« July 2008 Table of Contents
Trend Watch: The business of employment
Some small businesses turn to PEOs to fulfill the human-resource function
By Lauren Kramer
July 01, 2008
All business owners can testify to the importance of human
capital, but few know much about human resources and how to
manage aspects, like employee benefits and workers'
compensation. Over the last two decades, a growing number of
businesses have opted to outsource the HR function to
Professional Employment Organizations, or PEOs, an industry
that represents $63 billion in wages. According to the National
Association of Professional Employment Organizations (NAPEO),
whose 400 members account for 90 percent of the industry's
revenue, approximately 300,000 businesses, most with no more
than 19 employees, are using a PEO.
It makes sense to hire a PEO, says Brian Barry, president of
the National Human Resources Association. Company owners often
declare they can do HR themselves, but trying to take on
everything can be a big mistake, says Parry.
"The competitive strength of any organization, regardless of
size or industry, is predicated by the strength of its talent.
The CEO is either recruiting it, retaining it, developing it or
the talent is leaving, being pirated out by competition. This
all falls on the CEO," he says. "The only way to manage this is
with a strong
human resources executive."
The biggest handicap the professional employment industry
faces is knowledge - or lack thereof. "Most businesses don't
understand the value that PEOs bring, and when they find out,
they wonder why they'd never heard of it before," says Milan
Yager, executive VP of NAPEO. PEOs tend to save time and money
for business owners, freeing them to focus exclusively on their
core business, he says.
Through PEOs, businesses outsource their human resources
management, including employee benefits, payroll, employee tax
compliance, risk management and workers' compensation. Once a
PEO has been contracted, it co-employs a business' worksite
employees, sharing and allocating responsibilities and
At Fresher Than Fresh, a seafood processor in Gastonia,
N.C., General Manager Eric Kyryliuk has outsourced the
company's human resources for the past six years to Advantec
SRTm , a Tampa, Fla.-based firm that integrates, develops and
supports human resources business solutions. With 45 employees,
Fresher Than Fresh did not have an employee who could see to
the human resources administrative work, he says.
"That work is important to do, but if you're buying fish and
fielding customer issues, you don't have time to handle it,"
says Kyryliuk. "And it's hard to find someone who is relatively
competent and can do human resources as well as other things
that need to be done in a small business like ours."
PEOs say they provide critical assistance with employer
compliance, which helps protect their clients against
liability. They also improve job security, as the PEO
implements efficiencies to lower employment costs.
"Job satisfaction and productivity increase when employees
are provided with professional human resource services,
training, employee manuals, safety services and improved
communications," says Yager. "In many cases, a co-employment
relationship provides employees with an expanded employee
benefits package too."
Regulatory costs can be high for small firms. According to
figures from the Small Business Administration, between 1980
and 2000 the number of labor laws and regulations grew by
almost two-thirds. The SBA estimated that owners of small or
mid-sized businesses spent up to a quarter of their time on
A September 2005 report indicated that, in the face of
higher costs of federal regulations, small businesses bear a
disproportionate share of the federal regulatory burden. In the
manufacturing sector, for example, the compliance cost per
employee for small manufacturers is at least double the
compliance cost for medium-sized and large firms.
Using a PEO has saved the company time, but Kyryliuk is
unsure of the cost savings. "That's the idea - to save time and
money by outsourcing, but I don't know exactly how much we've
saved," he admits.
The PEO industry is not for everyone, cautions Yager. "We're
probably a better fit for seafood restaurants than for seafood
fishermen or processors, because the latter are very high risk
industries that require specialized knowledge in how risk is
managed," he says. "A PEO usually has clients that are more
similar in their risk needs."
Kyryliuk, whose company specializes in seafood processing
and packaging, disagrees. "I don't know that our business is
that much different from that of a restaurant. We process fish
and sell to grocery stores and foodservice accounts," he says.
The decision whether or not to outsource HR functions is
personal and individual to each company, adds Kyryliuk.
"If you give me some reasonably bright individual who is
adept at handling human resources and other things, I might not
use Advantec," he says. "I'm just not able to find that person.
So it made sense for us six years ago to hire a PEO. Advantec
has not done a bad job, but my point is that the alternative
might work, too."
Contributing Editor Lauren Kramer lives in British