First of all, a PEO is not an employee leasing, temporary staffing or contract personnel service. The National Association of Professional Employer Organizations, (NAPEO) defines a PEO as an organization that "provides an integrated and cost effective approach to the management and administration of the human resources and employer risk of its clients, by contractually assuming substantial employer rights, responsibilities and risk, through the establishment and maintenance of an employer relationship with the workers assigned to its clients."
There is no leasing back of an employee by a company. The employees are not temporary in status. The PEO and the client are co-employers bound by a contract that spells out each other's rights, responsibilities and obligations.
Joe started his landscaping business eight years ago because he enjoyed working outside, dealing with design projects, and watching his ideas beautify his clients' property. Joe was so successful that he now has 10 employees. He now spends his evenings and weekends computing his workers' time cards, tracking government compliance issues, and hiring and training new people to replace the ones that have left to go with his competition because they offer better employee benefits. Joe doesn't enjoy his business as he once did because he works for others like Uncle Sam, his employees, and his accountant. How many of your clients does this picture fit? How about you?
A PEO is a contractual co-employer. If Joe were to enroll in a PEO he would still have control to hire and fire, reward, discipline, train, and supervise employees on a daily basis. The PEO, for a fee or percentage of payroll, would perform all human resources functions, prepare payroll, and write checks to governmental entities, handle workers compensation issues, process medical claims, and verify premium audit among other duties. Joe then could concentrate on the business of business. Energy could be channeled to generate new clients, plan new projects, and train employees who will remain with his business over the long term.
A PEO will assist with the compliance issues of hiring and firing, the Equal Employment Opportunity Act, Americans with Disabilities Act, Civil Rights Act of 1964, W-4 preparation, and the establishment of employee handbooks.
John Brimner and Steve Stewart of Stewart/Brimner Insurance Agency, located in Fort Wayne, Indiana, established an agency-owned PEO, Employer Administrators Services of Indiana or EASi, about 18 months ago. EASi provides not only the administrative services of a PEO but also works to obtain employee benefits, loss control services and full EPLI coverages. Stewart remarks that PEO is very easy to sell but sometimes hard to close. "The upside is that once clients decide on a PEO they don't leave."
This is backed up by the NAPEO. Milan P. Yager, executive vice president, says that PEOs enjoy a 90% retention ratio. As more small and medium-size employers become more educated about PEOs, closing one will not be difficult.
Stewart-Brimner, a 1991 Rough Notes Marketing Agency of the Year, has concentrated on Indiana and its existing clients to kick off their EASi organization but growth may change that in the near future. Brimner stresses that PEOs must be underwritten with regards to insurance coverages such as workers compensation. "You can't make a bad risk good because you bring it into a PEO."
In the early 1980s PEOs started because small businesses could not handle the increased compliance issues, human resources, and management duties on a cost effective basis.
In the early 1980s PEOs started because small businesses could not handle the increased compliance issues, human resources, and management duties on a cost effective basis. Some outsourcing existed but not on a large enough scale to accommodate all aspects of the owners' responsibilities.
In 1996 Automatic Data Processing (ADP), which probably has written a payroll check for the vast majority of America's workers at one time or another, acquired a small PEO in Florida. Through a recent merger with the Vincam Human Resources Group they have formed the second largest PEO in the country, ADP TotalSource. This is an example of a service provider expanding into the PEO market, indicating that a company the size of ADP expects the future to be very bright.
Venture Programs of West Chester, Pennsylvania, part of this month's Marketing Agency of the Month, has been in the program business for some time in the country club, utility, construction, and hospitality industry. As a program manager, Venture has a workers compensation product designed for PEO entities. They consider this to be a niche market that is untapped and one that has tremendous future growth potential.
PEOs have had other misconceptions connected to them by business owners and insurance agents alike. A contract is in effect between the owner of the business and the Professional Employer Organization stating in detail what each other's duties and responsibilities are. The IRS recognizes the PEO as an employer for the payment of federal and unemployment taxes. In some states, the PEO is also an employer for the purposes of workers compensation and state unemployment taxes. The client employer still has the liabilities of Social Security and payroll taxes.
