In the late 1990s, Seth Miller was looking for a way to provide
better benefits at Miller Systems Inc., the small Boston IT consulting
company he founded in 1995. "We just couldn't get dental
insurance being the size we were," says Miller, 32. "But
to compete for the best people, we needed to have big-company
benefits."
In 2000, Miller joined a professional employer organization, or
PEO. A PEO takes over management of a small company's HR tasks
and becomes a co-employer to the company's employees. The
typical PEO client is a small business with 16 on-site employees,
according to the National Association of Professional Employer
Organizations (NAPEO), the national trade association that
represents the $43 billion PEO industry.
PEOs are increasingly popular because they manage all the HR
paperwork while offering entrepreneurs access to better employee
benefits through economies of scale, says Milan Yager, executive
vice president of NAPEO. He says, "Entrepreneurs can focus on
the business of their business, while the PEO focuses on the
business of employment."
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A 2002 Society for Human Resource Management report concluded
that companies with fewer than 10 employees that hired a PEO saved
roughly $5,000 per year in time and labor costs. Companies with 10
to 19 employees saved more than $10,000 per year, and companies
with 20 to 49 employees saved $18,700 annually.
Today, Miller's 16 employees have benefits including dental
insurance and a 401(k); his PEO also handles payroll, so Miller can
focus on building his business. "I think it makes a lot of
sense for smaller companies," he says. Annual sales at Miller
Systems topped $1.5 million in 2003.
While this arrangement sounds perfect, you have to understand
what youre getting into. The "co-employment" relationship
is controversial with labor proponents, who see it as a way for
small employers to shun responsibility for their employees. In
fact, some small employers have signed on with a PEO thinking
they're no longer accountable for employees at their work
site-a huge mistake, says David Curtis, a labor and employment law
partner with Gardere Wynne Sewell LLP in Dallas, who says courts
hold small employers liable along with the PEO when problems arise.
"You can't contract away [responsibility]," he
says.
The co-employment arrangement could also obligate your company
to laws that cover large employers. For example, if a small company
with eight employees signs with a PEO that manages 4,000 employees,
that small company could in fact be considered to have 4,008
employees, says Jim Craig, an employment partner with Ford &
Harrison LLC in Tampa, Florida."That's a real
danger." The aggregation issue could require you to comply
with regulations such as the Family and Medical Leave Act (FMLA)
and the Americans With Disabilities Act, which usually don't
affect companies with fewer than 50 and 15 employees, respectively.
It's an issue the courts still need to address.
Patricia Thorp, 48, learned the hard way after signing with a
large PEO five years ago. Thorp, founder and president of Thorp & Co., a
19-employee PR firm in Coral Gables, Florida, was surprised to find
she was obligated to provide 12 weeks of unpaid leave under the
FMLA to one of her employees. While she says her PEO experience has
been good-she's proud that five employees are fully vested in
the company's 401(k)-having to comply with the FMLA put a
strain on the business.
In addition, when you sign with a PEO, your employees are lumped
with the thousands of employees the PEO manages across many small
workplaces-great for attaining aggregate health benefits, but
potentially not so good under Title VII laws that forbid employment
discrimination based on color, race, religion, gender or national
origin. Youíre entrusting the PEO to administer your hiring,
firing and sexual discrimination policies. What if the PEO
doesn't do it well? Your company could face a Title VII
discrimination suit.
Do your homework, because only 23 states require licensing,
registration or regulation of PEOs. Some PEOs have been sued, and
others have gone out of business, leaving small employers
scrambling for coverage. This happened to Miller a few years ago
when his former PEO went under. "We had 60 days to find a new
benefits provider," he says. "Check on the stability of
your PEO." Miller signed with another PEO and says he'll
reevaluate its cost-effectiveness as the company grows. "The
management fees from the PEO might start to add up when you have a
certain number of employees," he says.
When researching PEOs, ask for references, and ask a lot of
questions. How will this expose my company to more liability? How
will it change my obligations under current employment laws? Who
underwrites this PEO? It's wise to consult an attorney since
PEO contracts can be 50 pages. Curtis suggests working an addendum
into the contract that clarifies each party's role and answers
all the "what ifs." For example, who's responsible if
an employee files a job discrimination claim? Don't be afraid
to ask for a 60-day trial period, either. "The good PEOs will
let you," Curtis says.
Also be aware that you may encounter morale issues with
employees who think you're shifting them to a large, faceless
organization. "You're injecting a third party into the
process. It waters down the one-on-one relationship," Craig
says. Explain why it's to their benefit, and designate a point
person in the office to answer basic questions. Finally, ask
employees at least once a year about their PEO experience.
Chris Penttila is a freelance journalist in Chapel Hill,
North Carolina. She can be contacted at chris@sitting-duck.com.