Small businesses can opt to outsource human resources and employee services

The fast changing world of micro and nanotechnology development demands that its businesses focus on their core products and services. At the same time, many of these companies have personnel requirements that demand time and expertise – both often in short supply at startups and small companies.

In some cases, outsourcing vendors that can deliver high service levels and predictable outcomes for non-core business processes provide a solution. With the right outsourcing partners in place, businesses are free to focus on the areas that directly affect the bottom line, such as R&D, manufacturing and quality controls.

In the area of employee and human resources (HR) services, professional employer organizations, or PEOs, can serve as HR outsourcing partners. There are now some 700 PEOs in America serving businesses in all 50 states. Careful selection of a PEO is key. Here are some tips on what to look for in a PEO.

A variety of HR services. PEOs perform functions similar to those assigned to in-house HR departments of large companies. These functions include: payroll preparation and reporting, time and attendance tracking, payroll tax filings, W-2s, garnishments, Internal Revenue Service and state inquiry management, policy and handbook development, unemployment administration and disability management. PEOs also handle all federal and state postings, equal employment opportunity reporting and compliance with workplace legislation. PEOs also manage Workers’ Compensation insurance administration and claims management, Employee Practices Liability Insurance and work site safety assessments.

More choices, more perks. PEOs may bring benefits and economies of scale to their affiliated companies and their employees. Among the benefits PEOs offer are cafeteria plans affording employees choices regarding their medical insurance, dental and vision coverage, options such as flexible spending accounts and health savings accounts and various insurance plans. Investment-related benefits include 401(k) plans and Web-based portfolio administration. Many PEOs offer secure, password protected Web sites for benefits and claims information, and online access for employers.

Under the category of Employee Assistance Programs, PEOs provide their clients with legal assistance, college savings, scholarships and tuition, adoption assistance, addiction and recovery services and wellness programs. Other possible perks: store and health club discounts, movie and theater tickets, travel promotions, transit checks and qualified parking.

Accreditation and other protections. Over the past decade, PEOs have raised the standards within their industry. Exemplifying the heightened emphasis on quality assurance is the Employer Services Assurance Corp. (ESAC). It can be likened to what the Federal Deposit Insurance Corp. and Security Investors Protection Corp. are to the banking and securities industries, respectively.

ESAC is an independent, non-profit organization designed to protect businesses and employees served by PEOs. It is led by a board of experienced regulatory professionals and is an accreditation and financial assurance governing entity for PEOs. ESAC-accredited PEOs are covered by a $1 million bond held in trust by a national bank and a $4 million umbrella bond to cover any claims in excess of the $1 million bond held for each PEO. Since its formation more than 10 years ago, there have been no defaults by ESAC-accredited PEOs, unresolved claims or litigation.

Many states also have licensing and certifications requirements that firms should inquire about when making a PEO selection.

Read the fine print. PEOs generate approximately $43 billion by providing a wide range of employment services and benefits through a co-employer arrangement wherein the PEO assumes certain responsibilities and risks along with the affiliated business (its client).

As part of the arrangement with a PEO, clients remain responsible for compliance with various laws. For example, they must comply with regulations that require a safe and healthy workplace. They must not violate laws governing discrimination and retaliation. Their PEO will guide and advise them to make sure that they comply with the law.

Charges for the service can vary and are determined by the service agreement negotiated with the PEO. Some PEOs will charge a fixed amount per employee per year, while others will charge a percentage of payroll. A client must make certain that all charges are spelled out clearly in the service agreement.

The service agreement should provide the client with an escape clause for reasonable termination of the arrangement, usually with a 30-day notice. Clients dealing with a PEO that is certified by ESAC are protected by a bond in the event that their PEO fails to meet its financial obligations, including the payment of taxes and health insurance premiums. For more information about ESAC-accredited PEOs, visit For more information about PEOs, visit:

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Barry Shorten is executive vice president of The Alcott Group in Farmingdale, N.Y. He can be reached at [email protected].


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