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Small Firms Seeking Big-Company HR Needs Turn to Professional Employer Organizations

Throughout New York City, fledgling and existing small companies are turning to PEOs—and not just to free themselves of the headaches and overhead of handling HR issues so they can concentrate on growing and managing their operations.

July 17, 2012
Related Topics: Top Stories - Frontpage, Growth, Employee Handbooks, Payroll, Compensation, Recruitment, Technology
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A serial entrepreneur with three startups under his belt, Jeffrey Wald owes his success, in part, to what he doesn't do: getting involved in human-resource issues.

Each time Wald has launched a company, he has contracted with a professional employer organization, or PEO, designating it as his workers' "employer of record" and then sending it checks to administer and cover a range of employee-related matters, including payroll, payroll taxes, workers' compensation and health insurance premiums.

"A PEO is rather standard practice in the startup world and gets us off the ground with a world-class human-resource infrastructure for a relatively inexpensive cost," said Wald, whose latest venture, a 40-employee firm called Work Market Inc., in New York, provides software for companies to manage contract workers.

Wald is the company's co-founder and chief operating officer.

Throughout New York City, fledgling and existing small companies are turning to PEOs—and not just to free themselves of the headaches and overhead of handling HR issues so they can concentrate on growing and managing their operations.

In the face of rising health insurance costs, PEOs, also known as employee leasing companies, are gaining traction as a way to access more reasonably priced health care insurance. With their economies of scale, they offer plans that are typically available only to large companies or would be too costly for small firms to buy on their own.

"PEOs give you a more robust benefit plan that a lot of small businesses need in order to recruit top talent," said Beth Schoenfeldt, co-founder and CEO of Manhattan-based FundedBuy, which helps startups procure everything from phone systems to employee leasing services.

PEOs generally serve businesses with 20 to 75 employees, although they're not likely to turn away five-employee startups, especially newly funded Silicon Alley ventures that show growth potential, said Thomas Farrell, founder and vice president of client relations at PEO Spectrum Inc., a brokerage concern in Lindenhurst, New York, that represents more than 100 employee leasing firms nationwide. In New York, PEOs serve a range of companies, including technology, accounting, law and financial-services firms.

This past January, Clothes Horse Inc., a year-old New York-headquartered fashion-technology business that helps online shoppers find clothes that fit, signed up with TriNet, a large San Leandro, California-based PEO with a Manhattan office.

Vik Venkatraman, a Clothes Horse co-founder, said he and his two other co-founders—who are the firm's three full-time employees—went the PEO route for two reasons: to "access better health care programs than we could find and afford on the open market" and to eliminate the need to find a payroll processor.

But PEO convenience comes at a price. At the outset, employee leasing firms charge an administrative fee that can range between $800 per employee per year for a client with 75 employees and $2,500 per employee per year for a firm with as few as five employees. The fee includes payroll processing, tax compliance and access to an HR consultant, according to Farrell.

Some PEOs give companies the option of calculating their administrative fee as a percentage of payroll, which, depending on the type of business and its salaries, can range from 0.2 percent for a hedge fund to 5 percent for a manufacturer, according to Farrell.

"We advocate for a flat administrative fee, because if you give employees a raise, you're giving the PEO a raise, too," he said.

Health care coverage is extra, although it generally runs 10 percent to 25 percent below open-market rates, according to Farrell. In addition, employee leasing firms usually have an arsenal of at least 10 plans, with clients typically offering their workers a choice of three to five.

"The only downside is the administrative costs, but I more than make up for it in what I pay for health care insurance," said Wald, whose firm covers 80 percent of its workers' health insurance costs in addition to paying an administrative fee of $100 a month per employee. "I would bear an extra $80,000 in health insurance costs if I switched out of the PEO."

In early 2011, the price of health insurance drove Jeff Giesea to a PEO for his startup, BestVendor Inc., a free online resource for finding business apps and services. As a result, the firm is paying "significantly" less than what a health insurance carrier said it would charge for comparable coverage.

"Even with the extra administrative costs, it's still less expensive than getting a policy on my own, and employees get a choice of the plan they want," said Giesea, the founder and CEO of the eight-employee company.

Six-year-old New York-based MindsInSync Inc., which designs and manufactures products for the home, pet and juvenile markets, is sticking with Houston-headquartered employee leasing firm Insperity, even though it no longer makes sense financially.

With 50 employees in New York, along with 100 overseas, MindsInSync could save as much as $70,000 if it left the PEO in favor of using another vendor just for payroll services and health insurance coverage, said COO Paul Cuthbertson.

But a departure from Insperity would require MindsInSync to take on time-consuming HR responsibilities, as well as give up health insurance that represents "a great package for the price," said Cuthbertson. "Some employees would get disgruntled by the change in health plans."

Still, PEOs aren't the antidote to the health insurance woes of single proprietorships.

Burton Goldfield, president and CEO of TriNet, which offers 105 different health plans, said his PEO would not take on a business with one person, because his firm generally requires clients with at least five workers to make the arrangement feasible.

Single-employee operations, he said, "would not be interested" in many aspects of TriNet's "infrastructure," such as its employee handbooks, recruitment services and employee liability insurance.

"They're not going to sue themselves," said Goldfield.

In addition, PEOs aren't necessarily the affordable health care solution for small businesses with an older workforce.

"PEOs use health insurance underwriting techniques to assess each prospective client's perceived risk from a medical standpoint, and will then either decline a company or accept it as a client but take into consideration its demographic profile in providing health insurance rates," said Farrell.

Cara S. Trager writes for Crain's New York Business, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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