Hands-Free HR

When does outsourcing make sense?

Chris Nininger won't necessarily refer you to a professional employer organization (PEO), even though he's a satisfied customer. Nininger uses Payroll Solutions Plus in Roanoke, Va., to oversee the human resources duties—from payroll and insurance administration to writing employee handbooks—of his Roanoke company, Bugman Exterminating. Payroll is Nininger's co-employer, acting as the official employer for taxes and payroll, even though Nininger still manages his employees. The PEO costs Nininger about $15,000 a year, but it has saved him at least 10% on workers' compensation insurance and lets him spend more time building his $1.5 million, 15-person company.

Nininger also co-owns Roanoke's Blueberry Hill Restaurant & Lounge, where he wouldn't think of using a PEO. The general manager of that 30-person, $600,000 business is an ex-attorney with a solid grasp of HR issues. Plus, workers' comp is less onerous for restaurateurs than it is in the chemical-heavy world of extermination. Going it alone works for the restaurant, but Nininger says using a PEO for Bugman is "one of the best things I've done."

As Nininger knows, PEOs aren't for everyone. They're expensive: Fees run from 1% to 4% of payroll, and there's often a setup fee, usually $1,500 or more. (That doesn't include insurance premiums, which the PEO collects and forwards to the insurance carrier.) And the benefits PEOs offer aren't equally important to all companies.

Entrepreneurs considering a PEO should analyze which services they need and what their current costs are. They also need to decide how much control of their business they're willing to cede to a third party. And they would be wise to ensure the PEO itself is on solid footing.

PEOs are most useful to companies that rely on competitive benefits to recruit and retain workers. They can also help entrepreneurs with lots of regulatory or compliance issues and scant time or expertise to deal with them. Because most PEOs negotiate insurance rates for all their client companies as a group, they can also help keep premiums low.

To find a PEO, start with the Web site for the National Association of Professional Employer Organizations (napeo.org), of which about 370 of the country's 700 PEOs are members. The Employer Services Assurance Corp. (esacorp.org) is a nonprofit that has accredited 24 PEOs willing to undergo financial and operational scrutiny and to shoulder the costs of accreditation.

If your would-be PEO is not accredited, make sure that it has the licenses or registrations your state requires. Then ask for proof that it's paying quarterly state and federal taxes and insurance premiums, and ask to see financial statements. You'll also need to check that the insurance carriers it works with are licensed in your state and authorized to provide coverage.

Next come the staffers who will be handling your account: Do they have professional training or certification from a group such as the Society for Human Resource Management? Are they located within driving distance of your office? You'll also want to do old-fashioned reference checks by talking to the PEO's clients.

Of course, the PEO should also be doing due diligence on you, in particular looking at your workplace safety record. If it isn't, look out. It may be signing on clients with potentially high workers' comp claims, something that could jeopardize the PEO's financial strength down the road—a scary prospect for any business owner handing his employees to a new partner.

By Amy Barrett

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