Want to cut down on paperwork? Provide better benefits at less cost? Employee leasing may make it possible.

Seven years ago, while wrestling with the rising costs of employee benefits, I stumbled across an unusual and somewhat daunting solution: Fire everyone.

Downsizing and outsourcing are buzzwords for meeting the challenge today in personnel management. How do you run lean but mean on a budget that's been squeezed bone-dry? For the Central Ohio Retail Grocers Association (CORGA), Columbus, the first step was eliminating the three-person staff (two full time, one part time).

Firing everyone - including the chief executive - may sound like a drastic and foolhardy way to cut costs, but it's actually an alternative staffing strategy that's catching on in the business world. The concept has also found favor among association executives who seek to save time, reduce paperwork, and lower costs by rehiring their staffs through a professional employer organization (PEO) that provides a service known as employee leasing.

Typically, a PEO helps manage a wide array of increasingly complex employee-related issues, such as medical benefits, workers' compensation claims, payroll, payroll tax compliance, unemployment insurance claims, and so forth.

Sometimes confused with PEO services is a practice in which an employer retains a former employee's services as an independent contractor. In the process, the employee usually loses benefits once provided by the employer. The Internal Revenue Service has been paying close attention to this practice for employment tax purposes.

In a client-PEO arrangement, on the other hand, the client continues to pay employment taxes, but they are rolled into one lump sum (invoiced each pay period) that includes payroll, benefits, and the PEO's professional fees. A PEO's value lies in its ability to provide integrated business services and manage critical human resource responsibilities more efficiently and cost-effectively, largely because of its volume-buying capabilities.

The better PEOs are much more than dressed-up payroll services. They assume the role of your off-site human resource professional, performing the sometimes perplexing, often complicated and time-consuming duties of that office. Team America, the PEO that has served CORGA for the past seven years, has handled recruiting, rewritten job descriptions, and once provided guidance in a sensitive personnel dispute concerning scheduling.

When I began my investigation of PEOs back in 1988, I saw two primary benefits. Transferring human resource management responsibilities to an outside company would free up my time to get back to the business-at-hand - running the association. I could also offer staff a wider array, of benefits - thanks to the PEO's volume-buying capabilities - that CORGA would never have been able to afford on its own. Even after the PEO's fees were factored in, we saved money, about $1,400 per year. (PEO fees range from 4 percent to 6 percent of the gross payroll.)

 

Saving time and money

Paul Shanor, executive director of the Medical Association of Georgia, Atlanta, says his own experience has been so positive that he wants to spread the word. Shanor has leased his staff of 30 since February 1993.

"We liked it so much, we asked if we could endorse the company for our members," he recalls (see sidebar, "Marketing to Members"). "It's the first time we've actually gone to a firm and asked if we could endorse them. Usually, it happens the other way around."

Shanor says he first learned about employee leasing from his elected president, who was the association's treasurer at the time and was using a PEO himself.

"Frankly, I didn't know anything about leasing employees at the time," he admits. "So I started reading everything I could find and, basically, I found that if you find a good company, it is a smart business move."

Shanor, whose state association serves a membership of 7,500 physicians, says the move to employee leasing reduced his association costs by $35,000 in the initial six months of the switch because of savings in insurance benefits. "Since then, we figure we've saved $75,000 a year, minimum," he says. "That's a lot of money."

Once you've found a firm and closed the deal, you fire then rehire your staff through the vehicle of the PEO. In the process, you pick up a number of benefits, including one that can't be overemphasized: time.

So attests Jim McMillan, executive director of ASA Cooperative, a national association with a two-person staff in Columbus, Ohio, that switched to a PEO two years ago. "I am no longer spending half a day each pay period with administrative duties," he says. "Now it takes me five minutes to take a phone call and write a check, so the time saved for me has been tremendous."

Another executive who values the time she saves by using a PEO is Beth Risinger, chief executive officer and executive director of the National Executive Housekeepers Association, also in Columbus.

"A good 35-40 percent of my time, which could have been used more efficiently, was being used to evaluate health policies and benefits packages for my staff," she explains. "Plus, my controller was spending an enormous amount of time on payroll, taxes, and so forth."

Risinger's organization, which is now international in scope, serves 8,000 members with a staff of 10 full-time and two part-time employees. She turned her human resource management over to a PEO three years ago.

Executives who've made the switch to a PEO stress the importance of keeping staff and the board of directors informed every step of the way - from initial consideration of the option to signing the contract. Keep reminding everyone that it's really only a paper transaction - one that will lead to considerable savings and greater benefits for all concerned. The board also needs to fully understand that having a PEO will not alter its relationship with the executive director. Once CORGA's board fully understood these issues, switching to a PEO was an easy sell.

