California Professional Employer Organizations

Effectively managing Human Resources in California has become a daunting and complex task for small to mid-market business owners. California-based corporations must grapple with one of the most complicated systems of employment laws in the country. While statistics report that many corporations are leaving the state, another trend has risen to assist overwhelmed business owners – California Professional Employer Organizations, or PEOs.

In just the first months of 2008, dozens of laws effecting numerous topics of employment law have been enacted in California. This includes a laundry list of unfriendly policies, including laws governing hiring and termination, family leave, sexual harassment, paying employees, leaves of absence, employee benefits, and workers' compensation. These trends have led to an unprecedented rise of employment litigation, labor regulations, and tax laws.

Employers continue to face fluctuating risks, and the high expense of conducting business has restricted the opportunities for business owners to remain competitive. Furthermore, it has become clear that the expertise required to manage a small to mid-sized operation has outgrown the experience and training of many entrepreneurs who started these businesses.

These complexities have led to one of the hottest business trends in California, and the nation as a whole: Professional Employer Organizations, or PEOs. PEO firms help companies reduce costs and efficiently manage HR-related issues, while navigating the complex business labyrinth, an intricate combination of policies and regulatory standards that are difficult to escape.

Outsourcing Human Resources to the Experts

PEO firms enable companies to shift responsibility of non-revenue generating competencies that can be handled easily, and inexpensively, by off-site experts. These functions include the areas of labor compliance, risk and safety, payroll, benefits, and other complex workplace regulations. The PEO firm helps companies reduce costs by effectively managing HR functions while allowing businesses to focus on their core operations that impact profitability.

Once HR and other operations are outsourced, many companies are showing a strong return on investment, according to a recent survey of American executives, by IDC, a global provider of market intelligence. The 2006 survey of executives at the IDC Midwest Conference in Chicago showed nearly 85 percent of the respondents saved as much as they spent on outsourcing, with 26.4 percent reporting a savings of twice as much. And the savings, according to nearly 95 percent of the respondents, went toward operational performance and innovation, which improved shareholder value.

Co-Employment

The PEO industry, formerly known as Employee Leasing, or Staff Leasing, has become a rudder for companies trying to navigate choppy seas. Taking on the responsibility of all human resource functions, the PEO can serve a multitude of functions. Primarily, the PEO creates a "co-employment" relationship with its clients, thereby sharing the risks and responsibilities of being an employer. The PEO assumes the role of the Administrative Employer, whereby the PEO pays the employees, files payroll taxes, provides health insurance, issues the workers' compensation insurance, and manages most aspects of employment. The client maintains the role as the Administrative Employer and continues to manage and oversee all day-to-day functions relating to their internal operations. This includes hiring, firing, establishing wages, and directing the workforce.

Helping Businesses and Their Employees

Through a co-employment relationship, small organizations access the economies of scale enjoyed by large corporations. The PEO client can offer premium benefit packages and retirement plans, typically provided by their larger competitors. They can maintain a simple in-house HR infrastructure or none at all by relying on the PEO. The client also can reduce hiring overhead. Costs related to monitoring of, and compliance with, employment laws are reduced, as are the often significant costs of failure to comply with such laws. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients. This enables the business owner to focus on the company's core competency and grow its bottom line.

In addition to providing important services to their business clients, PEOs offer substantial advantages to worksite employees. In many cases, these employees would not be provided the number, or quality, of benefits that a PEO can offer. These benefits may include health insurance, retirement savings plans, disability insurance, life insurance, dependent care reimbursement accounts, vision care, dental insurance, employee assistance plans, job counseling and educational benefits. Each individual small business's cost of establishing and administering this range of plans would be prohibitive. However, due to economies of scale, PEOs can sponsor and offer these plans at an affordable cost.

A Surging Industry

After a decline in the number of PEOs in 2003, a strong economy has resulted in a surge over the past four years. The PEO industry serves between two and three million employees per year, with most assisting companies with less than 50 employees. The average PEO is on the rise, too, with a growth rate of more than 20 percent per year for the last six years, according to a survey by the NAPEO, the national trade association for the industry.

For an annual fee that easily trumps the cost of an HR staff, PEOs manage training and education, health benefits, payroll, benefits, workers' compensation issues and employee relations. It is apparent that the frustration brought on by obtrusive human resource standards can be offset by the value found with PEOs, and other PEO providers.