Is A PEO Right For You?

How can today's entrepreneurs and small business owners compete with many of their larger rivals? That's easy-steal a page from their playbooks.

Over the last decade, many large businesses have leveraged a business phenomenon known as business process outsourcing, or BPO. The concept is simple. The company focuses on their core competencies-its products and services, customers, marketing, etc.-and outsources critical, yet noncore, functions.

Today, many small businesses are leveraging this approach as it relates to human resources by engaging the services of professional employer organizations, or PEOs. As the name implies, PEOs can assume most of an employer's administrative responsibilities and much of the liability as well.

Through a contractual relationship with a PEO, a small business (the average member of the National Association of Professional Employer Organizations has 17 employees) can create a co-employment arrangement in which the small business retains essential management control over the work performed by the employees while the PEO assumes responsibility for producing payroll, withholding and remitting payroll taxes, and providing workers compensation and health and welfare benefits.

PEOs can reduce its clients' exposure to liability stemming from allegations of wrongful termination, discrimination, and sexual harassment by helping draft employee policy handbooks. In addition, PEOs frequently offer employment practices liability insurance that protects both the PEO and its clients.

This type of business process outsourcing helps small businesses attract and retain quality employees and minimize costly employee turnover. Because PEOs aggregate hundreds or even thousands of small businesses, they can create economies of scale in health insurance, workers compensation insurance, technology (PEOs often provide employee Web portals), and human resource support. PEOs level the playing field for small businesses by providing them with a large company human resources experience.

Here are some things to consider when engaging a PEO:

• Look for PEOs that are flexible and can meet your human resources needs.
• Understand how the PEO's employee benefits programs fit into your overall employee compensation. Can the PEO help you determine overall employee compensation?
• Ask for client and professional references.
• Make certain that the PEO is licensed if required in your state.

Carefully review the service agreement, which can be lengthy and involved. A typical initial service agreement covers 12 months. Anything shorter could be construed as a temporary employment arrangement and therefore potentially subject to taxes.

PEOs can free you up to run your business and attract and retain great employees so that your business will thrive, not just survive.