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PEOs Make HR Easier With Staff Leasing

December 1, 1996
Related Topics: Contingent Staffing, Outsourcing, Featured Article
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Imagine what would happen if one day your company woke up and no longer had to be responsible for human resources issues. A new anti-sexual harassment law was just released? No problem. A new COBRA regulation just came out? No sweat. You need instant training for a new sales associate? Not to worry. Another company will take care of it immediately.

What if all you had to do was pick up the phone whenever you had a problem and talked to an HR expert who had all the answers you needed? Or, what if your workers weren't actually your employees, so if they had an employment issue you just sent them to someone else to take care of their concerns? Too good to be true? If this were possible, you might feel as if you had died and gone to heaven.

If your company outsourced its human resources concerns, or if it actually outsourced the administrative issues of its entire workforce (called employee leasing), to any one of the nearly 2,500 professional employer organization (PEO) firms that have sprung up around the nation over the past decade, you actually could be this nonchalant about HR issues, because you would have completely taken care of your employment obligations—without all the day-to-day headaches.

Outsourcing HR activities and leasing staff members to a PEO can be a great idea for some companies. It can save money, reduce risks, improve efficiency, help the company focus on its core business and attract a better workforce. But outsourcing HR and leasing employees through PEO firms also has its limitations and risks. Read more to see if the right HR staff for your firm is one that isn't onsite and whether the right employer for your workers is one that isn't you.

What PEOs are and what they do.
When the first professional employer organizations formally started offering services in 1984, PEOs were known only as employee leasing firms because their primary service is leasing employees—meaning that some or all of their clients' employees technically become the leasing company's employees of record, even though the employees continue to work at the client firms. A leasing arrangement usually consists of employees being on lease for long periods of time, although some employees are leased on shorter, more temporary assignments. The major advantage of employee leasing is that the leasing firm takes care of some, or all, of the employment issues for those leased employees, depending on what kind of arrangements the company buying the services wants to purchase.

But employee leasing is only one service that PEO firms offer. Now also known as professional employer organizations, PEOs offer a variety of additional human resources services including the administration of payroll, unemployment insurance, workers' compensation and payroll-tax compliance. PEOs can provide job descriptions, employee manuals, employee assistance program (EAP) services and handle employee grievances. In addition, PEOs can keep clients abreast of new labor laws and can ensure compliance with existing laws and regulations, such as Title VII, the Americans with Disabilities Act and the Family and Medical Leave Act. "It's one-stop shopping," says Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations (NAPEO), based in Alexandria, Virginia, who says his organization's membership is growing by 30 percent a year.

Small-business owners generally save 3 percent to 5 percent of their payroll expenses by outsourcing to PEOs.

Firms don't have to buy all of a PEO's services, or even lease employees. Other services can be hand-picked depending on business need, such as training design and delivery, compensation plan design and implementation, wage or employee-opinion surveys and affirmative-action plans. "We have those capabilities, but not every client has those needs, so those are ˆ la carte services that a company can obtain from a PEO," says Kirk Scoggins, president of NAPEO, who's also the chairman, president and CEO of TeamStaff, a Tampa, Florida-based PEO firm responsible for clients' employees in 42 states.

However, professional employer organizations typically bundle HR services together for clients so they can lower their overall employment-related costs—costs that most small firms have a difficult time controlling, especially if they don't have human resources experts on staff. According to the U.S. Small Business Administration, most smaller businesses with 100 employees or fewer don't have a human resources professional on staff. It's something companies usually can't afford until they've grown much larger.

According to a January 1996 research report on the employee-leasing industry by Bankers Trust Co. based in New York City, small business owners generally save 3 percent to 5 percent of their payroll expenses by outsourcing to PEOs, primarily due to lower costs for workers' compensation, unemployment and health insurance. The report says that some companies save as much as 10 percent or more of their gross wages.

PEOs can provide HR services at lower costs because they're able to negotiate lower costs with companies that provide health, dental and vision care because they can pool employees together from several client companies for greater group discounts. In turn, these lower costs help smaller employers offer better benefits and employee services to workers. Although many small companies couldn't afford to offer benefits to workers before using PEO services, businesses often can offer benefits to workers after signing up. Plus, offering better benefits helps many smaller businesses attract the same caliber of employees that larger employers usually attract with top-notch benefits, savings plans and retirement funds.

"[As PEOs], we can do payroll at the same cost or lower than what a payroll service can do [it for]," says Yager. "Most small businesses pay 40 percent higher workers' comp rates than larger businesses. We can provide workers' comp insurance to a small business somewhere between 0 percent to 40 percent less than what a small business is getting it for because we're big businesses." Yager points out that most small businesses can't afford to offer health insurance, pension plans or 401(k)s on their own, because these benefits are too costly both to purchase and to administer. But after contracting with a PEO, they're often able to offer employees these benefits.

