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Relieving Employer Stress
By Dr. Drake Beil
Today’s business organization is rapidly being transformed from a structure built out of jobs into a field of work needing to be done. Jobs are no longer socially adaptive. That is why they are going the way of the dinosaur." – William Bridges, The End of the Job, FORTUNE magazine, 9/19/94 issue.
A business needs employment like a whale needs a bicycle. Every engine remanufacturer, supplier, vendor and small business owner already knows the problems associated with employment, i.e., the mountains of paperwork, the compliance nightmares, the litigation liabilities, the numerous restrictions in screening, interviewing, testing and hiring, and we haven’t even included worker’s compensation, benefit programs, cafeteria plans and the other artifacts of employment.
Here’s what is really important: employment has no intrinsic value; what is really most important is providing products and/or services to the satisfaction of your customers. There is, however, a way out of the employment morass. But it involves the death of employment as you now know it. The solution is to outsource your employees and to focus more of your time on actually operating your business.
The key strategy being discussed here is to lease or contract your workforce. PEOs (professional employer organizations) represent a solution for doing this. On a contract basis, a PEO provides payroll processing, human resource administration, benefits administration, worker’s compensation, regulatory compliance and risk management.
A PEO assumes all responsibilities of employment, and as a strategic partner, it allows its clients to focus on their core business objectives, e.g., developing and producing products and services, getting new customers and/or keeping the existing ones happy. Outsourcing employment eliminates low (or no) value work (like employment management) and allows your managers to concentrate on higher value priorities, i.e., profitable activities.
Your company can still schedule its workforce, determine who it will hire and fire (the PEO does the actual hiring and firing), conduct performance appraisals, set pay and benefits levels, and provide day-to-day management. However, the liability and responsibility for employment shifts to the PEO.
What’s the appeal?
The appeal of outsourcing employment is enormous for the small and medium size firm. They can, as Thomas Stewart recommended (FORTUNE magazine 1/15/96 issue), "blow up" their Human Resources (HR) departments as a result of contracting with a PEO. Better than that, many small companies (1-5 person shops) can cost effectively provide big company benefits through a PEO where it would be almost impossible and very time-consuming to do so otherwise. Without the solution of outsourcing, firms have to devote so much time and so many resources to the specialized field of personnel administration that their productivity and profitability are forcibly and substantially reduced.
Or, because of limited resources to begin with, and often no HR specialists being available, many companies are forced to operate in violation of the hundreds of personnel laws, rules and regulations which often vary state-by-state. Fortunately, there are no "employment police" yet. But why operate with such high risk in such a litigious environment?
Many company owners are asking themselves why should they assume those risks when a more viable and cost effective alternative is available? Businesses need people to get the work done. But they certainly don’t need all of the other hassles that come with employment.
In his recent book, The Excuse Factory (Free Press, 1997), Walter Oslo talks about "how employment law is paralyzing the American workplace." What’s worse, employment law has become a booming industry in itself!
According to Oslo’s research, the increasing number of harassment and discrimination lawsuits filed has made employment law the fastest growth area for attorneys. Win or lose, continues Olson, "the cost of defending a suit to trial is likely to exceed $100,000." Sexual harassment charges, which require more elaborate investigations, are almost twice as expensive on average.
What’s worse, in the next five years your risk of being sued has risen to a now staggering 60%. According to Preventive Strategies’ newsletter, (August 1997), six out of 10 of you reading this article will be sued in an employment-related lawsuit between now and 2003.
Save money, increase productivity
In most cases, businesses will save money and increase productivity as a result of outsourcing the employees that they need. PEO costs typically run 4-6% of payroll. On the other hand, the Small Business Administration (SBA) and the U.S. Chamber of Commerce both estimate that current employment administration generally costs a typical firm 8-12% of its payroll.
Innovative companies that have jumped on the PEO express have often left their competitors behind. In essence, PEOs help their customers become more profitable.
According to Airtouch’s (a communications business company formerly known as PacTel Corp.) vice president of human resources and corporate services, John Riding, the keys to successful outsourcing include senior level support, choosing the right vendor, communication and monitoring objectives.
When Egghead, Inc., a major software developer, for example, turned to outsourcing for payroll, health and welfare plan administration, as well as for its ESOP, it saw positive results with minimal transitional impact in just a year’s time.
A booming PEO industry
Over the last 10 years, PEOs have become a prosperous industry group growing at a rate of about 35% annually. They provide a competitive advantage to many companies because via the volume of employees represented by a PEO, their workforce can often obtain the same level of benefits for reduced costs, or better yet, increased benefits for the same cost.
Someone else (the PEO) becomes responsible for worker’s comp claims, employment liability, payroll and taxes. In an era of increasing complexity, PEOs can offer a positive alternative to employment responsibilities, and help make operating your business simple again.
Big and getting bigger
PEO growth rivals the boom in technology, and it’s only getting bigger. In 1986, when employee leasing firms began in earnest, there were approximately 75,000 people employed in this manner nationally. As of 1996, PEOs employed more than 2 million people.
This growth, while impressive, is still in its infancy. The number of workers currently employed by PEOs represent less than 3% penetration into businesses with less than 500 employees. There are many who feel that the inevitable death of employment as we have known it is just a matter of time.
There are about 2,000 PEOs in the U.S. today, and that number is growing. Because many states have no certification process, anyone can allege to be a PEO. Consequently, as a potential customer, you should be very careful in selecting a PEO.
Guidelines for selecting a PEO
In choosing a PEO, first assess your workplace to determine your human resource and risk management needs and concerns. Make sure the PEOs you talk to are really capable of meeting your goals. Evaluate the experience and credentials of their internal staff and review their risk management services.
Sales brochures are nice to read, but you should meet the people who will be serving you and talk to several of their customers who have similar size companies. Ask for client and professional references and check them all out thoroughly.
Second, check to see if the PEO is a member of the National Association of Professional Employer Organizations (NAPEO). NAPEO, based in Virginia, can be reached at 703-836-0466. You can visit its Web site at www.NAPEO.com. NAPEO will be able to help you with further reference checks on the PEO in which you are interested. It can also assist you in determining if the PEO is licensed in the states in which you operate. If your state requires a PEO to be licensed, make sure the company meets all those requirements.
Third, understand how the employee benefits and medical plans are funded, and whether they are fully funded or partially self-funded. Is there a third-party administrator or carrier, and if required in your state, are they licensed? Understand how the employee benefits are tailored and determine whether they fit the needs of your people.
Last, before you leap, get a cost analysis from the PEO and read its service contract carefully. Are the respective parties’ liabilities and responsibilities clearly stated? Are there guarantees? What provisions or performance issues allow or prevent you or the PEO to cancel the agreement?
Contracting for employment with a PEO is not necessarily problem free. See sidebar story beginning at the top of page 42. However, if researched properly, your business may stand to benefit significantly in reduced employee management liabilities, while improving both employee benefits as well as your company’s profits.
Dr. Drake Beil is a published author and certified management consultant with more than 15 years of experience in management consulting and organizational development. He is president of ALTRES Solutions, a management consulting firm with offices in Honolulu, San Francisco, Los Angeles and Salt Lake City providing strategic planning, process re-engineering, marketing and sales consultations. He is happy to respond to rebuilders with questions on PEOs and can be reached at 808-591-4900, or by email to email@example.com.