By Laura Beller
Martin Van Horn of the Athens Insurance Center, Inc., in Athens, Georgia, first became aware of employee leasing firms after he lost a couple of workers compensation accounts to leasing companies. Once he began to look into the employee leasing concept, he began to see that it made sense to use it for the agency's employees. Since January 1, 1996, the Athens Insurance Center has been leasing its employees, just as it might lease employee automobiles or office equipment. "The employees aren't ours anymore. They work for the leasing agency but still act like they're our employees," he says.
Van Horn also saw it as a way to extend his product offering to his client base. The agency is able to generate commissions based on annual payroll, by selling employee leasing to its clients. "If you're trying to sell something, I always believe you should have it yourself," he comments.
For insurance agents, the professional employer organization (PEO) takes away the administrative burden associated with managing employees, while providing economies of scale on the purchase of benefits. "The economies of scale a PEO can generate is huge. This allows firms to spend money on things that will make the business money, rather than cost items," says Brian Boltz of Risk Management Solutions, a Ft. Lauderdale, Florida-based company which provides risk management services for PEOs.
"A lot of white collar employers love the idea of a PEO," states Page Lord, also of Risk Management Solutions. She adds, "Employers save on the hard costs like insurance and in human resources. But also on the soft costs like retraining, and in having more people to work on your type of business--people that you were dedicating to handling human resources and insurance."
Today, PEOs have to do much more and provide services that help employers reduce their costs while providing value-added services such as assistance with employment-related problems, and advice on labor regulations and workers' rights. Boltz says, "It's no longer enough to say 'I'm going to lower your work comp premium' as old employee leasing firms did." He goes on to say, "Employers want to compete for workers. Benefits are still really important to employees." He adds, "The number one reason employers respond to PEOs is the possibility to offer better benefits at a lower cost."
To Van Horn, the biggest benefit that employee leasing provides his agency is freedom from having to deal with state labor departments, tax filings, employee problems, and other human resource and administrative burdens faced by employers. "I was so tied up with corporate matters that I couldn't concentrate on writing insurance and managing an agency," he states.
In addition to freeing agencies from government red tape and paperwork, employee leasing companies also will provide expert support teams in human resources, risk management and accounting. "I have a person that answers all types of personnel and employment practice questions," says Van Horn. He goes on to say, "If I have an employee that goes to the dentist, I have a form for them to fill out that documents everything. And, I have a record beyond anything we ever kept. This is ideal for me because we didn't have time to do it to the extent the employee leasing company does. For this agency that has 10 people here, it works," he says.
Background on employee leasing
Employee leasing is not a new concept. This type of firm has been around for about 10 years. The term employee leasing was originally used because the employer would literally fire its employees, then the leasing firm would hire them and lease them back to the employer. According to Lord, a lot of fraud went on with employee leasing firms in Florida and Texas in the early days, which gave the business a bad name. These firms made a practice of taking money for insurance premiums from their clients and running off without paying the premiums. Because of the negative image created by these disreputable leasing firms, current organizations prefer to be recognized as professional employer organizations or PEOs. "Employee leasing got a fairly bad name because of what went on early in the process. The people that have survived this are really professional organizations," Lord says.
In the last five to six years, states have enacted regulations and licensing requirements to deal with the problems created by the fraudulent companies. Today, 15 states license or regulate these companies including Florida, California and Texas. "And, there's even the National Association of Professional Employer Organizations. NAPEO actually accredits PEOs by auditing the books, and making sure that premiums are being paid. It's a costly process for the PEO," says Lord. Of the 2,232 professional employee organizations in the U.S., only 20 have been accredited by NAPEO.
According to Boltz, the recent acquisition of large PEOs by national payroll processing companies has added a great deal of legitimacy to the business. Two of the largest PEOs, National Business Solutions and Staff Leasing, were recently purchased by Paychex and ADP, respectively. Boltz believes that these companies will grow by "leaps and bounds" simply by introducing the PEO services to their existing clients. This, in turn, may present challenges for commercial agents in maintaining and developing workers compensation business.
Why PEOs are so hot
PEOs are gaining in popularity because they make it much easier for companies to conduct business without being burdened by all of the work and expense associated with having employees. American businesses have seen a dramatic increase in employment-related federal and state regulations and laws which are difficult and time consuming for small businesses to handle. At the same time, the cost of providing voluntary employee benefits, such as health insurance, also has increased considerably. The cost of mandatory benefits, such as workers compensation and unemployment insurance, also has risen.
According to NAPEO, professional employer organizations have been growing at a rate of more than 30%; and experts predict this rate of growth will continue for the next 5-10 years. PEOs cover only 2% of businesses today, or 2-3 million employees with annual payrolls of $18 billion. Estimates made by the Small Business Administration indicate that there are almost 6 million businesses with fewer than 100 employees, with an aggregate payroll of over $1.1 trillion. This means that for PEOs, and agents that market or provide the services, there's a tremendous potential for growth.
