Professional Employer Organization: An Offsite Human Resource Department For Your Laboratory
Posted Apr 28, 2011 in Management
Scott Dyer, owner of Dyer Dental Laboratory in Las Vegas, Nevada, just wanted to do what he did best: make teeth. But he and his wife Cindy, who handles the bookkeeping, frequently found themselves drowning in administrative paperwork. Then a sales rep from a professional employer organization (PEO) dropped by and offered a plan. The PEO would co-employ the Dyers and their six staff members - and manage all of the lab's human resources needs. This gave Dyer time to focus on his life both in and outside the laboratory. "A PEO is the greatest thing that has come along for small business," says Dyer, "I have six children and 10 grandchildren. My hands are full with my life and I don't want the business to control our lives."
In the past two decades, the PEO concept has caught on among small businesses nationwide, including the laboratory community. Here's how it works: For a fee--typically 2 to 4% of gross payroll plus expenses--a laboratory enters into a contractual, "co-employment" agreement with a PEO. The PEO serves as an offsite human resources department, giving the laboratory owner more time to concentrate on production, service, sales and marketing. Typically, the PEO handles payroll, human resources management, benefits administration and workman's compensation but, depending on how the specific contract is negotiated, it can also provide a variety of other services, ranging from customized employee handbooks to legal advice.
The PEO has both current and long-term, legal obligations to your employees. For example, it is responsible for issuing paychecks, filing W2s and W4s, and finding and administering workers' compensation and health insurance. Each pay period, the laboratory transfers the appropriate amount to cover those costs plus the PEO's pre-determined fee. The PEO's name appears on all of the laboratory's financial paperwork and it technically retains the right to hire, fire and reassign employees, although, in practice, it rarely does so.
To the uninitiated, this co-employment arrangement may seem like giving up too much control, but laboratory owners who are using PEOs say nothing could be further from the truth. "All of my employees still answer to me. I still retain control and the responsibilities of all other aspects of my business and make all of the business decisions," says Jerry McGee, co-owner and president of 23-person Suncoast Ceramic Studio in Brandon, Florida.
While each party in the PEO-laboratory relationship has distinct responsibilities, they share accountability for certain aspects of the operation. For instance, the laboratory is responsible for workplace safety and compliance but, since the PEO handles worker's compensation, it has a vested interest in overseeing safety in the laboratory. This creates a win-win situation. "My PEO provides safety classes and workplace inspections that are helpful," says McGee. "It keeps me up-to-date with labor laws, makes sure my MSDS' are current and that I post all of the required federal and state labor posters to avoid violation fines."
As a neutral party, a PEO can be a good mediator to resolve personnel disputes. If a situation escalates, they also provide legal services. "They resolve personnel problems and answer all of our questions as far as payroll, insurance and legal ramifications--I have found no end in their ability to help us as far as employees are concerned," says Jamie Bartley, co-owner of Gator Ceramics, a 12-person laboratory in Bossier City, Louisiana.
The cost of working with a PEO varies depending on the specific contract and the company you work with, your gross payroll, and the expense of the benefits package you offer. Some PEO users have found it to be a money-saving proposition. For example, after deducting the costs of using a PEO, Gary Lockwood, president of Mason Dental Lab, Livonia, Michigan, still saved $40,000 by eliminating one-and-a-half administrative positions. "Using a PEO also saved at least 30% of my time," he says, "And time is money."
Operating under the umbrella of a PEO, laboratories have access to a wide range of cost-effective employee benefits that can serve as a valuable employee retention tool. For instance, PEOs typically offer 401(k) plans; flexible spending accounts; and health, dental, vision, life and disability insurance options. Some even offer specialized services such as employee wellness programs and adoption assistance.
The laws governing PEOs vary from state to state. In some states, a PEO can legally pool your employees with all of its employees, thus giving it the buying power to negotiate lower health insurance rates than a small business could get on its own. For example, Lockwood is saving over 20% per year--about $18,000--on health benefits costs while still providing a comparable insurance plan for Mason Dental's 42 employees.
However, you should still keep a close eye on your PEO's insurance costs; sometimes smaller laboratories might benefit from an alternative strategy, such as joining forces with a local business group or state association, or using another type of human resource management service. When Benson Hall, CDT, saw his PEO's health insurance costs rise, he decided to switch to a company that only handles his payroll and found a local insurance provider that offered equivalent rates. While he says the level of services is "nowhere near the same as with a PEO," it saves him $5,400 annually because the payroll services provider only costs $3,600 compared to the $9,000 he paid the PEO. "We use the savings to match 3% on whatever our employees save in their retirement accounts," says Hall, owner of 20-employee Great Impressions Dental Laboratories, Richmond, Virginia.
In all states, be aware that when you enter into a co-employment arrangement and pool your employees with a larger group, your laboratory is legally required to adhere to a host of federal employment laws from which you otherwise might have been exempt based on your number of employees click here to read Federal employment laws: how they apply to your laboratory. While this protection is a benefit to the employee, it also means that the lab owner is responsible for compliance. For example, under the Family Medical Leave Act, which doesn't apply to businesses with fewer than 50 employees, the laboratory must grant an employee who has a sick relative 12 weeks of unpaid leave each year if he requests it.
Do your homework
Once you decide to use a PEO, find an individual and company you can trust--after all, you will be entrusting them with confidential personnel information. "We chose our PEO because we were comfortable with our sales rep; if we had any questions, she was there for us and would follow-up right away," says Dyer.
Over its 20-year history, the PEO industry has had its share of companies who have attempted to bypass state insurance and tax laws. For example, when McGee changed his laboratory from a proprietorship to a corporation, the PEO neglected to transfer his taxes properly and then denied its actions to the IRS. "Everything was resolved but it was a hassle," says McGee, who then switched to a new PEO.
To safeguard against such scenarios, 26 states require some form of specific licensing, registration or regulation for PEOs. The National Association of Professional Employer Organizations (NAPEO) has adopted a Code of Ethics for its 350 member companies (listed on http://www.napeo.org.). Also, check to see if the PEO's risk management services have been certified by the Certification Institute http://www.certificationinstitute.org. You can also contact the Employer Services Assurance Corp. http://www.esacorp.org/main.asp to verify that a PEO is accredited and find one in your area.
When choosing a PEO, you should do a thorough background check. Ask to see audited financial statements, as well as banking, credit and client references. Ask the PEO to demonstrate certification compliance and that payroll taxes and insurance premiums have been paid for past clients. Investigate the staff's level of experience and find out if any staff members are certified as a human resources professional by the Society of Human Resources.
Also, it's critical to consult an employment lawyer and/or CPA when drafting the contract with the PEO. Specifically, he'll make sure the division of responsibilities and liabilities--as well as costs, services and terms of cancellation--are clearly spelled out.
Finally, tell your employees about the transition in advance to ease any concerns about having a co-employer and explain the advantages. In fact, lab owners say most employees are happier now that they have more options and a reliable company in charge of payroll. "They trust the PEO more to do payroll than they trust me," quips Bartley.
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