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How To Do Without Employeess

A new breed of service for staffing by contract tries to make personnel management easy for small companies.
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The Burgher Haus restaurant in North Syracuse, N.Y., doesn't have any employees. Neither does Alpha Meat Packing Co., which supplies packaged organ meats, such as liver and tripe, to supermarkets in Los Angeles. And neither does Cornerstone Resources Inc, an insurance brokerin Dallas.

PayStaff lnc., a new staffing service based in Long Beach, Calif, has taken the former employees of all these businesses on its own payroll and contracted to supply their services back to their former bosses. The arrangement provides a reasonably priced solution to a nearly intractable problem for many small companieshow to manage people in a professional, businesslike way and supply benefits that compare with those offered by mediumsize and large companies.

In return for a weekly check ranging from 119% to 140% of the employees' gross earnings, PayStaff:

* provides a complete payroll

* provides all mandatory benefits such as Social Security contributions and unemployment insurance

* provides an array of nonmandatory benefits ranging from health insurance to legal serviccs for employees

* handles all paperwork, including issuance of payroll checks and employeerelated tax forms

* supplies client companies with services that a personnel department would provide in a larger organization, such as preparation of a personnel manual, recruitment to fill vacancies, and review of salaries every six months.

For the same amount of money, the employer would otherwise be able only to pay employees, provide the mandatory benefits, and provide for basic medical coverage.

The employees continue working in the same offices or shops where they had previously been employed. Legally, the owners of the companies where they work no longer have the authority to fire them or set their wages. But clients actually suffer only a slight decline in their power over their staff. A client can order a PayStaff employee to leave his workplace and report to PayStaff's offices, giving PayStaff the choice of firing him or finding him a new job. And although a client's contract gives PayStaff the right to increase employee salaries without the client's consent -- a move that would result in a higher fee owed by the client -- PayStaff executives say they have never done so. Generally, the client, a supervisor from within the client's company, and a PayStaff representative jointly determine the amounts of any raises.

Many PayStaff clients say that turning their employees over to PayStaff has given them more time to manage their businesses and enabled them to provide a better benefit package than they could otherwise have afforded. At the North Syracuse Burger Haus, a small restaurant in a shopping mall, with only two fulltime and three part-time workers, owner Joe Ellis reports that PayStaff has eliminated "a terrible job juggling all the government forms and all the money that has to go to the different agencies," such as the Internal Revenue Service, federal and state unemployment insurance agencies, and workers' compensation programs. At Alpha Meat Packing, a business with 46 employees, controller Frank Searle says PayStaff's primary attraction was a low-priced, comprehensive benefit package. "We didn't think there was any way we could duplicate it," he says.

Most smaller companies do without clear personnel policies and comprehensive benefits rather than spend the time to develop the policies and pay the prices insurance companies demand for a full array of benefits PayStaff executives note. But, as a result, many suffer recruitment difficulties and rapid turnover. "It seems that someone who is interested in whether a company has benefits is someone who will be responsible about their job," says Penelope Gerhardt, a partner in Brown Cow Farm Inc., a yogurt company in Newfield, N.Y., that recently became a PayStaff client. "They're more likely to be supporting a family."

Carmen Arno, PayStaff's president and sole owner, is a 38-year-old independent accountant who began taking employees of other businesses on his own payroll in 1979 at the request of accounting clients who wanted to avoid paperwork. His clients' interest, and the realization that he could provide a better benefit package at lower cost if he served more companies, led him in 1980 to start a major contract staffing business. Other contract staffing companies already provided a similar service for medical doctors and clinics, but PayStaff claims it is the only company that will supply contract staffing to companies in any industry.

Despite his low fees, Arno says he will be able to turn a profit. Insurance companies have traditionally sold benefits for small businesses, mainly through local agents. Their prices tend to reflect the high risks and high sales and administrative costs of handling small groups through local sales representatives.

PayStaff has become the actual employer of more than 1,000 people working at about 200 businesses. It can therefore purchase comprehensive benefits at the modest cost per employee that is available to a large company. Then, to cover its own sales and administrative costs, it adds a markup of 5% or 6% of each client's gross payroll.

