Introduction to HR Outsourcing Using a PEO

When you start a business, there's usually not much to human resources – you are your human resources. Well, you and maybe some family, friends, or former colleagues you've managed to bribe into indentured servitude for a cut of the fortune you plan to make.

But if your business is successful, you start hiring real employees. Hiring takes more time and effort than you imagined. Not only that, but these new employees require more care and feeding than did your buddies. As you add more employees, the workload mounts: orientation and training; keeping tracking of hours worked, vacations, and sick days; procuring and managing health insurance programs and other benefits such as flexible spending and 401(k) programs; terminating employees; and keeping up with general employment law as well as the rules and regulations that apply to your specific industry.

"Depending on how fast you're growing, human resources can get out of control real fast," says Gail Pierce, who has handled HR for several startups and is now CFO of Newmerix, a software company with 40 employees.

Most business owners want to focus on their business, not on employment issues. But neglecting HR can cost you, and not only in unhappy or unproductive employees. Over the last 20 years, regulation of business has exploded. Among the laws that may affect your business is the Americans with Disabilities Act (which kicks in at 15 employees), Title VII (15 employees), Age Discrimination in Employment Act (20 employees), and the Family Leave and Medical Leave Act (50 employees). Of course, regulators have better things to do than checking to make sure you're following the exact letter of all laws, at least we hope they do, but all it takes is one disgruntled former employee to stir things up, and you can have a legal nightmare on your hands.

So how to get out of the HR burdens? Even with someone on staff dedicated to HR, you'll need to go outside for support on the trickiest aspects (see our sidebar on outsourcing your 401(k) management). There are a number of options for outsourcing various elements of HR on a piecemeal basis; then there is the professional employer organization, a sort of one-stop-shop to which small and medium-size businesses are increasingly turning. This Guide will explain the PEO option and advise you on how to understand and shop for good PEO outsourced employee services.