Will employee leasing work for your agency?
"Employee leasing has been interesting to me because it's a popular concept," says Sharon Cunningham, an agent and broker consultant with the Business Management Group in Hartford. "It's a nice option for a small business owner not to have to deal with all of the payroll issues," she says. Because most agents outsource their payroll, she believes that it makes a lot of sense to go to one company for all payroll and employee services.
Deciding to use a PEO for your own employees isn't always an easy decision because it involves a new way of conducting traditional human resource functions. In addition, it means severing traditional ties that agencies have with their employees so that the PEO can act as the employer. "The sale of the service to the employer is a very emotional decision in spite of how much sense it makes to you," says Boltz. "But when employers get comfortable with the idea it's easier. They warm up to it when they see what they can get," he adds. PEOs can provide more benefits than a lot of Fortune 1000 companies provide, such as dental, vision, and 401(k)s, and do so at a cost that's lower than an agency could get on its own.
Laurie Weinlein of International Professional Employers, Inc., a Chicago-based professional employer organization, shares Boltz' upbeat view of PEOs. "People really love it. Once an organization joins a PEO, they always stay within the PEO environment. The PEO retention rate is about 80%," Weinlein adds, "The only time a client company will leave a PEO is if the client is having financial problems, or if the client's going out of business. It really is a wonderful service for anyone in business. It gives the business the opportunity to really concentrate on their business. The government doesn't give out handbooks on how to be an employer," she says. Many small to medium-sized employers simply may not be aware of all the intricacies of complicated federal and state laws and regulations. "I've even gone into employers where they don't realize they need to have work comp insurance or state disability," says Weinlein.
As a way of expanding their product offering, PEOs offer agents a way to deal with the competitive pressures caused by these firms pursuing their commercial accounts. "I've seen agents looking at it for another source of revenue," says Cunningham. "On commercial insurance, premiums are decreasing. This is a way for agents to increase overall revenue and diversify income sources while offering more to their existing client base," she says. "For the commercial producer, employee leasing can be an easier sale than a commercial policy. It allows them to get their foot in the door with employee leasing, and sell commercial policies after that. You're reaching a lot of warm prospects which is what you want to do."
According to Weinlein, "For the agent, the benefit of promoting this service is the opportunity to make commissions on an all-inclusive service above and beyond the insurance piece." Another option for agents is to set up their own PEOs. "I worked with an agency that set up its own employee leasing company, and the commercial producers will be selling this to its commercial clients," says Cunningham.
Cunningham cautions that PEOs may not work for all agencies. In order to be successful at providing the employee leasing service, the agency needs to be well managed, have strong administrative and sales abilities, and a good understanding of its own costs. She adds, "Many agents don't have a good understanding of their own costs and where there's profit, and no profit. They need to have disciplines in place to handle this.
"If an agency is not in good financial condition and well managed, and has no knowledge of its own processes, this product could be a disaster because the agency may not be able to manage it effectively. Or if they may pick an employee leasing firm to joint venture with that doesn't follow through. Agents have to have full confidence that the leasing firm can do a quality job."
Cunningham believes that even if agents choose not to market the service to their clients, it's important at least to be aware of the service because it could lead to the loss of valuable commercial accounts.
Selecting a PEO for your agency
According to Lord, a number of PEOs are cropping up all over the U.S., with some specializing in particular industries. These range from small "mom and pop" operations to large, sophisticated firms. She goes on to say that, "we're seeing a more specific approach being used by new PEOs, such as one in Silicon Valley that writes only technical companies." In addition, associations are even getting into the business, and creating their own PEOs.
Whether you're selecting a PEO for your own employees, or considering marketing these services, it's important that agents are diligent about taking time to thoroughly examine a PEO's operation. Weinlein comments, "I think they should make sure it's an accredited member of NAPEO. Also, they should check the background of the organization, its principals, what their expertise is, the experience rating of the organization, and the insurance company they use." She also recommends that agents check their Dun and Bradstreet rating. Or better yet, ask for certified or review level financial statements.
Other areas that agents should examine include banking and credit references, and verifying that the organization pays its payroll taxes and insurance premiums. If your state requires licensing, make sure that it meets this requirement. It's also important for an agent to understand whether the benefits being provided are being done on a self-insured, or fully insured basis, and what insurance carriers and third-party administrators they use.
If properly selected, a professional employer organization represents a unique opportunity for agents to improve the way their businesses operate, and to profit by expanding their product offering to their existing clients and prospects. *
The author
Laura Beller is an Atlanta area-based freelance writer who has written extensively about employee benefits and compensation.