Another misconception is that only seasonal-type businesses make use of PEOs. This is definitely not true. PEOs are used by medical facilities, retailers, construction firms, mechanics and insurance agencies. According to the National Association of Professional Employer Organizations, the average size of a client is 16 to 18 employees and there are currently over three million employees in PEO arrangements. In excess of two thousand PEOs exist in the United States with more than
$18 billion in employee wages, human resources, and employee benefits.
Some states require a PEO to be licensed or registered. Currently 15 states have licensing requirements. They are Arkansas, Florida, Illinois, Kentucky, Maine, Montana, New Hampshire, New Mexico, Nevada, Oregon, South Carolina, Tennessee, Texas, Utah, and Vermont. In Rhode Island a PEO must be registered only.
Insurance companies have recognized the growth potential in PEOs and have structured policies to address exposures specific to this class of business.
Smith Bell & Thompson, of Burlington, Vermont, launched their program for PEOs in January of 1998. It is underwritten by CNA member companies and administered by Smith Bell & Thompson on an admitted basis in all states except Texas, where nonadmitted paper is utilized. The program is open to all licensed agents and brokers.
"Our program," says Bill Thompson, senior vice president, "offers a full line of P&C coverages forms including specific errors and omissions wording. We write this on an occurrence form and the coverage is designed to protect the PEO for a multitude of professional liability exposures that they assume under contract in their relationship as a co-employer with their client companies."
Smith Bell & Thompson's coverage agreement reads:
"We will pay on behalf of the insured all sums in excess of the deductible the insured shall become legally obligated to pay as 'damages' because of a 'staffing services incident' by the insured by someone for whom the insured is legally responsible ..."
Staffing services are defined to include "PEO Services" also.
"Our view of the E&O exposure," Thompson continues, "is that the most obvious, unidentifiable exposure is the administrative mishandling of employee benefits, workers compensation and unemployment claims. The EBL coverage that a PEO might carry as an extension of their general liability would only extend to their own direct employees, and would not cover these third-party exposures. In addition, PEOs face exposure in negligent handling of administration of payroll and potential IRS violations such as failure to report and deposit federal and state taxes."
PEOs manage insurance programs, COBRA benefits and research and negotiate for increased or new employee benefits. It is estimated that 40% of employees receive increased benefits after enrolling in the PEO. Of those, 25% have benefits for the first time ever. PEOs also can bring a full array of optional benefits to the table. Vision care, short- and long-term health plans, dental, 401(k)s, prepaid legal plans, and group life and health plans are among the most common. To enhance their market share some have even negotiated travel benefits, banking and investment programs, and rental car discounts.
At a growth rate of 30% per year and barely scratching the surface, PEOs represent an attractive specialty market of the future.
To return to our landscaper Joe, he now is enrolled in a PEO and has time to grow his business and enjoy it at the same time. His employees have increased benefits and are more productive. Joe doesn't have to worry about all those government forms and reports. Liability exposures are reduced because all employees are in possession of an employee manual which sets guidelines for procedures and company policy. He is retaining good employees and focusing on growing his landscaping business.
The PEO market can be an opportunity for agents in many ways. They can sell the client on the PEO's advantages and earn a fee in doing so. Workers compensation sales are one of the main products sold to PEOs. Or, as some agents have done, they can establish an agency-owned PEO and build equity for the future. Group life and health products, general liability, EPLI, and professional liability are all products that someone will provide the PEO for its members.
The following is a list of contacts regarding information on all aspects of PEOs:
ADP/TotalSource
Phone: (800) 962-44094
Fax: (305) 630-3000
Web site: www.vincam.com
Employer's Administration of Indiana (EASi)
Contact: John Brimner, Partner
Phone (800) 655-EASi (3274)
Fax: (219) 484-5576
National Association of Professional Employer Organizations (NAPEO)
Contact: Milan P. Yager, Executive Vice-President
Phone: (703) 836-0466
Fax: (703) 836-0976
Web site: www.napeo.org/
Smith Bell & Thompson, Inc.
Contact: William Thompson, Senior Vice President
Phone: (800) 7356-1800
Fax: (802) 658-6191
Venture Programs, Inc.
Contact: William Dalton
Phone: (800 282-6247
Fax: (610) 692-0199 *
©COPYRIGHT: The Rough Notes Magazine, 1999