Professional Employer Organizations

New options for small business owners

by John F. Graham

Today, cost-cutting-conscious businesses are looking to outsource services in order to become more efficient. One path that is starting to trend in this direction is the concept of a Professional Employer Organization (PEO). PEOs are integrated manager's human resource responsibilities. The PEO assumes the human resource responsibility by lowering costs and by allowing the owner-dealer to operate and grow his or her business. It is not employee leasing.

PEOs have grown 33 percent annually based on the fact that the business community is undergoing rapid changes in resource management. This is especially true of small-to-intermediate businesses, such as MHEDA dealerships.

Federal, state and local regulations are becoming more complicated in terms of compliance. Quality Health Insurance and related programs have increased over 30 percent in terms of price, making it difficult for dealers to retain their best employees, or to attract new ones. Also, the Worker's Compensation market is beginning to deteriorate, forcing dealers to lose their market availability, cost-cutting dividends and credits.

Advantages
There are many advantages to a PEO, especially for a small to midsize dealership. PEOs typically are designed to allow regulatory and legislative compliance, comprehensive benefits programs and professional personnel services—all in the realm of cutting costs and paperwork.

In essence, the small business owner gets the same benefits as the bigger guys. The major advantages to employees are comprehensive benefits previously unavailable, up-to-date advice on labor and workers' rights, and a professional employee handbook.

Are PEOs for Everyone?
This depends on you doing your homework. There are over 1,000 PEOs in the United States, each with a different perspective relating to human resource services. Here are some major considerations:

• Can the PEO offer payroll and benefits services whereby its internal structure has the ability for payroll, accounting, benefits, human resources and risk management compliance?
• Is the PEO experienced and reputable, with a proven, successful track record and references?
• Check the PEO's banking and credit references, and make sure you understand how the payroll taxes and insurance premiums are paid.
• Review how the employee benefits are funded. For example, is the PEO a fully insured medical or a self-funded with reinsurance? Is it a licensed insurance company and/or third-party administrator?
• It's imperative that you review the employer contract concerning the responsibilies of the PEO and your dealership. Have a 30-day cancellation notice. Also, check your state requirements concerning licensing.

Benefits
A major consideration concerning benefits is to be sure that the PEO is not in the practice of “Mod Dumping.” This is a process whereby your PEO replaces your experience modification factor for Worker's Compensation with another experience modification factor. Please check with your Worker's Compensation Bureau concerning legality. Ask the PEO representative about your state's approval of such a practice.

In terms of major medical costs, your dealership would be a member of a larger buying group whereby you could increase your benefits and reduce price as opposed to having your dealership rated on its own experience. You can avoid the HMO's dilemma and have a choice of numerous doctors and hospitals. Self-funding programs are prevalent; however, you must perform due diligence on the financial stability of the self-funding carrier.

Finally, if you decide to go this route, please inform your employees that you have not sold your business to the PEO organization that is managing your human resources. Confusion can exist at enrollment time, since the names of the PEO and your dealership will be listed together as co-employers.

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The MHEDA Journal • Third Quarter 2002 • Volume 31, No. 3 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.