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Why Startups Should Use a PEO

Given the challenges of an ultra-competitive business environment, a startup business may still fall short of its goals, even if it is brimming with energy, new ideas, drive, and excitement. Experts believe that one of the most difficult challenges for startups is acquiring excellent personnel. Startups may have difficulties finding employees with the abilities needed to add value to their company.

Besides recruiting skilled employees, another important factor to consider is the time and money spent on recruiting the proper employees for your company, which will eventually detract from other parts of the business. When you do the math, it can cost anywhere from 6 to 9 months' wages to hire a new—salaried—employee. Recruiting and training costs alone range between $30,000 to $45,000 for an employee earning $60,000 per year. This time spent on recruitment is time that the organization is not spending on other important tasks. Taking all costs into account, hiring can be a very costly and time-consuming procedure.

Most startups simply lack the staff, knowledge, finances, time, or skills necessary for navigating labor laws, payroll, employee benefits, retirement programs, employee benefits, and HR management. This is where a Professional Employer Organization (PEO) comes in.

What is a PEO?

A Professional Employer Organization (PEO) is an organization that enters into a co-employment relationship, which leases personnel to an employer, allowing the PEO to share and manage many of the employer's employee-related responsibilities and liabilities. Employers can now outsource HR tasks such as employee benefits, compensation and payroll administration, workers' compensation, and employment taxes to a third party.

For a more in depth explanation of how a PEO operates, click here.

Advantages of using a PEO

1. Increase Time Savings

Perhaps the most significant benefit a PEO can provide is a large time savings by outsourcing administrative tasks. A PEO is virtually the only vehicle that significantly reduces the employer's involvement in managing their employees, allowing business owners and managers to focus on growing the company. According to management consultant Peter Drucker, "PEOs allow business owners to focus on the business rather than employment-related laws, regulations, and paperwork."

2. Lower HR Costs

Failure to create any kind of professional HR program is a serious risk that can drive a startup out of business, but cash-strapped businesses may have no other choice. PEOs, on the other hand, can dramatically save HR administrative expenditures. When compared to all companies, the average cost per employee for HR administration for PEO clients is 35 percent lower, according to the National Association of Professional Employer Organizations (NAPEO). "This is one of those rare occasions where it is both cheaper and better," says Peter Cappelli of the University of Pennsylvania's Wharton School.

3. Increase Revenue

Although a PEO won't directly enhance revenue, many startup founders underestimate the costs associated with handling HR on their own. PEOs can help clients create more income than if they tried to do it all on their own by helping entrepreneurs free up time to focus on business expansion and growth while also cutting employee-related costs on average. In its 2017 PEO industry analysis, NAPEO compared the revenue growth and profitability of organizations who utilize PEOs to those that don't. PEO customers had double the usual median revenue growth and 16 percent higher profitability increases year over year, according to the study.

4. Maintain Compliance

Even when company is doing well, compliance can be challenging to maintain. Employers that are focused on running their businesses and growing their profits may not have the time or resources to keep up with changing legislation, especially if they operate in different states. Unfortunately, an unprepared firm can be severely harmed by a single oversight or employment lawsuit. A claim can distract from profitable activities, put a strain on resources, and potentially tarnish your reputation.

Maintaining compliance means navigating tax reporting requirements, unemployment and workers' compensation insurance, the Affordable Care Act, COBRA (Consolidated Omnibus Budget Reconciliation Act), and employment laws such as the Americans with Disabilities Act, Fair Labor Standard Act, and EEOC (Equal Employment Opportunity Commission).

Luckily, risk and compliance experts are available through PEOs, who keep up with current changes in tax, benefits, and HR regulations and can help businesses steer through an environment of ever-changing laws.

5. Access to Better Benefits at a Cheaper Cost

PEOs can offer the same employee benefits as Fortune 500 companies to small and medium sized businesses. PEOs accomplish this by pooling their clients and purchasing a large group benefits or insurance plan and administering it on behalf of their clients. By using economies of scale, PEOs can get higher quality benefits at a much more affordable price and those savings are passed down to their clients.

6. Reduce Liability

PEOs help to limit your risk exposure by sharing in the liability of legal complications of employment-related issues. That’s one of the main reasons why business owners in risky industries, such as construction, choose to partner with a PEO. This is because your company’s employees actually fall under the EIN of the PEO, so the PEO’s rates and wallets get dinged in the event of a claim. Many client companies like the fact that their PEO is financially incentivized to keep claims and fines at a minimum.

7. Cheaper Workers Compensation

Just like benefits, PEOs pool their clients together to purchase insurance policies at a much cheaper price, and then pass those savings on to their clients. This allows smaller and riskier businesses to get access to coverage without breaking the bank. Due to the unique co-employment agreement, PEOs can also lower a client company’s experience modifier. Since a company’s employees will fall under the PEO’s EIN, any work injuries or claims will directly affect the PEOs modifier, not the client company’s. This could also set up the company for long term success since their future rates will be cheaper due to a lower mod.

Some PEOs (including Cornerstone) also offer pay as you go workers comp solutions. Meaning, instead of a large upfront cost to buy coverage, you pay only based on who was on the payroll for every pay period. This is great for newer or smaller businesses because it can free up cash flow. A PEO is also responsible for paying out any workers comp claims. This is because client company employees fall under the PEO EIN. Therefore, the PEO is financially incentivized to help keep your workplace safe and claim free.

8. Stay in Business

Startups might fail for a variety of reasons, not just a lack of sales. HR challenges can knock companies out of business just as easily. PEOs can assist startups in lowering costs while also meeting their HR needs. According to NAPEO, businesses that use a PEO for at least a year are about 50% less likely to go out of business compared to those who don’t.

The Cornerstone Advantage

It's clear that PEOs not only save businesses a tremendous amount of money, but also positions them for growth and success.

Like other PEOs, Cornerstone will help you save significantly on employee benefits, automate your payroll, lower your experience modifier, and help with certain employee related compliance. However, unlike other PEOs, our focus is on excellent customer service.

Other PEOs will just add you to their system and send you an invoice. At Cornerstone we assign a professional customer service rep to work with your account. This not only adds more of a human touch, but it also allows us to create custom solutions unique to your business. Got questions? We have a rep to help you answer them. A problem occurred? You have a rep who understands your business and can create an effective solution.

Contact us here for a FREE consultation.


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