Fed up with HR?

Let someone else handle it. Professional employer organizations let you hand off the headaches and focus instead on your business.

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Peter McCann's HR troubles started in 2001, when a former employee filed a complaint alleging that Ideal Images, McCann's Omaha-based screen printing and embroidery company, fired her because of her race. McCann and his entire staff were questioned by investigators from the state's Equal Opportunity Commission, and the investigation dragged on for several stressful weeks. The complaint was eventually dismissed, partly because the worker's replacement was also a minority, but the thought of another discrimination charge frightened McCann, who began to obsess over everything from background checks to performance evaluations.

By 2004, McCann's staff had tripled, to 27 employees, and the HR chores had become nearly all-consuming. Meanwhile, workers were grumbling about Ideal's lack of flexible spending accounts and a retirement plan. McCann was eager to offer the benefits, but he didn't have time to implement them.

In October 2004, McCann ran into an acquaintance, Mike Mapes, who said he could make McCann's HR woes go away immediately. Mapes is CEO of Alliance Group, an Omaha-based professional employer organization, or PEO. Such firms place most or all of a client's work force on their payrolls, assuming responsibility for benefits, paychecks, and other HR functions and essentially becoming the company's HR department. McCann signed up three months later. Alliance now handles all of Ideal's HR issues, from workplace safety to payroll administration. Thanks to the PEO, McCann has begun to offer a 401(k) plan and flexible spending accounts. Even better, because Alliance oversees the benefits of 2,000 employees at 92 companies, it is able to negotiate better deals with benefits providers than McCann could on his own. "It really comes down to knowing that my HR is buttoned up," he says.

PEOs have been around for years but, until recently, most administered only basic payroll services and benefits programs. Over the past few years, however, the industry has undergone a makeover, partly in an effort to regain credibility following several well-publicized bankruptcies. Many PEOs now behave much like consultants, helping clients tap into the latest health benefits and comply with complex labor regulations related to discrimination and workplace safety. PEOs are becoming one-stop shops for business owners eager to outsource all of their HR functions and focus instead on their core business.

The new breed of PEOs caters primarily to companies with between five and 100 employees--both white collar and blue collar. Most charge a fee per employee or pocket a percentage of a client's total payroll. Prices vary but typically amount to between 2 and 4 percent of a company's payroll. PEOs make the most sense for business owners who can't afford a dedicated human resources staff and don't have time to handle day-to-day HR issues themselves.

McCann's relationship with Alliance is a good example of how PEOs work. After signing the contract, McCann gave Mapes a list of employees, along with their W-4 tax forms. Every two weeks, the PEO sends Ideal a single bill that covers gross payroll, taxes, insurance premiums, and Ideal's 401(k) contributions, plus an administrative fee. Alliance then cuts checks for Ideal's insurers, benefits providers, employees, and the IRS.

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