEO handles, but others may include risk management/worker’s compensation insurance, human resources consulting, and assistance with any other employee-related issue.
Who Uses PEOs?
CyberCopy is a typical size firm for a PEO.
Walter Avis, senior vice president of human resources for Acadia HR, a PEO headquartered in Red Hook, New York, explains that PEOs are most commonly used by small to mid-size companies that need HR help but aren’t large enough to hire an employee to handle that.
“The typical client has grown to the point they realize they are just shy of needing to hire an HR manager in-house, say 50 to 100 employees depending on the organization,” Avis says.
However, Avis notes that Acadia does have some clients with only one to five employees who find the PEO is still worth the fee, and some larger companies that use them for auxiliary services to support in-house HR departments.
Services Include Termination
PEOs offer a wide range of human resources services.
The job may begin with helping recruit and screen prospective employees. Fridrich notes that Insperity helps with criminal background checks and previous employment verifications for his potential hires. The PEO also offers legal representation in HR matters.
"In the past, before we decided to sign up with PEO, we had to handle a phony wrongful discharge suit," Fridrich says. "The legal fees were enormous even before we settled out of court."
Payroll administration is perhaps the most obvious service PEOs offer, and this includes handling all the tax filings, new employee reporting, and other paperwork. It can also extend to time management.
“We can implement and maintain everything from a simple online clock-in system to a full biometric handprint system where there’s an actual unit they put their hand on when they clock in and clock out,” Avis says.
Insurance management is another major benefit of a PEO, especially because a PEO’s buying power often results in better rates than if an employer sought its own insurance.
Legal compliance is another important PEO benefit. A PEO can create an employee manual, help with training and discipline issues, and even make sure that employee terminations occur properly.
“A PEO has trained HR and labor law people,” Avis notes. “One service that is often performed is assistance with a face-to-face termination. When I tell people that I get a low of raised eyebrows – ‘You help fire people?’ – but business owners are usually happy to hear that that kind of help is available.”
Acadia has clients in 42 states, so its ability to actually go to a client’s office to help with a termination is limited geographically, Avis notes. But even if a client is not local, the PEO can make sure all the legal aspects of a termination are properly handled.
“The PEO helps with anything in the life cycle of the employee,” Avis says.
How much does it cost?
PEOs typically charge in one of two ways – either a flat percentage of gross payroll or a per-payroll fee.
Whether the fee is worth the expense or not often comes down to a calculation of time savings – if a business owner is currently spending four hours per week on HR matters, would having a PEO handle those issues instead allow her to make that much more revenue?
Fridrich notes that the fee he pays to Insperity is less than he would pay an HR person.
“Most PEOs specialize in small to medium companies, and the majority of IRgA members fall into these two categories,” Fridrich says. “Those are precisely the companies that cannot afford to have in-house staff to administer expertly these duties.”
How do you choose?
There are thousands of PEOs across the country. How do you find one that is sound and will serve your needs well?
Here are some points to consider:
1) Is the PEO licensed in your state? PEOs need state licensing in order to provide insurance and other benefits.
2) How long has the PEO been in business? The recession killed many lower performing PEOs; make sure you find one that has enough years experience to weather a storm and guide your company through one.
3) Will the PEO customize your package, or try to sell you an off-the-shelf package?
4) What will the timeline be for deliverables, such as an employee manual or 401K plan?
5) How will the PEO handle the timing of unemployment insurance payments, if the company is taking on a PEO mid-year?
If you are tired of handling HR matters on your own and would like to potentially save money on insurance, a PEO may be a good option for your reprographics firm.