Outsourcing HR can help small biz owners be more efficient — for a price

Many small business owners have turned to Professional Employer Organizations to take some of the burden off their plates.

(This column originally appeared in the Philadelphia Inquirer)

Small business owners face an unending list of challenges when it comes to ensuring that their businesses are profitable and their employees are happy. From accounting to human resources, the administrative work can quickly become overwhelming. That’s why many small business owners have turned to Professional Employer Organizations to take some of the burden off their plates.

According to a new survey of more than 500 business owners and decision makers from the National Association of Professional Employer Organizations, more than 15% of all employers surveyed with 10 to 99 employees now partner with a PEO and that rate continues to increase.

If you, like many of my clients, are still wondering about what a PEO can do for your small business, you’re not alone.

When you partner with a PEO, you outsource your company’s human resources functions to that organization. A PEO is not a staffing company that provides workers. Instead, it takes over not only payroll for existing workers, but the administration of health, retirement and other benefit plans, which includes tax filings, workers’ compensation, compliance, policy-making and other functions that an internal HR manager would perform. As regulations have increased, many small business owners are deciding to outsource this function to firms that are better equipped to handle the complexities.

Steven Sweeney, the President of NEMR Total HR, a PEO service located in Marlton, N.J., says that his average client has about 20 employees, but he serves companies with as few as five workers in industries ranging from manufacturing to health services.

“Generally clients come to me when they’re growing but they’re not at the stage of affording a full time HR executive,” he said. “They’re looking to make sure things are uniform and consistent and that they’re keeping up with all the changes in the rules.”

David Pearson, a senior vice president at PEO provider ExtensisHR in Woodbridge, does the same. He says that although his firm would never make decisions about pay rates or other employee-related policies independently, a good PEO serves as a valuable HR partner for their clients who don’t necessarily have this expertise in house.

“When you’re a small to medium-sized business, you don’t necessarily have the infrastructure that a PEO can bring to the table for you,” he said. “We focus on handling the HR responsibilities so our clients can focus on their competencies. Many of them can’t keep up with all the things they need to know about compensation, benefits, risk and compliance. When you have a PEO involved you’re essentially buying all of that off the shelf.”

This is probably the biggest issue that business owners raise when considering a PEO service: the employees of the business are no longer technically its employees. With a PEO, your company is no longer the employer of record. The PEO’s organization will appear on your employees’ tax filings and other employer reports. Sounds strange, but even though their W-2 will come from the PEO, your employees will still be working for you because you will still be the “co-employer” which means that you can continue to take advantage of employer tax deductions, credits, incentives and other government programs.

Of course, the service isn’t free. PEOs generally charge a percent of the payroll they manage. But by creating a pool of employees from all of their clients, the PEO can then benefit from the economies of scale and negotiate better rates on health insurance and other benefit programs as a larger purchaser. So, in some cases, a company’s fees can be mitigated by the savings achieved from these lower-priced benefits.

In addition to these savings a PEO will usually take responsibility for the administrative work needed to comply with the myriad of federal and local safety, worker classification, overtime and other rules. Some PEOs also provide HR consulting and recruiting services, often for additional fees.

If you’re thinking of working with a PEO, you should analyze the fees in comparison to any savings, including the savings in administrative time. You should also work with a PEO that has been certified by the IRS or the Employer Services Assurance Corporation, which means they’ve met certain industry standards and are bonded.

Claude Schoenberg, an employment attorney in Bala Cynwyd, always advises his clients considering a PEO partnership to fully understand the new relationship and to always make sure that their company is included on the PEO’s liability policy as an “additional insured” in case any incidents occur.

“You must be careful as to who is responsible for any workers’ compensation claims,” he said. “You may want to consider getting extra workers’ compensation insurance as sometimes the PEO’s coverage may not be adequate for your needs.”

In a word no. For example, Schoenberg warns that companies with union employees should be extra careful because he’s seen some PEOs that are not up to speed on all the rules and mistakes — like filling out reports and notifying the right representatives — can happen. Like anything you outsource, you can’t just rely on the provider to do everything the right way all the time.

“Outsourcing your HR tasks to a PEO doesn’t relieve you of your responsibilities as an employer,” he said. “You’re still a co-employer with the PEO.”

Originally published at https://www.inquirer.com on February 21, 2023.