Small Business

The Appeal of a PEO


By Karen E. Klein Q: We are investigating the potential of a PEO (professional employer organization). The upside of pushing the human-resources responsibilities and costs, of gaining better benefits due to belonging to a greater pool, etc., sound great. Is there a downside to joining a PEO? -- D.D., Columbus, Ohio

A: The use of professional employer organizations is becoming increasingly popular with small businesses, especially those with few employees that lack the resources to establish an in-house human resources department.

Although there are many variations in the details of PEOs contracts, typically PEOs establish a "co-employment" relationship with a company's employees, so that the employees work jointly for the PEO and the contracting firm. The upside, as you have found in your research, is that PEOs can help your company manage increasingly complex employee-related matters such as personnel management, health benefits, workers' compensation claims, payroll, payroll-tax compliance, and unemployment insurance claims.

By contracting with a PEO and becoming part of a larger insurance pool, you may also be able to provide health benefits for your employees that you wouldn't otherwise be able to afford on your own. And finally, by outsourcing some of the responsibility for your employees, you and your business will have more freedom to concentrate on the revenue-producing side of your operation.

ANY QUESTIONS? You should investigate several PEOs, get detailed information on how their contracts work, check their credentials, and do some general background research to find out if such an arrangement will be good for you and your employees. Especially in shaky economic times like these, you don't want to alienate your workers or scare them into thinking that you are distancing them from the company, pushing them out of your employ, or replacing them with temps. This can be a problem if you don't thoroughly explain the PEO arrangement before it is implemented, and why you've chosen it.

You also want to make sure that you cannot be accused of turning full-time employees into contract workers, temps, or freelancers. There are tax implications -- and potential penalties -- associated with doing that, so before you contract with a PEO, talk to their representatives about the specific status of your employees. It also wouldn't hurt to talk with your attorney about the implications of using a PEO.

Human-resources consultant Joann K. Klinkowski, who is based in Port Byron, Ill., conducts analyses for companies to help them determine whether or not to use a PEO. She recommends that CEOs ask themselves the following questions before signing up: Have you set specific goals that you wish to accomplish by using a PEO? Will the PEO arrangement apply to all your employees, or just certain segments? Have you gotten advice from legal counsel on the implications of the PEO arrangement? Does the PEO reimburse or indemnify your company for legal fees and damages arising from any claim filed by a worker? Will the PEO you're negotiating with give you references from satisfied clients? How about the name of a company that no longer uses their services?

THE KEY QUESTIONS. You will also want to get specific information on what the PEO charges. "Don't let the PEO lump their fees into a per-worker cost -- know what you are paying for!" Klinkowski says. "Are there any startup costs? Is there a termination-of-the-agreement clause? How will any future claims, such as worker's comp or unemployment, affect the charges?"

Also, make sure that a site representative from the PEO is available to work at your company headquarters, especially at the beginning of the contract. Ask if there is an extra charge for site visits, and have the rep outline procedures for handling such issues as worker complaints and terminations. For your employees' sake, you should also determine ahead of time how pay checks will be handled -- direct deposit, mail, or workplace distribution? -- and exactly what benefits they'll be getting. "There are a host of other things to look at, including who does job training, how are evaluations done, how are pay increases determined and what does an increase in pay do to your overhead costs," Klinkowski says.

For more information on PEOs, check out the Web page of the National Association of Professional Employer Organizations at www.napeo.org. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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