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Trend Watch: The business of employment

Some small businesses turn to PEOs to fulfill the human-resource function

Approximately 300,000 businesses are using a PEO to
    conduct HR functions.
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 liabilities.

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 employment-related paperwork.

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 Columbia


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