 

A few statistics

Employee leasing isn't a new idea. It's been around since the 1960s, but only recently has it begun to grab headlines as a viable approach to the human resource challenge. Estimates vary, but according to the National Association of Professional Employer Organizations (NAPEO), Washington D.C., which formerly was the National Staff Leasing Association, the number of employees being managed by PEOs has jumped from a million in 1992 to 1.6 million in 1993. Extra paperwork resulting from an increase in regulations may be one of the factors fueling the increase, according to some observers.

A 1986 study issued by the Small Business Administration (SBA) found that most companies then using a PEO had 2-50 workers, with an average of 12. Of those employees in PEO staffing arrangements, 35 percent were professional or technical; 35 percent were clerical; 10 percent were craft workers; 9 percent were laborers, 5 percent were operatives; 3 percent were service workers; 2 percent were in sales; and 1 percent were managers and administrators.

NAPEO currently reports the industry growth rate at around 30 percent per year. Its members cite recent figures that vary somewhat from SBA's 1986 study, with an average of 12-15 employees per client in industries "across the board," according to Eaton Lavigne, director of NAPEO's government affairs division.

 

A bundle of benefits

Reviewing the benefits provided by Team America, Columbus, Ohio, and other NAPEO members yields an impressive list. Before entering a partnership with Team America, my association provided basic medical coverage and life insurance. Period. Neither the resources nor the time to develop a broader and more flexible benefits package was readily available. Team America made rein-venting the wheel unnecessary. Once enrolled, CORGA employees had access to a lengthy menu of benefits.

We now have an adoption assistance program, amusement park and movie discount tickets, a deferred compensation plan, free checking and Visa through a local bank, payroll-deducted auto and home payments options, payroll-deducted life and disability program options, a store discount program, and travel club membership.

I especially like the tax-qualified programs, which include a Section 125 "cafeteria style" flexible-benefits plan for medical care, disability insurance, and other benefits; Section 129 dependent care assistance, a type of reimbursement account; and a Section 401(k) retirement savings plan. A benefits package that includes tax-qualified programs is one of the ways in which both the employee and employer can save money even while paying the PEO's administrative fees.

Effective management of workers' compensation and unemployment claims is another way in which the PEO can reduce operating costs, according to studies conducted by the U.S. Department of Labor; the U.S. Chamber of Commerce, Washington, D.C.; and the Society for Human Resource Management, Alexandria, Virginia. The average small business with 1-25 employees can save as much as 40 percent on the cost of unemployment and workers' compensation. A business with 25100 employees typically can save as much as 25-35 percent. CORGA's PEO has saved us nearly 50 percent on these costs.

A word of caution

Workers' compensation is one area in which the leasing industry's exposure to mismanagement, fraud, and abuse is painfully obvious. Over the years, a few companies have collapsed, and their clients have inherited the grim task of sorting through unpaid health insurance and workers' compensation bills. Claims for which some small employers were later held liable totaled in the millions of dollars. In other instances, clients have used an employee leasing arrangement to duck responsibility for a poor safety record.

Perhaps because it's still a relatively young industry, employee leasing isn't widely regulated. NAPEO is working to change that. The 12 states that currently require licensing are Arkansas, Florida, Idaho, Maine, Nevada, New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas, and Utah. This is quadruple the number of states that required licensing in 1993, and more may soon follow. "We expect at least another four to five states to adopt licensing laws in 1995," predicts NAPEO's Lavigne.

Safeguards against abuse

Tightening state and federal laws may discourage further abuses. Until then, the best safeguard is thoroughly investigating each company under consideration for the association's employee leasing needs.

Richard Schilg, president and founder of Team America, which now manages more than 3,000 employees for more than 200 clients, offers a simple checklist for those interested in both leasing staff and considering leasing as a potential membership service.

* Look for a PEO that can meet your needs and with which you feel comfortable.

* Determine whether the companies under consideration are accredited by NAPEO. And make sure they "have the experience to get the job done," says Schilg. "You re only as good as the company you keep, so go after companies that have established reputations. Check their references. Make sure the contract is airtight and that their fees are appropriate."

McMillan, who says his board likes the simplicity employee leasing has brought to his association's bookkeeping, seconds the need for contacting references. "Look at who they are presently doing business with," he suggests. "One of our initial concerns was whether the company was a fly-by-night operation, so be sure to ask for documentation. Look to see where they're licensed."

* Check for financial stability. Ask for banking and credit references and proof that payroll taxes and insurance premiums have been paid. NAPEO-accredited members must complete a quarterly audit. Make sure PEOs under serious consideration have been certified for at least a couple of years.

"The financial stability of the organization that you're outsourcing to is important," notes Dean Sisson, executive director of the 600-member Ohio Hardware Association, Columbus, which has a staff of four-full-time employees and one part-time employee.

