Louis Rivaldo was ready to hire his first employee a year ago.
Like many small-business proprietors, the owner of Lou’s Automotive in Spencerport wanted to offer employees a good benefits package but found insurance options unaffordable. He also was not relishing the paperwork required by new employees.
Some friends told him about employee leasing, and Rivaldo says it was a no-brainer to go in that direction.
“They take care of everything,” Rivaldo says. “It’s so much easier than interviewing people and dealing with it yourself.”
Many small businesses outsource human-resource functions, whether they be payroll services or tax paperwork. Employee leasing takes that outsourcing a step further.
The employee-leasing firms–called professional-employer organizations, or PEOs–actually become co-employers. The contracting company decides the number of employees and skills needed, and continues day-to-day supervisory control. The PEO handles all human-resources functions, including issuing paychecks.
Because the employee pool is larger, PEOs often can negotiate better rates on insurance policies and offer benefits many small-business owners find difficult to fund on their own, such as retirement plans. Small businesses get a better deal because even though they must pay the PEO a fee, they do not have to hire an in-house HR staffer or pay for related administrative and regulatory upkeep.
Employee leasing emerged 15 to 20 years ago, and the industry has had its ups and downs. With two national companies going public and Paychex Inc. entering the market this year, the industry is now on an upswing.
Analysts say Paychex has given the industry an extra boost of credibility, turning heads in the process. The challenge now, industry people say, is to make headway while everybody is looking.
James Wemett, CEO of ROC Communications, was in on the ground floor of the employee-leasing movement, contracting with ROW Concept Corp. (now part of Staffing Network Inc.) more than a decade ago. ROC was on a growth track, and Wemett wanted to concentrate on increasing business, not on day-to-day personnel policy. Like Rivaldo, he also wanted to offer his employees a better benefits package.
“The simplicity was what I was after,” Wemett says. Personnel policy and paperwork “is not something to neglect. Basically, I have no headaches over it, and I feel, over all, that my employees are handled on a more up-to-date basis.”
The employee-leasing firm takes responsibility for ROC employee paperwork, workers’ compensation policies, and workplace requirements to comply with state and federal law.
Employee leasing is not for every business owner. Especially as more legislation and agency policies have shifted ultimate responsibility for employee pay, taxes and benefits to PEOs, the employee-leasing firms have taken a stricter approach as far as setting techni- cal human-resources policy. PEOs also have become the advocate for employees in situations such as sexual-harassment or discrimination complaints.
“The companies are losing some control,” says Richard Fish, vice president of sales and branch manager for Staffing Network’s Western New York office. “There’s no way to get past that.”
But Fish says companies that contract with his company did not want to deal with the technical policies anyway.
Nationwide, 1 percent to 2 percent of the work force is managed by PEOs, according to the National Association of Professional Employer Organizations.
In the Rochester area, a few PEOs manage approximately 1,000 small businesses with some 6,000 employees, according to statistics from owners. The businesses range from manufacturers to doctors’ offices to restaurants.
Statewide, there are more than 20 members of the New York State Association of Professional Employer Organizations that manage more than 50,000 employees.
That number is growing by leaps and bounds, says Milan Yager, executive vice president of the national organization. Average growth for individual PEO companies’ client base is 36 percent, and that growth rate is expected to remain the same or accelerate over the next 5 to 10 years.
The challenge for the industry will be managing the growth while maintaining the professional standards that have been built up over the last decade, Yager says.
For that reason, the industry has established a certified professional-employer specialist designation given after education and examination requirements are fulfilled. PEO associations also have pushed for licensing legislation, which has passed in 14 states. It is still pending in New York.
“We’ve been fighting for this for years to weed out the bad ones,” says Philip Ronzo, owner of the former ROW, the first PEO in New York.
Ronzo says it has been a long, hard fight to be recognized in New York. At one point, he says, the state was requiring duplicate paperwork. Like in many other businesses, he would have faced far fewer regulatory steps had he located in another state.
The biggest battle with the state–over workers’ compensation policy–is almost over, says Louis Basso, president of the New York State Association of Professional Employer Organizations. The state Labor Department has left it up to individual insurers whether to recognize the contracting company or the PEO in determining a policy.
That could negate the benefits of pooling employees and put the workers’ compensation responsibility, in some cases, back onto the contracting employer.
Basso says the Labor Department is close to including PEOs in its official employer designation so workers’ compensation laws would have to recognize them.
“We hope to have it resolved by the end of the year,” he says. “I think we’re moving in the right direction.”
On a national level, association members are close to hammering out a bill that would define exactly what a PEO would be under the Internal Revenue Service code, so tax laws could be applied unilaterally instead of subjectively. The codification is essential for companies with government contracts–which can be particularly complicated–especially those with the Department of Defense.
In addition, the Bureau of Labor Statis tics now is including PEO as a category in its surveys, Basso says.
Meanwhile, as individual PEOs are adjusting to increased numbers of customers, they also must start preparing for larger companies to start using the service, Yager says.
While in past years the customer base has been companies with fewer than 100 employees, more businesses with 150 to 200 employees now are looking to lease agreements, he says.
That new pressure, plus the evolution from a new industry to an established one, is causing consolidations and buyouts. Hence, Paychex’s entry into the market, and Staffing Network’s expansion in the last few years.
Staffing Network, based in Manchester, N.H., now has a presence in all 50 states. A year ago, it bought out Fish’s firm, Business Contract Staffing, and this month it entered into the acquisition agreement with ROW.
Staffing Network’s acquisitions this year will bring its employee base to more than 9,000, the same as Paychex Business Solutions, formally National Business Solutions Inc.
Paychex acquired NBS of St. Petersburg, Fla., over the summer. It will start expanding PEO services from NBS’ Southern base to its other customers after Jan. 1, with Rochester PEO services within a year, says John Carlin, Paychex’s executive vice president.
“We’re really excited about the industry and its potential,” Carlin says.
The small, local PEO market is likely to see more consolidation as the existing firms ready themselves for competition from Paychex and other national companies, the PEO owners say.
Paychex in many ways will help other local companies because the company will be able to give visibility to the PEO industry both locally and nationally, Yager says. Even with the industry’s explosive growth, many employers still do not know exactly what employee leasing is.
“The challenge here is marketing, educating people as to what this service is and what it can do,” he says. “No one goes into business to be an employer. They go into business for the service they offer. We can let them concentrate on that service.”
Employee-leasing firms ease the administrative burden on employers
Louis Rivaldo was ready to hire his first employee a year ago.