PEOs usually offer services from a distance. That is, they aren't onsite, but usually offer most of their services from a nearby location. "We make onsite visits on a regular basis," says Barry Shorten, vice president of The Alcott Group, a PEO service firm based in Farmingdale, New York. After making the initial presentation to employees about the PEO company's role as the primary employer, the services it provides and the benefits employees will receive, PEO representatives return to the worksite from time to time to update employees on new or changed benefits or programs.

PEO firms service clients with an average of 43 employees. So the majority of companies using these services are small businesses. "In the last year or so, however, that has changed dramatically," says Yager. "More companies that have 100 to 200 employees are saying, 'If this is so good for smaller companies, why isn't it good for me, too?'" So, more medium- to large-size companies are now seeking PEO services. "If you have more than 300 employees, because of economies of scale, you're probably better off doing HR yourself," says Yager. "But until then, this is really the new American mousetrap."

He adds: "No one goes into business to be an employer. And yet, the most important thing you can do in business is to be an employer. But being an employer brings no revenue; it only brings nightmares, problems and challenges because you've got to meet tons of forms and regulations and deadlines." Outsourcing HR helps many companies focus on their core business—what they're best at—and why they went into business in the first place.

Outsourcing—it's often as good for employees as it is for employers.
Servo Corp. of America, a commercial aerospace firm based in Hicksville, New York leases all of its 58 employees from The Alcott Group. Servo has one of the more traditional service packages that employee-leasing firms offer.

Two years ago, Servo had 250 employees and a three-person HR staff, including an HR director. Then the firm sold its major product line which represented approximately two-thirds of the company's revenue and reduced its staff to 50 employees. "In the process, we asked ourselves, 'What are we going to do with our human resources department?'" remembers Servo President Steve Barre (pronounced "berry"), shortly after the company downsized. "That's what got us thinking about the employee- leasing idea." By January 1, 1996, the firm decided to go with the leasing concept. Now, The Alcott Group takes care of all of Servo's employee related issues.

Barre says there are three main reasons why Servo decided to sign an employee-leasing contract. First, having Alcott provide benefits to employees allows the organization to offer employees a much more flexible benefits package, with more choices and at a lower cost to the company than it could have provided on its own.

Second, after the downsizing, the firm no longer could afford to maintain a human resources department, but still needed HR services. "My senior vice president of finance and administration, who needed to spend most of his time on financing and controlling company resources, was spending a lot of time trying to decipher all of the complicated changes in the labor law, benefits rules, ERISA regulations and so forth," says Barre. "We basically turned all that over to Alcott to worry about." He emphasizes that Servo executives still have to think about these things, but they spend a lot less time on them these days.

"Third, there's a real return on investment in terms of out-of-pocket costs because we pay Alcott less than we were paying the myriad labor lawyers and consultants when we had our own HR function," says Barre.

But he realizes there are trade-offs to not having an HR professional on staff. "Right now, people development is basically a responsibility of me and my managers," says Barre. "And while we try to do a good job at it, I won't pretend that it gets the same day-to-day attention it would get if we had somebody who was focused on that every day."

Barre says he liked it when the company had an HR director onsite who could take care of employee issues. But often, it comes down to money, and sometimes HR is better outsourced than kept in-house. And sometimes, it just doesn't matter to employees who the HR professional is, as long as workers feel well-served.

For example, when Barre was considering employee leasing, he was worried about what employees would think about being employees of another firm. "I thought there might be an initial feeling of 'Gee, what has Steve done? He has sold us off into slavery to Alcott and what's going to happen to us?'" Employees' reactions pleasantly surprised him. From the first time Barre explained the concept, employees have been much more curious about their new benefits packages and other advantages than they are about the technicalities of being employees of a second party. "I think it's well understood that the leasing process benefits everybody and doesn't change the working relationship at all," says Barre. "I haven't seen any significant negatives."

Like Barre, Ken Blankenhorn, president of Rapid Rack, a City of Industry, California-based manufacturer of metal racks, is another senior executive who sees many benefits to employee leasing. For one, the company has a large fluctuation in its business from month to month, and appreciates being able to expand and contract its workforce based on business needs.

"One month we'll do $2 million in sales and the next month we'll do $4 million," says Blankenhorn. "Orders fluctuate in different months, but we also need to be able to change people from one operation to another. So in one month, we'll have heavy [demand for people to work in] packaging, and the next month [that area] will have light demand. Having a leased labor force gives us the ability to hire people and lay people off very easily and quickly; whereas, if we have our own full-time employees, it's very difficult to just lay them off today and bring them back tomorrow because of workers' comp laws, payroll regulations and all the rest. [Employee leasing] helps us match our [business] needs."