Sisson inherited an association that outsourced its staff when he became executive director four years ago. It's an arrangement he has chosen to maintain because of the time and expense he saves, but he subjects the service to periodic review.

"I think the risk involved in having someone handle your payroll is extensive because you're turning over one of the largest expenses of your organization," he says. "You certainly want to minimize that risk by knowing the track record and financial stability, of the company. I can't emphasize that enough. Find out what their asset structure is. Get a Dun & Bradstreet report."

* Be on the lookout for companies that either don't charge fees or charge rates significantly lower than the national average of 4-6 percent of the gross payroll. Schilg says this is a warning sign that the leasing company's intention may be to get in the market, make a quick buck from the client's cash flow, and then get out.

* Look for a termination clause that permits you to cancel at short notice; 30 days is ideal, "Make sure there's no more than a 90-day termination clause," Risinger recommends. "That wax, if you don't like it, you can get out."

* Get up to speed on licensing requirements. If your state requires licensing or registration of PEOs, make sure any company you are considering fulfills such requirements.

 

Your own investigation

If you're beginning to warm up to the idea of employee leasing, you're not alone. Industry leaders believe employee leasing is poised for an explosion in the next few years. New clients most likely will come from small to mid-size organizations seeking benefits at better prices and a cost-efficient means to implement or replace a full-time, on-site human resource staff. And since associations aren't immune to the economic and demographic trends that are changing the workplace, now may be a very good time to take a closer look at any service that offers a prescription for meeting today's human resource challenge head-on.

Begin by comparing the PEO's proposal to your current costs to determine if the PEO can save you money. Don't forget to place a fair value on your time. Next, compare the PEO's employee benefits offering to your own. If the leasing firm's package is superior, it may offer a way to compete for needed talent.

Finally, find out if the PEO's professional staff are pursuing ongoing educational training to stay abreast of changes in human resource management, government compliance, and sophisticated technology. Schilg, who is a certified professional employer specialist, says they should be if they hope to remain competitive.

If your investigation yields satisfactory answers, you may be ready to lease. That was the conclusion I reached. The firm I chose now serves nine other associations, and I believe more will sign up soon. Like me, some may be first mystified, then intrigued, by the concept. But the potential rewards make the search worthwhile.

RELATED ARTICLE: HIGHLIGHTS

* Some association executives are saving time, reducing paperwork, and lowering benefits costs by staffing through professional employer organizations (PEOs) that provide a service known as employee leasing.

* A PEO's value lies in its ability to provide integrated business services and manage critical human resource responsibilities more efficiently and cost-effectively.

* PEOs provide access to a lengthy menu of employee benefits.

RELATED ARTICLE: Marketing to Members

The jury is still out on what it will take for associations to successfully market professional employer organizations (PEOs) as a member service. So far, the experience of association executives who've tried it has been disappointing for reasons that have yet to become crystal clear.

Once sold on the idea for my own organizations - the Central Ohio Retail Grocers Association, Columbus - I was eager to explore ways in which employee leasing could be structured as a new membership service, with special group rates and incentives. So far, member participation has been disappointing. Apparently, it will require a tremendous marketing effort to make tiffs fly, so I will be working with my PEO representatives to fine-tune CORGA's marketing strategy in the hopes that our track record can be improved.

Several association executives I talked to who were interested in developing a new revenue stream through an employee leasing program for members experienced similarly lackluster results.

The biggest hurdle may well be that the learning curve is high when it comes to educating employers and employees about complex services provided by PEOs. Another problem seemingly involves the erroneous perception, especially among small businesses, that PEOs will result in loss of control of an organization. We haven't yet found a way to adequately address those fears.

"We found the independent businessperson in our industry is reluctant to give up perceived control of his operation," explains Dean Sisson, executive director of the Ohio Hardware Association, Columbus. "There was a perception that the leasing company is in some way going to control their business. In reality, it is a good supplement that will help them administer their business by removing some of the pressures."

Paul Shanor, executive director of the Medical Association of Georgia, Atlanta, says his program also has met with resistance. "We've had some doctors who are interested, but their office managers are afraid," he says. "We've had doctors walk away from a savings of $50,000-$60,000 a year just because of that one employee."

Richard Schilg, president and founder of Team America, a PEO in Columbus, Ohio, believes resistance will crumble once the benefits are fully understood. "The surface of this market has only been scratched," he points out. "Most people don't even know the concept exists, and as soon as they do become aware, they're fascinated and intrigued.

"As more and more people become educated about the concept, the industry will explode," Schilg predicts. "But it does takes a while to warm up to."

 

Sammi Soutar Able Management Solutions, Inc.

First Appeared in American Society of Association Executives Oct 1, 1995