PEOs — Hot New Outsourcing Trend

Professional Employer Organizations Give Businesses
a Comprehensive Package of HR Services

Alexandria , Va.   (January 30, 2004 ) — As outsourcing gains momentum in America , thousands of businesses are leading the trend by working with professional employer organizations (PEOs), the hot new development in outsourcing.  These businesses have a competitive advantage because their PEOs’ comprehensive package of HR services gives them more time for productive activities, saves them money and provides a valuable group of employment experts.

PEOs contribute to the entrepreneurial strength of small to mid-sized businesses, whether they are just starting, jump-starting or growing to a new level of performance. PEOs enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation.  PEO clients focus on their core competencies to maintain and grow their bottom line.

The average PEO has grown more than 20 percent per year for each of the last six years, according to a survey of members of the National Association of Professional Employer Organizations (NAPEO).  About 700 PEOs that offer a wide array of employment services and benefits are operating today in 50 states.  The PEO industry generates approximately $43 billion in gross revenues annually.  PEOs have a nearly 80 percent client retention rate due to strong client satisfaction.

One of those satisfied clients is Frank Albi, president of Business Information Solutions, Inc., a Cincinnati-based records control business.  “Working with our PEO, Employee Management Services, has enabled us to redeploy our own internal resources to further the objectives of our core business,” Albi said.  He contracted with EMS after a “nightmare lawsuit” by a former employee. “EMS helps us solve our human resources challenges. We are not HR experts, nor do we want to be.  By outsourcing the HR services to a company whose core competence is workforce management, we can better pursue our own business objectives.”

Howard Stone, executive vice president of administration for Invision, an eBusiness consulting firm in New York, cited two main benefits of working with their PEO, The Alcott Group: “access to a broader range of benefits, especially healthcare, to suit our employees and at a rate we could afford; and the availability of a full-time professional HR department at a fixed cost.”

Outsourcing Human Resources

In a partnership with a PEO, the client retains control over the activities that contribute to the bottom line.  The PEO becomes the employer for the employment administration required to improve regulatory compliance and maintain an effective workforce.  The PEO client controls the employees’ workflow and products.  The employees receive their pay, benefits and employment related communications and training from the PEO.

“As our company grew we would have needed more HR staff.  Instead we decided to work with Compensation Solutions,” said Raymond Conta, vice president and co-founder of North Eastern Asset Recovery, Inc., a debt recovery firm in New York . “We also found that working with this PEO was good financially in the short term and long term.  We’ve had cost savings on insurance, and we do not spend money to find all the independent carriers to provide the services that Comp Solutions provides.”

Saving Time and Money

The pay-off from working with a PEO can be dramatic.  Nearly nine in 10 PEO clients (89%) in a recent survey said that their PEOs significantly reduced their time demands.  The smallest companies (one to nine employees) saved an average of seven hours a week; those with 50-99 employees saved 23 hours. The 2002 study was commissioned by the Society of Human Resource Management Foundation. 

In the study, 68 percent of the PEO clients reported that using a PEO saved them significant amounts of money.  That’s no small feat, considering that small businesses spend about $2,000 per employee just to comply with tax and workplace related federal regulations, according to a study by the U.S. Small Business Administration (SBA). Small firms (fewer than 20 employees) spend 60 percent more per employee than larger firms to comply with federal regulations. The SBA also reports that small firms spend twice as much on tax compliance.

Business owners spend about one-quarter of their time on employment related paperwork and are often hard pressed to stay on top of the many employment laws and regulations. According to the SBA, between 1980 and 2000 the number of U.S. laws and regulations regarding employment policies and practices grew by 60 percent.  PEOs help improve their clients’ compliance with employment regulation and the timely payment of payroll taxes.

Improving Access to Benefits

An estimated 40 percent of businesses in a PEO relationship upgrade their total employee benefit packages as a result of their association with a PEO. The SBA has reported that the opportunity for workers at a small business to have access to a 401(k) retirement savings plan has dropped from 28 percent to just 19 percent. In contrast, nearly 84 percent of worksite employees in a PEO arrangement were offered a 401(k) retirement savings plan, according to a survey of NAPEO members.

“Our first and foremost reason for using EMS was the ability of a small company like ours to buy big-company health benefits,” said Patti Reeder   , office manager for Master Plumbing, Inc., in Ohio  .  “There are lots of benefits that as a small company we could not offer without EMS .”  Reeder also values EMS ’s advice and information on employment issues and believes that this PEO has helped reduce employee turnover.

Another benefit of using a PEO is the sense of relief it can give to the business owner.  “Using The Alliance Group has given me peace of mind, and that’s invaluable,” said Christine Swilley, owner of Bond Equipment, an Iowa based manufacturer of food processing equipment.   “I have good people and need to keep them.  Alliance helps me to be a good employer.” 

For more information on the PEO industry, visit the NAPEO Web site: www.napeo.org.

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NAPEO, the National Association of Professional Employer Organizations, is the recognized “Voice of the PEO Industry.^®” NAPEO has nearly 500 members found in all 50 states, representing more than 70 percent of the industry's revenues. Professional employer organizations enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation.  PEO clients focus on their core competencies to maintain and grow their bottom line.

Edie Clark , NAPEO
[email protected]
(703) 739-8162