PayStaff's benefits are not lavish: It offers only $10,000 in life insurance on employees, for instance, while many medium-size and large companies provide as much as $50,000. But the variety of benefits will impress most employees: a dental plan, long-term disability insurance, vision care, coverage for prescription medicine, tuition reimbursement, and a pension plan. There is even a plan to provide financial assistance for employees who want to adopt a child. Moreover, PayStaff provides additional job security for many employees because it can sometimes place people who become surplus to one employer in new jobs with other client companies. It has an affirmative action plan for recruiting veterans and handicapped people, among others, helping small companies qualify for government contracts. And when a company buys all its people's work from PayStaff and thus legally has no employees, its pension plan can be structured to shelter up to $200,000 annually in income for the owner, without requiring contributions for the workers.

Can PayStaff keep delivering all these advantages for managers and employees at such rock-bottom prices? There are reasons for skepticism. The company is young. Although Arno says it was profitable in 1981 when it managed 650 contract employees, primarily in California, its national expansion in 1982 forced it to increase its support staff, including salespeople, to 80. It now has offices in Long Beach, Dallas, Syracuse, Las Vegas, San Francisco, Phoenix, and Chicago. By its own calculations PayStaff won't break even until it has 1,450 on its payroll.

The company recently raised its markup for new clients to 6%, from 5%, of payroll to cover unexpected services Arno found he needed, such as a full-time corporate attorney. Furthermore, the cost of the pension plan Paystaff provides for employees will rise as a result of the Tax Equity and Fiscal Responsibility Act of 1982, which prohibits company owners from establishing sheltered pension funds for themselves if they have farmed out their workers to a labor contractor who contributes less than 7.5% of the workers' pay to a pension plan. PayStaff, which had been contributing 5% of pay to worker pensions, must now increase that amount by 1984.

The most serious potential problem is that PayStaff could find itself unable to continue providing employee insurance at prices comparable to what it pays today. In most states its rates are based on an insurance package that costs an average of $54 a month for employees without dependents and $114 a month for employees with dependents. The cost had been higher when the insurance was provided mainly by Connecticut General Insurance Co. But this year PayStaff decided to partially self-fund medical insurance claims of less than $20,000 -- that is, to set aside money from clients to cover such employee claims directly, rather than paying an insurance company. PayStaff's insurance broker, an affiliate of Jardine Matheson & Co., the Hong Kong trading company, calculated that PayStaff could save $35 to $40 per month, per employee, by doing so. But self-insurance funds are not examined for soundness by state insurance regulators, so purchasers have no guarantee of reliability.

And there is a question as to whether Paystaff's self-funding arrangement is legal -- a question that official sources say is under investigation by the California Department of Insurance. Ordinarily, insurers are required to obtain certificates of authority from the states in which they operate.

PayStaff hopes that it can increase the number of employees under contract to 90,000 over the next three years. But if PayStaff's idea works as well as Arno and rnany of his clients claim, he is likely to face increased competition. Computer service bureaus already provide most of the paperwork advantages of PayStaff for modest charges. Pete Kearney, regional manager of PayStaff's Syracuse office, says a company in his area with 10 employees can buy payroll service for $27 a week. And other companies, including Kirke-Van Orsdel Inc., an innovative Des Moines insurance broker that was January, 198353 on the INCPrivate 500 (see INC., December 1982, page 35), are preparing competitively priced employee benefit programs that could meet the needs of smaller companies at prices comparable to those PayStaff now charges. "We see this as a very big field, and we are getting ready to be big in it," says Charles J. Maxwell, an employee benefits specialist at Kirke-Van Orsdel.

PayStaff is one of the first companies to try to provide all the personnel management advantages of a big company to managers and employees in small companies. But even Arno acknowledges the risks of dealing with a new, little-regulated business like his. He says it is "unfortunate" that state insurance agencies don't oversee self-funded programs like PayStaff's. "For the protection of the employee, that should be a requirement," he comments.

Arno is convinced that PayStaff will be able to grow anyway. "We find that the people who are really responding to us are the entrepreneurial types -- the guys who are used to taking a little bit of risk and don't want to be bothered with the hassle of recruiting employees," he says. "They want to leave that to us."

Last updated: Jan 1, 1983




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