Professional Employer Organizations: PEO
Professional Employer Organizations: PEO
A New Approach to Employee Retention
[Source: Grant Thornton, A major U.S. accounting, tax, and management consulting firm – http://www.grantthornton.com]
The key to employee retention for many companies is to outsource some or all of their human resource functions.
According to research recently conducted, as part of the Grant Thornton Business Owners Council, attracting and retaining talented employees is the number-one issue facing business owners in the United States. However, many companies have neither the time nor the experience to create the necessary infrastructure for human resources services.
To address their human-resource needs, these companies increasingly are outsourcing certain functions to professional employer organizations (PEO's), companies that offer an integrated, cost-effective approach to human resources management and administration. PEO's assume substantial contractual employer rights, responsibilities and risk, and establish and maintain an employer relationship with the workers assigned to their clients.
There are a variety of approaches among companies that are implementing the PEO-model. For instance,
a Manassas, Va.-based PEO works with client companies to take on their outsourced human resources responsibilities as a partner. They manage a broad range of human resources functions for clients, including employee compensation, benefits and procurement, staffing, job performance, counseling, employee retention tracking, risk management, workers' compensation, and other day-to-day administrative issues.
The PEO takes a proactive stance toward managing human resources issues. Client company employees have Web-based access to benefits information, handbooks, and overall company policies. The PEO takes an active stance toward employee disputes. "The most important part is intervention, since an employee expects to get a response within 24 hours," its president says.
Working with client companies of usually fewer than 100 employees, PEO's adopt the philosophy that each company has a unique culture, and therefore customizes its human resources program for each client. The goal is to use human resources expertise to improve recruiting retention and performance of employees. The company's business model includes sending staff to work at client sites, and offering clients Web-based access to human resources information.
Ultimately, this PEO says it achieves economies of scale through developing programs that drive down overall costs for worker's compensation, unemployment, and healthcare. The firm also handles all claims administration, payroll, tax, and W-2 filings for client companies.
Another company with a more targeted, industry-specific approach is a New York-based PEO. Focusing primarily on technology, e-commerce, and financial services companies, this company is a PEO that offers human resources, payroll processing, 401(k) plans, and benefits services; flex spending accounts, and other back-office human resources functions to small- and mid-size companies.
PEO's allow its clients to recapture valuable time to focus on their core businesses. Many of the firm's clients are venture-backed fast-growth companies that cannot replicate these benefits on their own. Others are well established and are looking stay up to date and to be competitive in marketplace.
To meet their technology clients' needs, this PEO is introducing a Web-based human resources information system designed to decrease administrative inefficiencies and provide increased access to employee data. Employees can use the system to enroll in benefits online, access and change their personal data, and view their employee handbook. Employers can use it to inform the PEO of new hires and terminated employees online, make changes to employee status, and access live data on employees. Through the Web-based system, PEO clients will have capability typically available only to large companies.
"The primary reason clients come to us is that they want to focus on growing their business, but not on these administrative functions," says their director of business development for the East Coast. Like other PEO's, this company helps reduce accounting costs for clients by managing state and federal taxes, as well as benefits costs and relief from administrative burdens imposed by state and federal regulations.
Through the PEO's system, firms are not outsourcing their organizations unique culture. Rather, clients note improvement in overall employee morale and satisfaction through the PEO's proactive company wide benefits education.
Their director of business development adds that employees often prefer coming to the PEO with their medical health and benefits questions because of the firm's objectivity. Like other PEO firms, they offer client companies competitive benefits packages at reasonable costs.
PEO's also manage clients' electronic payroll systems through the Automated Clearing House banking system. Once a client signs on, the PEO manages payroll tax deposits, quarterly payroll tax reporting, and unemployment tax collection and reporting in full compliance with state and federal laws.
While the use of a PEO offers many advantages to technology companies, there are certain accounting and tax implications that the company should consider. It is essential that any company planning to use a PEO consult with its independent accountants first to ensure compliance with these complex tax and accounting rules.
These concerns notwithstanding, by managing so many human resources services in general, PEO's let their clients concentrate on the "business of business" without the challenges and distractions associated with the "business of employment." As a result, PEO's can enhance their clients' profitability, help reduce client costs related to the monitoring and compliance with employment laws, and offer clients significant tax and accounting cost savings.