Professional Employer Organizations Let Businesses Focus on Work

Professional Employer Organizations Let Businesses Focus on Work

AHEAD Human Resources Professional Employer Organizations

Nancy and Ken Augustine know car repairs.

But after opening their Maaco Auto Painting & Bodywork shop in Murfreesboro last year, the couple realized they also needed to know payroll, worker’s compensation insurance, workplace regulatory compliance and 401(k) retirement savings plans.

Like an increasing number of small business owners, the Augustine’s turned to a professional employer organization, or PEO, to outsource their human resource needs.

For a fee, PEOs handle everything from payroll and direct deposit to sexual harassment guidelines for smaller companies, most averaging 15 employees.

“They know a lot more about this than I do,” Nancy Augustine said of Century II Staffing, one of the PEOs in the Midstate.

“We have enough to do just keeping up with the business.”

Allowing entrepreneurs to focus on their business has been the driving force behind PEOs like Century II. Opened in 1985, Century II was one of the first PEOs in the country and the Nashville market.

About 90 PEOs operate in Tennessee, and most are based out of state, according to the state’s Department of Commerce and Insurance, which regulates the businesses. That’s up from 66 PEOs in the state a year ago.

Industry growth has also been strong, with an estimated 2,500 PEOs nationwide in 1997, a 400% increase since 1988, according to the National Association of Professional Employer Organizations.

Much of the growth is attributed to the growing role benefits play in attracting and keeping employees, the increasing complexity of federal workplace compliance issues and potential savings to small businesses.

In today’s tight labor market, PEOs are one way for small businesses to offer benefits competitive with big corporations.

“By hiring Century II, I was able to offer a wider range of benefits than I could afford as a small business,” said Beth Tanner, owner of technical consulting firm Tanner Corporate Services.

Since founding her company 15 years ago, Tanner handled all human resource functions in-house. But now with 25 employees in four states, she decided this year to hire Century II so she could concentrate more on her business.

“It has relieved the burden of ‘Am I doing all the things I need to be doing?’ when it comes to payroll and regulations,” Tanner said.

How it works: The company hires employees and decides how much to pay them. But instead of giving them a paycheck, the company pays the PEO, which then pays the employee.

Why involve a PEO as a middleman? By pooling thousands of workers from different companies, PEOs can offer a wider range of benefits at lower cost. Also, PEOs assume liability for employment tax and benefit plans, and often pay lower state unemployment taxes because they are more established companies.

PEOs typically charge 2%-5% of a company’s payroll to cover their expenses, plus 9%-20% of gross wages to pay for benefits and the PEOs’ profit.

Unlike employee leasing firms, which hire a company’s workers and lease them back to an employer, PEOs offer a “co-employer” setup, taking over as much of the human relations functions as a company wants, said Jay Keegan, director of sales and market development for PEO firm Adams Keegan Inc. The Memphis-based firm, founded in 1987, has offices throughout the Southeast, including an office opened in Nashville four years ago.

Outsourcing payroll saves small companies from having to support a human resource department, said Tonya Jones, owner of construction company Mark IV Enterprises.

“For the time I’d have to spend on government forms, that’s a full-time employee who really has nothing to do with my business,” Jones said. “This is like a whole employee I don’t have to give office space to.”

Small business owners spend an average of 7%-25% of their time handling employee-related paperwork, according to the U.S. Small Business Administration.

PEOs have grown in popularity as tax codes, workers’ compensation laws, anti-discrimination statutes and occupational health and safety laws have grown more complex and apply to smaller businesses.

“You’re seeing government regulations, such as the Americans with Disabilities Act, apply to smaller companies,” said Marc Fortune, Century II’s president and chief executive officer.

The business has evolved from simply running the payroll of small businesses to handling compliance issues and now taking on an advisory role, Fortune said. Since Fortune took over Century II two years ago, the company has more than doubled in size, to more than $60 million in revenue.

“We’ve had to become the counselor to the small businesses in terms of human relations issues,” Fortune said.

With much of the small business market still to be tapped, PEOs are predicted to continue growing, at a rate of 30% a year, according to the national association.

“A small business owner wears so many hats anyway,” Jones said. “There’s such a temptation to use payroll for cash flow. They’ve taken that out of my hands and manage it for me.”

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