Rapid Rack leases approximately 200 of its 265-employee workforce. About 45 of the 65 regular employees are exempt, such as accountants, engineers and salespeople. Rapid Rack primarily leases lower-skilled laborers for its manufacturing area, rather than leasing higher-skilled workers, such as structural or electrical engineers. "For that type of [more-skilled] labor pool, we typically have to advertise or go through headhunters, which WorldTec also does for us," says Blankenhorn. WorldTec Group International, a PEO in Cerritos, California, takes care of Rapid Rack's payroll services and issues related to the leased employees.

Because the company leases only two-thirds of its workforce, it still maintains a small HR department which takes care of the employment needs of the rest of the staff and oversees the PEO contract and interactions.

Blankenhorn thinks the leasing arrangement works perfectly for his organization. "If the nature of your business is such that you have to fluctuate your workforce, then [employee leasing] is definitely the best way to go," says Blankenhorn. "But, then again, if you start a business tomorrow and need 30 solid people, then you might really want to hire them yourself. The needs are different for different types of companies."

Staffing firms are different from PEOs, but some services overlap.
Advo Inc. is one of those companies that has a different need for staff leasing. It backed into a staff-leasing arrangement after first working with a more traditional staffing organization. Advo, a direct-mail advertising firm with 600 employees in Compton, California, started out working with Staff Control Inc., a temporary placement firm also based in Cerritos, California, and a sister company to WorldTec Group International. Advo later converted approximately 100 of the employees it originally sourced through Staff Control into an employee-leasing arrangement with WorldTec. Advo doesn't buy the other PEO services that companies usually buy when they lease employees, such as workers' comp insurance, payroll processing and benefits administration.

"We refer to [these workers] as leased employees, but they are, by and large, operating like a temp workforce," says Dennis Cisneros, HR manager for Advo. "The nature of our business—light industrial production—doesn't lend itself well to leasing," says Cisneros. "I think it works better in industries that are more long-term, such as service industries with massive workforces." By that, Cisneros means not only that his company has a constant need for a flexible workforce whose work hours vary greatly from week to week, but also that the number of workers the firm needs on a weekly basis changes rapidly. So, a leasing arrangement that's more like a temporary workforce is the best answer for his organization.

These types of temp-to-lease arrangements, like the kind Advo has arranged, are being provided by an increasing number of traditional staff leasing firms. They're also offering PEO services in response to clients' requests for a single-source provider to satisfy all of their HR needs. Although traditional staffing firms typically provide clients with long-term, as well as short-term staffing solutions, one of the chief differences between the two types of companies is in the services that employees themselves receive. "Temporary or staffing firms, whether short-term or long-term, probably would never provide a 401(k) program or health care," explains Peg Reinhart, vice president of sales and marketing for The Synergy Advantage Inc., a PEO franchise firm based in Chicago.

However, the kinds of benefits employees have don't always provide the clue. Experts in the temporary employment area disagree that temps rarely get benefits. "If by benefits we mean group health, life and pension benefits for which the employer makes a contribution or pays for fully, those kinds of benefits are less prevalent, but they're by no means unavailable to temporary employees," says Ed Lenz, senior vice president and general counsel for the National Association of Temporary and Staffing Services (NATSS) based in Alexandria, Virginia. Lenz explains that often after a certain period of time, usually 300 to 400 hours on the job, temporary employees are eligible for health-insurance benefits, incentives and cash awards, such as vacation pay and sick pay. "The story on benefits isn't as bleak as some people might portray it," he says.

According to Lenz, the real key to understanding the PEO employment relationship is where the employees start out. "The main difference under a PEO arrangement is that employees almost always are individuals who already are employed by the client firm and the firm contracts with the PEO to provide services to that already existing workforce," says Lenz. "Whereas temp firms, in most cases, recruit workers from the general labor market and then assign them on a temporary or supplemental basis to their clients. So the original source of the workers is the essential difference." According to Lenz, the length of employment also is key. Workers under a PEO company contract tend to be long-term and leave their jobs at the normal rate for their industry, whereas workers under a staffing company tend to complete assignments faster and then move on to other employers.

Whether you use PEO services as more of a short-term or long-term service, it can be an advantage, especially for the small employer. Although his firm has a less traditional employee leasing arrangement, Cisneros says he thinks employee leasing is generally a good idea because it allows firms to direct more of their resources toward producing the company's product or services, rather than spending so much money on the administration of employee services.

You can lease either portions of your workforce, or the entire group.
Typically, smaller companies (with fewer than 300 employees) tend to lease their entire workforce, rather than just a portion of it. They also tend to buy the complete HR services package. However, larger Fortune 500-type firms tend to lease only a portion of their workforce.

"What you're trying to accomplish is to functionally outsource the administrative parts of being an employer, and if you keep your own employees, then you still have to perform the functions. Therefore, you don't gain the advantage of outsourcing, so it doesn't really make any sense for a partial workforce except in the case of very large corporations," says NAPEO's Scoggins.

