Professional employer organizations take on the whole package: HR, benefits, payroll—even compliance with labor laws

Tolpegin

Ever heard of a professional employer organization?

Neither had Joe Franklin at the $4 million-revenue American Gear Manufacturers Association, nor David Almy at the $2.5 million-revenue Marketing Research Association.

That is, until they learned that PEOs could save their small associations money and protect them from legal risks by assuming all human resources, benefits, tax, payroll and other responsibilities.

"It was news to me when I discovered them," said Almy, CEO of Washington, D.C.-based MRA since June 2010. His 14-staff group contracted with professional employer organization TriNet in January 2012.

"It's actually pretty clever conceptually," Almy said. "Marrying those services together under one provider makes it a one-stop shop."

Tanya Tolpegin, executive director of the $2 million-revenue Society of Cardiovascular Computed Tomography (think cardiac CAT scans), agreed.

"By outsourcing everything, you're getting a better deal," Tolpegin said. SCCT has a staff of 11 and has contracted with TriNet for the past six years.

But Almy and Tolpegin said PEOs might not be appropriate for larger groups, those that can afford staff dedicated to human resources.

Franklin, the longtime president at Alexandria, Va.-based AGMA, has used a PEO—Human Resources inc., or HRi—for about 10 years. He had met HRi President Tim Schaffer at an association event.

Franklin said AGMA, with 12 staff, pays HRi about $40,000 a year for its services. Almy and Tolpegin declined to specify what their groups pay.

The twist with PEOs is that they become co-employers—legally, their clients' employees work for the PEO. That's what it says on paychecks and tax forms.

"They handle the entire personnel activity for us other than hiring and firing and directing operations," said Franklin. "Taxes, W-2s, benefits, payroll—removing that administrative burden is a tremendous relief for us."

The theory is that by assuming all the legal risks of an employer, the PEO protects its clients from inadvertent violations of federal and state labor laws and has a stronger incentive to get the payroll right. In addition the PEO should be able to negotiate better benefit packages with health care and 401(k) providers because of the larger number of employees they represent.

"You get a more expansive set of human resources offerings and a more devoted focus around risk protection and compliance because we have skin in the game," said TriNet Vice President of Marketing Steve Apfelberg.

"We provide the scale where [our clients] can get bigger-company benefits at an affordable price."

Apfelberg said TriNet has more than 6,000 customers and, through them, more than 170,000 employees. "Associations are a really strong industry sector for us and it's one we focus on," he said.

The National Association of Professional Employer Organizations says there are an estimated 700 PEOs in the country.

Franklin said about 10 years ago he needed to replace an accountant who also handled benefits. When he realized a new accountant would cost him nearly $100,000 in salary and benefits, he needed an alternative.

By contracting with HRi, he saved half the cost, he said—and put those savings toward the hiring of a full-time staffer devoted to boosting membership.

By doing this, he said he replaced a position that was strictly an overhead cost with a new position that helped generate revenue.

Almy and Tolpegin said their savings haven't been quite so dramatic, but that hiring their PEO has been worth it. Almy said savings have been less than expected at MRA but added that quality is an important factor too.

"The intent here was to generally upgrade the level of quality we were able to provide the employees and the organization at the same time as lower costs," Almy said. "There's no way an organization our size could have that level of sophistication that they provide to us."

Tolpegin said compliance with employment law is costly and complicated. For example, employers can be fined for mistakenly hiring illegal immigrants, she noted. Dealing with terminated employees also can be a risk, she said.

"If someone just looks at expenses on a line item they might not realize how much they're truly saving because they might not have the actualization of that risk," she said.

"It's not as cheap as if you went to a payroll processing company—it's a totally different value proposition—but a lot of times people might not take that into consideration."

Reason for caution

Robert Miller, a human resources executive with more than three decades of experience, said organizations should tread carefully when hiring PEOs. Miller is a member of the Society for Human Resource Management's special expertise panel.

"Some are very good and have been around and have a deep reservoir of expertise. Some of them may not be well financed and if they go under, the employer is left holding the bag [for obligations such as workers' compensation insurance]." Miller said that in such a case an organization could find its insurance rates suddenly rise.

Depending on how the PEO's contract is written, there also may be conflicts over which employees to hire and fire, he said.