Small, solo firms can seek professional help with HR duties

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So, you’re starting your own solo or small firm, and you’re looking to hire staff. Will your employee(s) be classified as exempt or nonexempt for Wage and Hour regulations?

If such questions leave you scratching your head – and you don’t feel like taking the time to find out the answers, nor would you feel 100 percent confident that you found the right answers – a Professional Employment Organization (PEO) might be in your future.

The simplest way to describe a PEO is outsourced human resources. Joining a PEO means you’ve entered into a co-employment agreement with it, although you maintain control of you firm’s management. Instead of putting you and your staff on your payroll, you’re all on the payroll of the PEO.

The PEO writes the paychecks and makes the payroll tax deposit and filings. The PEO administers the insurance and other benefit programs. It handles workers’ compensation, unemployment claims, wage garnishment and many other payroll and employee-related issues. You, as the employer, have to write them a monthly check to cover the costs of payroll, taxes, insurance and other benefits and, of course, their profit.

Milwaukee lawyer Sarah E. Blackwell, of the Blackwell Law Group S.C. suggested I explore the topic. Blackwell, who chairs the Solo and Small Firms Committee of the Milwaukee Bar Association, says what she values about it the most is that it gives her, as a solo practitioner, access to high quality health insurance.

But, the reason to join a PEO is not for health insurance alone, says Scott Rasmussen, president of The Waterstone Group in Milwaukee, the PEO with which Blackwell contracts. If you’re one of two 25-year-old, healthy, single males looking to start your own firm after law school graduation, you’re in the demographic that health insurers love and you can probably get a better deal either purchasing individual coverage, or looking into the State Bar of Wisconsin’s group health insurance. Moreover, a PEO is not a health insurance company or broker, regulated by the state’s insurance commissioner.

Rather, Rasmussen said he thinks the most compelling reason to join a PEO is to free up your time, so you can focus on your core competency — practicing law to serve clients.

Michael Gotzler, general counsel of the QTI Group Inc. in Madison, adds that, unless your concentration is employee benefits and employment law, two fairly complicated and rapidly-changing fields of law, you could probably use the access to experts in those areas that a PEO would give you. He notes that QTI has served, and serves, many law and other professional service firms, including a law firm that concentrated in employment law. There’s an interesting irony.

There’s a limitless number of ways that a PEO can be paid, Gotzler says. However, most are paid in one of two ways, either as a percentage of the client’s annual payroll, or on a per-employee, per-month basis. When using the first method, expect to pay somewhere between 3 and 7 percent of annual payroll, including the lawyer’s salaries but not partner draws. It’s all negotiable.

Because there’s a certain economy of scale, typically the PEO wants to serve firms with a minimum of five employees, says Gotzler. However, as previously stated, professional service firms are considered very desirable clients, so there’s some wiggle room, especially if you’re a referral, says Rasmussen.

Both Gotzler and Rasmussen recommend reading “A New Approach to Employment Administration,” By James J. Gettel and Bruce A. McIlnay, Wisconsin Lawyer, Vol. 72, No. 9, September 1999, which goes into greater detail than space allows here.

Importantly, what’s changed since that article’s publication is that Wisconsin has enacted a regulatory scheme over PEOs since then. Last year, 2007 Wisconsin Act 189 created Ch. 461, to require PEOs operating in the state to be registered with the Department of Regulation and Licensing and to demonstrate financial capability via audited financials.

The law takes effect July 1, 2009.

I do have some personal familiarity with the topic. My husband’s employer joined a PEO a year or so ago, and that meant letting go the part-time human resources person, who was well-liked and very knowledgeable. Morale went down, albeit temporarily. In fairness, though, the move undoubtedly did save his employer money, which keeps the small business for which he works afloat in these tight economic times. Moreover, the need to let someone go won’t be the case with every business.

As for the quality of the benefits, like Blackwell, I’m very satisfied. However, others in his office have griped about the PEO’s customer service. I don’t know if those criticisms are valid. But, it underscores the point that customer service is key.

In sum, if you’re thinking about joining a PEO, Rasmussen and Gotzler offer the following tips:

• Start with the National Association of Professional Employment Organization’s Web site, at www.napeo.org, and learn about the industry, before clicking on “Find a PEO in My Area.” NAPEO members must agree to a code of ethics, so that should give you at least some confidence that the PEO’s owner will not run off with your pay roll.
• Shop around. Rates are negotiable, says Rasmussen, but cheapest isn’t necessarily the best, in his opinion. Do you want to talk to someone local when you have a question? Or, do you want to call an 800 number, out-of-state, which is probably cheaper, but might not be as responsive to your needs?
• Ask about other satisfied customers. At both QTI and Waterstone, they’re happy to give references and/or testimonials. Rasmussen says it’s especially important to talk to someone who’s in a firm of about the same size as yours.