But certainly there are times when it can make sense to lease a portion of your workforce. "We've seen most of the cases [of partial workforce leasing] occur because of head-count problems in situations in which there's been a hiring freeze or a restructuring," explains Shorten. "We've also seen it happen when there was a department established for a short period of time and the company didn't wish to take on the responsibility or the burden of having to hire and then terminate employees. So we [served as the PEO for that group] for a period of about two years in one case."

In another case, Your Staff Inc., a PEO company, took on 1,000 employees for a client that wanted those employees to have benefits similar to its in-house employees, but for budgeting reasons, it couldn't bring them on staff permanently. "Or, we may take 500 to 800 part-time employees for a large company or take care of just a few part-time em-ployees for a big company's satellite offices," says James R. Conner, general manager of Your Staff based in Chula Vista, California. Your Staff is the PEO arm of Kelly Services Inc. based in Troy, Michigan, one of only a few large staffing organizations that also provides PEO services nationwide.

Conner says in one case, an employer had problems with high turnover of its part-time employees in satellite offices because they weren't eligible for company benefits. "So we were able to provide some benefits for these people and already we're seeing some improvement on their turn over rate," says Conner. Also, for those workers who want to work more hours, Your Staff is able to work closely with Kelly's 900 U.S. staffing offices to find other part-time jobs to fill in the gaps. "So it has really been a win-win situation," he says.

Understand your responsibilities and liabilities.
According to most firms that step into the employee-leasing arena, not much about the day-to-day relationship with employees changes once employees are leased to a PEO. "Employees work for the same people they used to work for," says Barre. "They don't all of a sudden say, 'I'm now an employee of [the PEO] and therefore I don't have to do what you tell me to.'"

However, there are differences in some key areas, such as in cases of an employee dispute. Although the PEO firm executives would be the first people the authorities would go looking for, both organizations would be at risk since there are two employers.

"We're the employer, so if there's a complaint, we're going to be the first ones that are contacted by the agencies and we have to respond," says Shorten. PEOs usually provide ongoing programs to let people know that if something occurs, they should report it first to the PEO which will investigate the problem immediately and take all the proper actions. "We take corrective action when necessary," adds Shorten. "And sometimes, it has been necessary."

In reality, it's co-employment, shared employment. Although the PEO firm has absolute control over certain areas such as payroll, hiring and terminating, the day-to-day supervision over the employee and his or her work performance rests with the client company managers and supervisors. "They're the best ones to judge employees' capabilities and we do take their recommendations. Responsibility is shared," says Shorten.

I thought there might be a feeling of "What has Steve done? He has sold us into slavery. What's going to happen to us?"

That's why employers shouldn't look upon the leasing situation as a cure-all—that once they outsource, they're completely off the liability hook. "Just because an employer is leasing somebody from another company, doesn't necessarily mean that the onsite employer is 100 percent protected from liability," says Laura Wilson Shelby, an associate with the Los Angeles law offices of Seyfarth, Shaw, Fairweather & Geraldson.

Shelby has broad experience in labor and employment law, and nontraditional employment situations, and says she has seen problems occur when onsite employers become too comfortable with the leased employees and forget they can't act in the role of the primary employer by offering things like vacation benefits or other perks. "The analysis is similar to the independent contractor situation in which a worker isn't really an independent contractor if you're supervising what he or she is doing every day, telling the person to be there from nine to five, giving him or her benefits and doing all the things you normally do with employees," she says.

Shelby says the key to staying out of trouble is in the supervision of leased employees. "I think some companies are running into problems in this area because they have their leased employees reporting to the onsite employers' supervisors," says Shelby. "What they really should be doing is either lease the supervisors as well, or make sure the leased employees report to the leasing company so the PEO is really doing the supervising." If it begins to look like you're treating leased employees exactly like nonleased employees, the courts can treat you as the primary employer, or as a co-employer at the very least, if a problem should arise.

"You can never be 100 percent protected," says Shelby. "You can have the contract, you can do all the things your lawyer tells you to do, and there's still risk. The key is to minimize risk and protect yourself as much as possible [by following these guidelines]."

Because of the risks involved with leasing, it's important that you choose your PEO wisely because you don't want the primary employer of your workers making any mistakes in the highly regulated area of employment and HR issues. "Make sure you're working with a reputable company who knows the law and knows how to protect you," adds Shelby. "They've got your future on the line."

Despite the risks, many employers are finding that PEO relationships work well and meet their goals for saving money and increasing efficiency. Whether it can work for your firm will depend on your company's business and staffing needs and overall comfort level in allowing another firm to manage your workers. It's just one more HR option in a sea of cutting-edge, employment-management choices.

Personnel Journal, December 1996, Vol. 75, No. 12, pp. 64-72.

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