HR Outsourcing Solutions 101

Updated: April 30, 2009

Small businesses face a crushing HR burden. According to the U.S. Small Business Administration, small-business owners spend up to 25 percent of their time handling payroll , taxes, benefits , workers' compensation and other HR matters. Add to that burden skyrocketing insurance premiums, and it's no wonder that many small businesses are seeking to outsource HR functions.

HR service providers are also commonly known as PEOs (professional employer organizations). They act as the employer-of-record for many small companies, assuming the burdens and liabilities of payroll and tax compliance. PEOs pool the employees of many companies to get more favorable health-insurance premiums, 401(k) plans , workers'-compensation insurance and more. PEOs can also handle staffing and recruiting , risk management and safety training, and a host of other HR functions that small companies cannot afford on their own. A client company can get the expertise of dozens of HR experts for about 2 percent to 6 percent of payroll.

Do you think that your business might benefit from a PEO? Here are some tips on what to look for.

Ask the Right Questions

You will want to know how many HR employees the PEO has and how many client employees it manages. How big is the workload on each PEO employee? This bears directly on the quality and timeliness of the service that your company can expect.

Does the PEO offer the functions that your business wants to outsource? If you are particularly interested in recruiting assistance, for instance, ask about the composition and track record of the PEO's recruiting team. Does the PEO have experience recruiting the kinds of people your business wants to hire?

Will you have a dedicated representative? Usually, PEOs do not dedicate a rep to each small business, but they do provide access to a pool of experts via the Web or phone.

Investigate the health-insurance plan offered by the PEO. Talk to its insurance provider about how long the PEO has done business with it. Confirm coverage. Find out how the PEO's insurance carriers are rated by A.M. Best Co. Inc. or another insurance-rating organization. Is the rest of the PEO's employee pool in a higher risk category than your employees? If so, that could mean higher premiums.

Are employee benefits fully funded and insured? If not, the entire cost of a claim may become your company's liability later. Be skeptical; get a guarantee of the various plans' funding in writing and ask to see backup documentation.

Do qualified employees receive first-day coverage? A waiting period is a negative when it comes to recruiting talent.

The privacy of your employees is paramount. Ask the PEO how it ensures the security of employee data, complies with HIPAA (Health Insurance Portability and Accountability Act) and ensures that its contractors do the same.

Does the PEO assume compliance liability through its contract? It is essential to read the PEO's contract carefully in order to know which risks you can transfer to the PEO and which your business must bear. Some risks — such as payroll timeliness and accuracy, employment taxes, and HIPAA and COBRA (Consolidated Omnibus Budget Reconciliation Act) compliance — can be transferred completely to the PEO. Others, such as harassment or discrimination liabilities, remain with your business or may be shared with the PEO.

Does the PEO offer Web-based self-service ? Good PEOs provide employers and employees with 24/7 access to their insurance and retirement data, management reports, and open claims. Open enrollment in health-insurance and retirement plans via the Web is a perk that employees really appreciate.

Do Your Own Sleuthing

Check a PEO's references, and ask for both existing clients and clients that have terminated its services. Find out why the latter organizations chose to cease working with the PEO. Probe deeply. Ask about the quality of service received and any problems encountered.

Do a Google search on the PEO and see if anything negative pops up. Contact your state's Attorney General's office to see if there has been any litigation involving the PEO. Ask how these matters were resolved.

Of course, you should also check the bank and credit references of any PEO your company may be considering.

Popular PEOs

There are more than 700 PEOs worldwide. Based upon gross revenues for 2005, here are five of the most popular ones.

  • ADP TotalSource of Miami, which earned $6.97 billion. The company had 5,700 clients and 139,000 work-site employees. Gross PEO revenue grew 26.9 percent from 2004 to 2005.
  • Administaff of Kingwood, Texas, which earned $6.63 billion. The company has 5,000 clients and 94,000 work-site employees. Gross PEO revenue grew 23.4 percent from 2004 to 2005.
  • Gevity HR Inc . of Bradenton, Fla., which earned $4.77 billion. The company had 8,200 clients and 136,600 work-site employees. Gross PEO revenue grew 10.8 percent from 2004 to 2005.
  • Paychex Business Solutions of Rochester, N.Y., which earned $2.48 billion. The company had 3,300 clients and 59,000 work-site employees. Gross PEO revenue grew 8.6 percent from 2004 to 2005.
  • TriNet Group Inc . of San Leandro, Calif., which earned $1.67 billion. The company had 1,100 clients and 16,600 work-site employees. Gross PEO revenue grew 20.6 percent from 2004 to 2005.
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