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Fast-growing PEOs crucial for small businesses

Tuesday September 02, 2008

According to the National Association of Professional Employer Organizations (NAPEO), as of 2007, there were more than 700 PEOs operating in the U.S., covering more than 2 million workers.

The main function of a PEO is to provide outsourcing of payroll, workers’ compensation, human resources (HR) and employee benefits administration. This service is of considerable value to companies whose employee count ranges from 15-50.

An entrepreneur obviously has a lot of knowledge and skills related to his business, but he may not have the understanding or time to spend on human resource administration or other HR responsibilities, said Gayle Nicholas, managing director for Tandem Professional Employer Services in Oak Brook.

“That’s not why they started the business,” she said.

In essence, a PEO, or a human resource management firm, serves as the company’s HR department away from home. The PEO is made up of experienced human resources professionals who can facilitate the resolution of any HR-related concerns. This allows the business owner to focus solely on the day-to-day tasks of running a business, without having to spend time and energy on employee issues.

The process usually involves one HR professional within a PEO who is designated as a representative for a small stable of clients. When employees in any client company have HR-related questions or problems, they can directly call their representative to get the issue resolved.

“Our internal HR people have specific clients they work with,” said Rob Wilson, CEO of Employco Group, Ltd, in Westmont. “They know them, go out to see them and have built a relationship with them so they’re easily able to answer their questions.”

This type of service is invaluable to the expanding small business owner who has a number of employees but not the revenue to support a full human resources department.

“The business owner doesn’t have the HR expertise,” said Nicholas. “So as they begin to grow, they need someone who has more experience and strategy from a human capital standpoint.”

The value proposition for client companies is that a PEO saves time and labor costs associated with payroll and the administration of benefit plans. In addition, the client company may also be able to offer a better overall package of benefits, which is attractive to more skilled employees.

This is especially helpful considering the current state of the economy. When businesses aren’t as profitable, the staff is usually the one of the first costs to be cut, said Lisa Callaway, vice president of the Management Association of Illinois, in Downers Grove.

“The biggest expense any employer has generally is the labor costs,” she said. “One area that an employer might say, we seem overstaffed here, is in the HR area. So you might have fewer HR professionals within an organization doing more work.”

This scenario often becomes problematic, as a pared down, less-experienced HR staff can be easily overwhelmed from attempting to meet the myriad demands of a fully-staffed company. In this situation, an easy solution for a small to mid-sized company is to outsource its HR needs to experienced professionals in the field.

While the Management Association of Illinois is not technically a PEO, it does provide similar services, such as support, information and tools to its members in the area of human resources, said Callaway.

PEOs typically work with clients from a wide range of industries, yet shy away from high-risk companies and those that tend to have a lot of employee turnover, said Nicholas.

“We’re willing to look at just about any company, but when we pool benefits we have risk that’s associated with that and it’s our job to protect the risk and costs for all of our clients,” she said.

Another advantage of outsourcing to a PEO is the ability of a smaller company to offer more extensive benefits at a lesser cost. Because PEOs pool clients, benefit costs are reduced, thus allowing a mid-sized company the opportunity to acquire the same benefits packages as a Fortune 500 company.

“You may have someone come to you and learn and get hands-on experience with you and then leave for a bigger company because of better benefits,” said Wilson. “Any of our clients can compete with any big company in that area. You’re getting better benefits and you’re saving money, so it’s a win-win for business owners.”

These types of opportunities for companies and employees alike have created a booming industry. According to NAPEO, the PEO industry expanded by more than $10 billion in gross revenues in 2007—a 15 percent rise.

Yet being a fairly new industry is not without its challenges. Because of the recent emergence of PEOs, state and federal governments are still figuring out all the regulatory issues related to human resource management firms. Many industry abuses have taken place over the past 20 years, forcing organizations like the Illinois Department of Employment Security to create regulatory legislation.

“We’re a new type of organization and they don’t really know how to deal with us,” Nicholas said.

Jeremy Stoltz, News Editor
The Business Ledger

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