Outsourcing payroll and benefits may save money -- but can carry risks

Show of hands -- anyone out there not worried about the cost of employee benefits? No? One option is to outsource the whole rigmarole to a professional employer organization (PEO) employee-leasing business. But that carries its own set of nail-biting anxieties.

Nancy Ruddy, president of $2-million, 20-employee Cetra/Ruddy Inc., an architectural and design firm in New York City, had never heard of PEOs until her insurance broker began stumping for her to use one two years ago. She was skeptical about ceding a function as detail driven as human resources to another company without first doing a thorough investigation. HR foul-ups, after all, could mean potential lawsuits and real discord among employees.

Ruddy performed six months of due diligence before she decided to make the switch. Her method is useful to anybody trying to decide whether (and which) PEOs are right for his or her business.

Her first step was to check insurance issues. Would her professional liability coverage still hold up if her employees belonged to the PEO and only were assigned to Cetra/Ruddy? Ruddy also wanted to be sure the licenses her company had to do design work in different states were still valid -- since under a PEO the employees doing the work wouldn't officially work for her company. She was reassured on both counts before signing with the PEO.

Next came the legal questions. After consulting her lawyer, Ruddy quizzed the PEO on its policies in the event of an employee lawsuit. Would the PEO cover legal costs? Would it stand as a codefendant? When checking the PEO's client references, she made sure she spoke with the law and accounting firms it served. Besides the technical knowledge they could share, those firms were structured in a manner similar to her company's. Talking to them made it easier for Ruddy to imagine what a PEO would be like for Cetra/Ruddy.

Ruddy also asked the PEO for the name of its biggest competitor and then had the rival give Cetra/Ruddy a proposal for comparison. The final result of her work: a smooth, albeit slow, switch to the PEO her broker had suggested. "When you do something like this, you don't want to make a mistake," she says.