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The Rise of PEOs for Small Businesses

July 14th, 2018 by Valerie Juarez, Inspiring HR

Small businesses with lean management structures often struggle with the cost containment, administration, and time management of business practices.  Daily obstacles include managing insurance and liability policies, unemployment claims, payroll processing, tax filings, and general human resources processes such as staffing and performance management.

Take for instance the situation of Elite Cleaning Service (ECS) of Philadelphia, PA. ECS started out of Joe’s basement with his wife, three sister in-law’s and brother.  Within 6 months, he grew out of the basement and started renting office space.   After some additional business and staff growth, he secured a significant contract with a major bank requiring he hire 10 more people, fast.

Reality set in that he needed help.  In addition to assistance with hiring, he needed job descriptions, workplace rules, leadership training, formalized payroll processing and direct deposit options, some affordable but competitive benefits, wage and hour training, and his worker’s compensation claims and policy renewals were coming to a head.

He did not have the resources to employ dedicated administrative staff to handle the logistics of personnel and business administration; he needed to free up his own time to focus on strategic matters and sales; and, ECS was growing large enough for Joe to feel the increased pressure of his businesses’ liability and risks.

Joe’s headaches are common for growing small businesses, but he found the solution in an increasingly popular relationship: He elected to partner with Professional Employer Organization.

Professional Employment Organizations (PEOs) provide a one stop solution for outsourcing resources and increased purchasing power.  They may have started with simple payroll processing, but PEOs now provide a wider scope of services for some 180,000 small and mid-size companies across the U.S.

How The PEO Relationship Works

The PEO relationship is that of co-employment, with the PEO taking on the role of “employer of record”.  The small business is still an employer, however, and maintains a span of control over its staff, able to make day to day decisions on new hires, promotions, compensation programs, internal procedures, job duties, disciplinary actions, terminations. etc.

The PEO Advantage

Increasingly, franchises seeking brand uniformity for business and policy administration sans their own co-employment conflicts, are discovering and partnering with PEOs.  A PEO offers HR Business Consultants who can work with various franchisees in multiple states to provide an “instant HR infrastructure”, able to craft polices and culture behind the scenes that can be delivered independently by franchise owners to their staff.   This avoids the inconsistencies that evolve when individual franchisees attempt to start from scratch, allocating personnel or HR responsibilities to in-house staff with varying degrees of skill and knowledge and without the benefit of interacting with other franchise locations to build a consistent image.

That same “Instant HR” concept is especially appealing to businesses that are just getting started.  Before the organization has even started staffed the first employee, resources such as handbooks, time and attendance policies, pay policies, and internal employment practices can be ironed out, or are very quickly available, as new needs or questions present themselves during the business’s growth. An added feature, usually only affordable for larger businesses, is access to senior HR professionals equipped to expertly coach leadership on topics ranging from organizational development; performance management; handling difficult conversations; or guidance while facing internal complaints and associated investigations.

Mindy Flanigan, CIO and Owner of HR consulting firm Inspiring HR, assesses the monetary value for the time spent on basic HR Consulting services inclusive in her company’s PEO partnership to be $1,500 to $2,000 out of the gate to a new client needing a handbook and basic forms.  The return in investment grows exponentially if the client leverages the HR Consultants for wage and hour compliance coaching, performance management, and employer relations problem solving to mitigate legal entanglements.

An important area of operational alignment: Small business owners value simplicity and its impact on time management.  PEO payroll administration delivers on this concept as it allows one simple payment by the business per payroll cycle so that payroll is accurate, on-time, and covers all liability.

According to Daniel Mormino, senior vice president, at PEO INFINITI HR, “we shield each owner from employer related liability, ensuring the employer does not focus additional time or resources on non-revenue generating work”.  This is accomplished by providing teams dedicated to loss-control services such as business insurance, often taking on the lion’s share of the deductible and liability for claims or charges.  Additional support may include claims management of Unemployment and Safety cases, and managing work place incident reporting – all designed to minimize cost.  As part of risk management, the business can also look to the PEO to provide guidance on safety policies and the creation of safety manuals.

Through the shared pool of employees across its client base, PEOs have greater negotiation power, which allow small businesses greater access to benefits at a lower cost.  The complexity of benefits administration is reduced by access to one point of contact versus multiple providers when there are questions. Small businesses see the return on investment yet again, by having a competitive and affordable benefits package to attract new hires and retain current workers.

Looking Ahead

The bundled PEO resources are very appealing for any small business wanting to avoid the hassle of multiple vendors with inconsistent messages, and the efficiency can translate into improved business survival.

In September of 2016 a report by McBassi & Company and The National Association of Professional Employer Organizations examining a 2014 comparison between businesses using PEOs compared to national data available from the Bureau of Labor Statistics stated, “the employee turnover rate for PEO clients was 10 to 14 percentage points lower per year than it was for comparable companies in the U.S. overall: 28 to 32 percent annual employee turnover for companies that used PEOs for at least four quarters, compared to approximately 42 percent for all companies.”  In addition, they found that “businesses that used PEOs for at least four quarters are approximately 50 percent less likely to permanently go out of business from one year to the next when compared to the overall rate for similar private businesses in the United States.”

A realization this uncovers in the HR realm is that there has been a parallel maturing of the HR Profession and the PEO industry for over 20+ years.  PEOs once believed that outsourcing HR largely meant asking the Payroll Specialist some wage and hour questions while HR was regarded as the “personnel” paperwork pushers.  Neither sit in those spaces any longer.  HR’s reputation of adding value to any size business continues to improve; thus more businesses are interested in HR support.  As PEO’s compete for clients, the overall HR Consulting experience that can be delivered directly affects their sales and client retention efforts.  Thriving PEOs now understand that a comprehensive and quality client service experience must include dedicated access to experienced HR Consultants who can personalize service & support per client.

Click the link to view the recent INFINITI HR blog: Responsible Alcohol Use Policies at Work or check back for more on human resources, payroll, insurance and benefits.

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