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During these difficult economic times, small and midsized businesses are looking for ways to reduce their employment costs—while maintaining employee benefits and gaining a competitive advantage in the marketplace. Many employers are looking at alternative staffing models to meet those objectives.

There are several kinds of alternatives staffing models to consider.

Payroll services

These providers generally just pay employee wages and taxes under your tax identification number. They do not provide any benefits or HR services. Their primary advantage is that they may allow you to reduce or eliminate your internal payroll and tax staff.

Temporary work force services

These services provide employees for either short- or long-term assignments at your workplace. The workers are employees of the temporary-service provider, which pays their wages, taxes and benefits. Many of these firms will allow you to hire temporary workers without paying a fee, as long as they complete a specified period of service with your company.

Administrative Services Organizations (ASOs)

Under an ASO arrangement, the service provider administers your HR functions, such as paying wages and taxes, providing HR advice and ensuring government compliance. The ASO does not assume an employment relationship with your employees, but acts as an agent to pay wages and taxes under your tax identification number. Your company remains the sponsor for workers’ compensation, health care and retirement plans, but the ASO may actively help you secure coverage.

An ASO agreement generally is structured so the ASO is not considered the employer for the purpose of federal and state employment laws such as wage-and-hour claims, civil rights violations and similar laws.

Professional Employer Organizations (PEOs)

Traditionally referred to as “employee leasing,” PEOs offer the largest selection of services and benefits to employers. The PEO actually becomes a co-employer of your existing work force, often including management and the owners.

Employees enter into employment agreements and fill out tax forms with the PEO. All wages and taxes are paid under the PEO’s tax identification number. Since your workers now are considered employees of the PEO, the PEO can provide workers’ compensation and medical and retirement benefits under master plans sponsored by the PEO. Because the PEO aggregates thousands of employees under those master plans, benefits may be better and less costly than small businesses would be able to obtain on their own.

PEOs also have trained HR and safety personnel, provide employee handbooks and may even maintain employment practices liability insurance coverage to protect your company from certain types of employment-related lawsuits. While the PEO becomes the employer for the administrative aspects of the employment relationship, the company retains the authority to direct the day-to-day aspects of the employees’ job assignments. The company also has supervisory authority and the discretion to make decisions on wages, hiring and firing—in consultation with the PEO’s HR staff.

Making the right choice

In choosing any type of staffing provider, exercise the same caution and due diligence you would use when selecting any other trusted advisor, such as your CPA, insurance agent or attorney. Get the names of businesses using the provider and call them to see if they are satisfied with the services and benefits being provided.

Make sure that any PEO you are considering is licensed to provide services in all the states where you have employees, and determine if it is a member of the national trade association for its industry. Some national associations have independent certification organizations that will audit the service provider for its financial strength and determine if it is following the industry’s best practices in such critical areas as workers’ compensation, safety and risk management.

Verify workers’ compensation policies and get certificates of insurance for all benefit programs in which your employees will be enrolled. Make sure you know whether the benefit plans are fully insured, self-funded or subject to large deductibles.

Find out whether your price is subject to change based on your company’s loss experience.

Finally, most service providers will want the owners of a small business to sign personal guarantees. Before undertaking this step, make sure you discuss the ramifications with your personal advisors to make sure you protect your assets in the event of a default.

These are just a few of the issues to consider if you are looking into any type of HR outsourcing arrangement. Make sure you completely understand all the ramifications for your business and your employees. Have your attorney review all the documents and agreements before committing to any program.

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