Essentially, PEOs serve as an off-site human resources department for small and mid-sized businesses by managing such functions as payroll and tax filing, unemployment and workers' compensation claims, benefits and regulatory compliance. Full-service PEOs provide a broader range of services, including recruiting, interviewing, training, policy development and compensation analysis. Although fees vary, PEOs typically charge a fixed percentage of a company's payroll for their services.

Rapid Growth
Nationally, it is estimated that 800 PEOs are responsible for generating more than $43 billion in gross revenues (wages and taxes). PEOs operate in every state, and the industry is growing more than 25 percent annually. Still, the concept remains widely unknown outside the Southeast and Southwest. While there are more than 75 licensed PEOs in Florida, there are less than 20 in New Jersey. The PEO model, however, is expected to gain wider acceptance in the East as more employers come to understand the benefits of the relationship. The State of New Jersey has passed legislation (S-1466) recognizing the legal status of PEOs and regulating the industry. Under that legislation, PEOs in the state must be licensed, have a minimum net worth, certify quarterly unemployment tax payments and provide evidence of workers' compensation coverage.

Co-employment
According to the National Association of Professional Employer Organizations (NAPEO), a PEO contractually assumes substantial employer rights, responsibilities and risks by establishing an employer relationship with the client's employees. Under this "co-employment" structure, the PEO has sole liability for filing state and federal payroll taxes, sponsoring benefit plans, providing workers' compensation coverage and paying wages out of its own account. The client and the PEO share such responsibilities as hiring and firing, regulatory compliance and employee relations. The business owner, however, maintains complete control of the company's core operations and strategic business decisions. The PEO simply frees the business to concentrate on generating revenue.

Saving Time
Since 1998, the number of federal laws and regulations regarding employment policies and practices has grown more than 60 percent. As a result of that and other human-resources issues, business owners now spend up to 25 percent of their time handling employee-related paperwork and complaints, according to the Small Business Administration. Not only are human resource issues taking up more time, but businesses also face the continually growing threat of employee lawsuits and actions. Between 1991 and 2000, the number of sexual harassment cases filed with the Equal Employment Opportunity Commission more than doubled, increasing from 6,900 to 16,000 a year. Commenting in Harvard Business Review, management expert Peter F. Drucker notes that it's "no wonder that employers (especially smaller companies) complain bitterly that they have no time to work on products and services, on customers and markets, on quality and distribution – that is, they have no time to work on results."

PEOs help to alleviate the administrative burden by taking care of such tasks as:

• Administering payroll and related tax filings
• Processing unemployment and workers' compensation claims
• Sponsoring and administering health and 401(k) plans
• Ensuring compliance with COBRA, FMLA, ADA, FLSA and other employment statutes.

Economies of Scale
The liabilities and administrative responsibilities that a PEO assumes are a powerful incentive for using a PEO. There are other benefits, however. Perhaps the most compelling in today's economy is that a PEO relationship allows small employers to purchase Fortune 500 benefits at a significantly lower cost. On their own, small companies have little leverage for purchasing benefits or for limiting increases in insurance costs. They also often are unable to gain access to a broader set of products and plan designs. By pooling their clients' employees, PEOs can negotiate lower rates, manage ongoing increases, and tap into a broader range of benefit plans. A PEO partnership can provide:

• HR support: Most small businesses have no HR support
• Superior benefits: Small businesses can obtain big-company benefits
• Expertise: Small businesses gain access to tax, labor law, benefit and workers' compensation experts
• Reduced risk: Risks are shared by the PEO
   

Impact on CPAs
Because clients look to CPAs as their most trusted advisor on a multitude of issues, CPAs have been the source of many new and innovative concepts for their clients. As PEOs continue to gain in popularity, CPAs will need to be ready to assist their clients in reviewing the pros and cons of using a PEO and selecting a company. 
 
As with any outsourcing arrangement, there are issues to consider before entering into partnership with a PEO:
 

• Number of years the PEO has been in the business and its general size (as measured by clients, employees, etc.) 
• Management experience and general background
• Appropriate licensure
• References (banks, suppliers, CPAs)
• Member of NAPEO (check the website at www.napeo.org) 
• Insurance plan funding and supplier (for example, self-insured or fully insured, rated carriers)
• Insurance coverage (GL, E&O, EPLI, crime, or other)
• Administrative, HR and risk-management competencies (ask the PEO's clients)
• Pricing methodology

PEOs are the next wave in outsourcing and an especially beneficial option for small to mid-sized businesses. For a business to remain competitive, it needs to focus on the market and new opportunities, not on paperwork. PEOs help to make that happen by reducing the administrative burden.

BRIAN J. RADIN is President and CEO of Extensis Holdings LLC, one of New Jersey's largest professional employer organizations. Extensis is also an active participant in many NJSCPA statewide and local chapter events. For more information, go to www.extensispeo.com or call 888-473-6398.