HR Powerhouses
Professional Employer Organizations - Benefits and HR Powerhouses with Employment Responsibilities
As human resources outsourcing (HRO) gains momentum in America, thousands of businesses are leading the trend by working with professional employer organizations (PEOs)—powerhouses of employee benefits and HR services. PEOs exemplify the hottest HRO trend: multi-process HR outsourcing. They give businesses a one-stop source for the management of human resources, employee benefits, payroll and workers’ compensation.
PEOs deliver one comprehensive HR package that can be more cost-effective, efficient and robust than maintaining an in-house HR and benefits department and negotiating for competitive benefits piecemeal. PEOs provide solutions to businesses through a staff of experienced HR professionals who are the best in their field, and they offer a broad range of benefit plans and employee services. Howard Stone, executive vice president of administration for Invision, an eBusiness consulting firm, cited two main advantages of working with their PEO: ”...access to a broader range of benefits, especially health care, to suit our employees, at a rate we could afford; and the availability of a full-time professional HR department at a fixed cost.”
EMPLOYEE BENEFITS POWERHOUSES
PEOs are powerhouses of employee benefit plans for businesses that are having difficulty negotiating quality coverage for their employees. They provide access to a comprehensive employee benefits package that enables their clients to compete for the best talent.
PEOs’ benefit programs range from major and supplemental health-care choices, including vision and dental care, to 401(k) programs, EAPs and even adoption assistance. PEOs assume the burdens of finding and negotiating the benefit programs and can handle the burdensome and often complicated regulatory requirements, such as those of HIPAA and COBRA. They also handle the details of enrollment and administration.
Nearly eight in 10 PEOs (78 percent) are sponsoring health care plans for their clients, and 94 percent offer 401(k) plans, according to NAPEO’s most recent survey. (1)
“We heard PEOs could provide Fortune 500 benefits to small companies, so we selected one,” said Addie Cinquino, vice president of operations for Engineered Assemblies Corporation, a manufacturing company. “When employees and job applicants compare us with other companies our size that do not have a PEO,
we have so much more to offer.”
Marshall Boutwell, president/CEO of $83 million, 16,000-member Gwinnett Federal Credit Union with 32 FTEs in Lawrenceville, Ga., has worked with a PEO and particularly values the health care benefits. “Our PEO was able to give us a more efficient health care cost model. They tailored the benefit package to our needs, rather than offering only one option,” he said.
PEOS’ BENEFITS INCLUDE NEW AND POPULAR OPTIONS
PEOs enable client worksite employees to take advantage of many benefit options available to U.S. employers and workers. Nearly all PEOs have established “Section 125” cafeteria plans to offer client worksite employees the opportunity to offset medical expenses with tax-free dollars. Without the PEO, most small businesses lack the expertise to establish and administer such a program.
When a PEO serves them, many workers can enjoy flexible spending accounts. The PEO handles the administrative details so employees can set aside money from their paychecks before taxes are withheld, thereby reducing federal income and social security taxes.
PEOs may also offer the option of health savings accounts (HSAs). The PEO serves as the HSA facilitator and educator, working with the insurance carrier and the financial institution offering HSAs. The PEO puts the HSA into place on behalf of workers at its client locations and educates the business owner and workers about their options for coverage of health-care costs. HSAs may be one of several coverage options that a PEO offers. To add an incentive for participation, the PEO client may contribute to each employee’s HSA. Employees own the accounts, which are portable if they move to a new employer.
PEOS TAKE CARE OF BENEFIT COMPLIANCE
Since their inception, COBRA and HIPAA have challenged employers of every size with a multitude of specific requirements for administration and employee notification. The myriad details required by each act have caused worry lines for those not fully familiar with the laws and unable to put all policies and procedures in place. PEOs can virtually eliminate these worries by specializing in HIPAA compliance, including the required privacy policies and procedures, employee notification, risk analysis on health information flow, and employees’ rights. PEOs that sponsor health care plans for their clients also understand the requirements under COBRA and handle the administration of COBRA with respect to their health care plans. They handle the COBRA claims, provide the required notices, educate the employees about their rights, and clarify the termination provisions. As with all responsibilities, the PEOs’ and clients’ respective responsibilities are clarified by their client service agreements.
