Managing People

Employee leasing can be a boon--or a nightmare

Perhaps you've already heard of employee leasing. If not, you will, and probably soon. The employee-leasing industry is booming, and it's squarely targeting small companies.

Here, in brief, is how employee leasing works: An employee-leasing company, also known as a professional employer organization (PEO), "leases" the employees of the business that's hired it. That means the PEO serves as a coemployer, taking control of the personnel administration and paperwork that drive small-business owners to distraction. Most PEOs offer a wide range of services and benefits packages, including payroll administration, medical benefits, workers' compensation and unemployment insurance, retirement plans, and compliance assistance with labor laws.

In return, the PEO charges an administrative fee of roughly 2% to 8% of total payroll. (That's over and above the cost of benefits, taxes, and insurance, of course.) Basically, you outsource your human-resources administration, while keeping employees under your control for on-the-job operations. You write one check per pay period to cover wages, taxes, benefits, and fees; the PEO takes it from there. By pooling your employees with other companies', a PEO can negotiate for lower insurance rates and amortize the cost of benefits plans over a broader base.

Employee leasing has been growing rapidly, and according to an analysis by Bankers Trust, the industry could involve $185 billion in revenues and more than 9 million employees by 2005. Some of the big payroll-processing businesses and temp agencies are buying PEOs, while investment banks are taking some large PEOs public.

Beware, however. The employee-leasing industry has seen spectacular flameouts, owing to everything from bad risks and poor management to outright fraud. When a PEO goes under, its clients often discover that their payroll cash and insurance coverage vanish with it. It's tricky territory. But let's say you decide to consider a PEO. With an estimated 2,000 of them in operation, how can you decide if the one seeking your business is right for you? Here are some criteria to consider:

Financial strength: First zero in on the company's economics. Demand to see audited financial statements and have an accountant dissect them for you. Some PEOs, in rushing to lock up as many clients as possible, take on risky accounts that can undermine their financial stability. The soundest PEOs are picky in accepting new business.

In addition, about 15 states now license PEOs that meet their standards. Also check with the Institute for the Accreditation of Professional Employer Organizations, in Bethesda, Md. This self-regulating industry group has accredited only 15 or so PEOs to date, but they represent workers in 50 states.

References: Request a long list of the PEO's clients. When you call them, bore in on details: Whom inside the PEO do you deal with? How often do its staffers visit your site? What happens when there's an injury?

A lengthy list of clients helps ensure that you won't get only references who are well schooled in the "right" answers, and it also offers a look at the PEO's customer base. "If you go with a PEO that already knows your industry, it can help improve your operations," says stock analyst Randall Mehl, who tracks the industry for Robert W. Baird, a Milwaukee investment bank.

The comfort zone: When you take on a PEO, you're taking on a partner. Check for a personality fit. You--and your employees--need to feel comfortable with the switch. Employees are invariably skeptical at first, but a good PEO will offer orientations to alleviate their suspicions. Also, make sure the PEO's executives have clean records. "If they have bad things in their past, in whatever business, back off," warns Mehl.

Services: Ask if the PEO will customize a program to your requirements. If you want to administer your own 401(k), for instance, the PEO shouldn't object. But if you want too narrow a slice of its services--only workers' compensation insurance, say--it might not want you. Also ask if the PEO will help defend you against employee lawsuits.

The contract: If the PEO hands you a standard contract, remember that "everything is negotiable," says Miriam McKendall, an employment lawyer at the Boston firm Sherburne Powers & Needham PC. Above all, she says, the contract should spell out exactly which "coemployer"--you or the PEO--is responsible for certain duties, especially tax withholding.

Be wary of signing anything that broadly insulates the PEO from liability. Some PEOs, McKendall says, will try to slip in potentially pernicious clauses. It's a good idea to have an employment lawyer review the contract.

So weigh the situation carefully. "If you pick the right PEO, it's the best thing you could ever do," argues Darrin Fedder of Professional Employee Management, a $150-million PEO based in Sarasota, Fla. However, even he acknowledges the dangers of a bad PEO: "If you pick the wrong one, you will make a terrible mistake. There is no middle ground."

Jay Finegan is a senior writer at Inc.

Resources: To find an accredited professional employer organization (PEO), contact the Institute for the Accreditation of PEOs (7910 Woodmont Ave., Suite 1040, Bethesda, MD 20814; 301-656-1476; fax, 301-656-5932; iapeo). If you'd like, executive director Regis Canny will explain the intricacies of the accreditation process to you.

Then there's the National Association of Professional Employer Organizations (901 N. Pitt St., Suite 350, Alexandria, VA 22314; 703-836-0466; fax, 703-836-0976). This trade group, with about 400 member companies, is a source for general industry news and trends.

PROFESSIONAL EMPLOYEE MANAGEMENT, Darrin Fedder, 1819 Main St., 8th Floor, Sarasota, FL 34236; 800-329-7823

ROBERT W. BAIRD, Randall Mehl, 777 E. Wisconsin Ave., Milwaukee, WI 53202; 414-765-3818

SHERBURNE POWERS & NEEDHAM, PC, Miriam McKendall, 1 Beacon St., Boston, MA 02108; 617-523-2700