ROBUST HR TECHNOLOGY, SECURE DATA
A growing number of PEOs have invested in robust technology to support their HR and benefits programs. For any size business client this means a sizeable investment in technology is avoided, allowing the business to invest instead in their own products and services. Because of their significant cost, these portals are often only available to smaller worksites via a PEO arrangement.
With the PEO portals worksite employees can review and update their benefits accounts online 24x7, a popular feature. They are becoming more comfortable with interface technologies for benefits and policies, according to research by the Society for Human Resource Management (SHRM). (2)
SHRM also emphasizes that employers with benefit programs need to ensure that data integrity, data security and employee privacy are protected. The PEO takes care of this important safeguard and spares the business client the headache of insecure data. The PEO’s reputation rests on a proven track record to deliver the assurance that employee privacy is protected.
TEAM OF HR PROFESSIONALS, SUITE OF HR SERVICES
Many PEOs deliver HR management solutions to organizations seeking to hire and retain the most productive employees by providing a team of experienced human resources professionals who deliver a suite of services.
Compliance. PEO professionals facilitate the development and documentation of workplace policies and procedures in accordance with all applicable state and federal employment laws. With more than 60 federal laws regulating employment, it is virtually impossible to stay on top unless you have PEO specialists. For many businesses, having a PEO can eliminate the need to keep an HR professional on staff. Many PEOs assist in developing an employee handbook and provide related guidance and training. They manage required record-keeping and reporting and help focus an organization on workplace rules and employee conduct. They also offer training programs to help clients decrease their exposure to liabilities from harassment, discrimination, wrongful termination and other employment law claims.
Recruitment and retention. PEOs arm their clients with recruiting tools to find the best applicants. Today’s complex employment realities require the sophisticated resources that PEOs provide, including skill evaluations, psychometric tests, background checks and in-depth interviews. Businesses also benefit from the lower fees PEOs provide for such services. Without using a thorough screening process, which the PEO can implement, a business runs the risk of placing the wrong person in the job, leading to lost productivity and costly turnover. PEOs can also tailor preemployment tests to predict success on a specific job and loyalty to the employer.
Business executives often dread the mountain of résumés and numerous interviews involved in recruiting. PEOs remove this burden and deliver good candidates quickly, then handle the paperwork for the new hire.
PEOs can provide their clients with knowledge about why people leave a company, and why they stay. Losing employees means higher unemployment costs, so a PEO’s proven ability to cut the turnover rate contributes to the bottom line.
“My unemployment costs motivated me to select a PEO,” said Brian Bell, president of Capitol Marketing. “I had high turnover in my telemarketing business, but my PEO has significantly reduced the turnover and saved me at least six figures a year.”
Labor market assessment. Business planning can benefit from the input of the PEO’s professionals. If a business wants to expand into a new market, the PEO can assess the labor market, offer a strategy for recruiting there and then conduct the recruiting for the client.
Improved productivity. PEO services bring clarity, communication and certainty to worksite employees, which improve morale and increases productivity. PEOs work with organizations to develop, clarify and implement polices and procedures, detailed job descriptions, handbooks, compensation statements and other communication pieces. Their HR professionals handle the questions and issues regarding benefit plans, regulations and employment practices and employees’ pay, and they are well versed in the latest trends and offerings.
With a PEO, executives have access to a team of experienced professionals in human resources, benefits, payroll, regulatory compliance and risk management who can help the organization take care of employees. In today’s business climate, that’s a powerful resource to have on your side.
PEO’S EMPLOYMENT RESPONSIBILITIES
PEOs are more than HRO service companies. What sets them apart is that they contract with businesses to assume certain employment responsibilities, such as payroll taxes, workers’ compensation coverage and significant benefit and employment compliance responsibilities in areas such as FLSA, FMLA, HIPAA and COBRA.
In a PEO arrangement, the client retains control over the worker activities that contribute to the bottom line, the production of the product and the delivery of the service. The PEO becomes the employer for the employment administration and benefits and assists in improving regulatory compliance and maintaining an effective workforce. PEOs assume a wide range of administrative functions, such as payroll processing and related tax filings, employee file maintenance, unemployment claims processing, workers’ compensation claims management and employee handbooks. They can also manage much of the employer-related paperwork associated with government compliance and benefits administration. The PEO:
• Pays wages and employment taxes of the worksite employees (employees at client locations) out of its own accounts.
• Reports, collects and deposits employment taxes with state and federal authorities.
• Establishes and maintains an employment relationship with the worksite employees that is intended to be long term, not temporary.
• Retains a right to hire, reassign and fire the worksite employees.
A PEO and client enter into a contractual relationship using a Client Service Agreement (CSA) to clarify their respective responsibilities. The CSA’s purpose is to allocate employer rights and responsibilities between or among the PEO and business client. The PEO is allocated certain obligations and liabilities; the client company is allocated others, while still other factors are the shared obligations by both the PEO and client.
The CSA usually addresses such issues as arbitration clauses, benefits records retention, unlawful harassment, deferred compensation, COBRA, FMLA, independent contract liability, return-to-work programs, regulated clients, I-9 verification, indemnity agreements, workplace safety risks and third-party liability.
PEOS SECURE WORKERS’ COMPENSATION COVERAGE,
MANAGE RISKS
Many states recognize the PEO as the employer of worksite employees for purposes of providing workers’ compensation coverage. PEOs securing workers’ compensation coverage for their client worksites are particularly focused on improving safety and compliance, effectively managing claims and keeping an eye out for claims fraud.
PEOs do more than just secure the workers’ compensation coverage. They focus on risk management and create safer working environments, resulting in more productivity and profitability. A PEO’s professional employee handbook helps reinforce safe work practices and encourages immediate treatment and prompt reporting of work-related injuries.
PEO-provided professional claims management controls claims costs by focusing on prompt reporting, early treatment and speedy resolution of each claim. PEOs also emphasize the prosecution of workers’ compensation claims fraud and “early-return-to-work” programs as cost-containment strategies.
The PEO industry has a certification program based on best performance practices in workers’ compensation risk management. Businesses looking for the best risk management services should look for a PEO that has a Workers’ Compensation Risk Management Certification from the Certification Institute, an independent nonprofit corporation promoting industry professionalism and best practices. (For more information, visit the Web site www.certificationinstitute.org.)
Certification gives PEO client businesses assurance that their PEO has the capability to deliver important risk management results. Certification also provides workers’ compensation insurance carriers with ongoing assurance that a PEO is in fact implementing industry best practices in a consistent and effective manner.
The performance practices were developed primarily by workers’ compensation carriers. A PEO undergoes a rigorous examination to achieve certification. The Certification Institute independently verifies that the company’s risk management program is meeting proven insurance industry risk-management practices to reduce work-related accidents and health exposures and to control workers’ compensation costs. Any PEO of any size can achieve certification if the PEO can show proof of the best practices.
PEOS A GROWTH INDUSTRY
PEOs have grown rapidly since the industry’s inception in the 1980s. Annual growth rates have averaged around 20 percent for several of the past few years, and PEOs continue to gain ground at a steady rate.
Approximately 700 PEOs operate in the United States, serving more than 100,000 businesses with approximately 2.5 million worksite employees. The PEO industry’s estimated total revenue, measured by the payroll handled, is $51 billion. The average PEO retention rate is 87 percent, according to research by the National Association of Professional Employers (NAPEO).
Although PEOs have worked primarily with small businesses, increasingly larger businesses are looking to PEOs for the same economies of scale in HR services and benefits that they experience with other types of business process outsourcing.
As the industry has grown, industry leaders have strived to define and promote best performance practices and to codify the PEOs’ role through state registrations bills. With leadership from NAPEO, the industry has established an independent accreditation program through the Employer Services Assurance Corporation. In addition, NAPEO has led the effort to pass PEO registration bills in the states to provide certainty and standards that protect all parties. Currently, 27 states had some form of PEO registration or licensing in place.
For more information on PEOs, visit the NAPEO Web site: www.napeo.org. Or contact NAPEO at (703) 836-0466.
Footnotes:
(1) “2005 Operating Statistics Survey Results Report,” National Association of Professional Employer Organizations.
www.napeo.org.
(2) Esen, E. (2004). SHRM human resource outsourcing survey report, Society for Human Resource Management. www.shrm.org.
