Latest News

Firms Increasingly Turn Over HR Functions To The Pros

Organizations called PEOs handle benefits, payroll for growing number of Ohio companies

By Chuck Soder
Crain's Cleveland Business, February 19, 2013

A growing number of employees in Ohio now work for two companies — one that manages the work they do and another that signs their paychecks.

A practice called coemployment is on the rise in Ohio, according to several people who manage professional employer organizations, or PEOs.

These organizations provide services that otherwise would be managed by a company's human resources department. For instance, they process payroll, manage employee benefits and take care of issues related to taxes and workers' compensation.

In the process, they take on some of the legal responsibilities of an employer.

They're far more prevalent in other states. For instance, in Florida, PEOs in 2010 employed about 900,000 people, which would account for about 10% of the 8.6 million people who have jobs in the state today, according to statistics from a survey conducted by the Florida Association of Professional Employer Organizations.

But they are becoming more popular in Ohio. Existing PEOs are growing.

Organizations from outside the state have opened offices here. And at least one local staffing firm has made a big push to become a player in the business.

The PEO division that Cleveland-based Minute Men Human Resources formed three years ago has exploded: Today, that division coemploys about 50,000 people in Ohio, most of whom work for companies between Cleveland and Columbus, said Minute Men president Jay Lucarelli.

The "Minute Men Select" division now accounts for most of the company's revenue. The rest comes from its traditional staffing business, which recruits people, hires them and sends them to work at other companies on a contract basis. By contrast, PEOs take on a company's existing, permanent employees.

On the grow

Minute Men's PEO division has grown so much that the company has hired more than 100 of its own employees to manage it. And to help house its growing employee base, the company this summer plans to start construction on a new building next to its headquarters at 3740 Carnegie Ave., which is near East 36th Street, Mr. Lucarelli said.

The new building will have roughly 60,000 to 80,000 square feet of floor space, making it bigger than Minute Men's 40,000-square-foot headquarters, which the company will continue using, he said.

The growing popularity of coemployment in general has helped fuel the growth of Minute Men's PEO division, Mr. Lucarelli said.

"It's to the point where people are calling us now," he said.

Insperity, the nation's largest PEO, opened an office in Westerville, Ohio, three years ago. Now the Houston-based company does "a substantial amount" of business in the Cleveland area, said district manager J.R. McCullough.

When the Westerville office opened, one of Insperity's biggest challenges was educating prospective customers throughout Ohio, many of whom had no idea what a PEO was, Mr. McCullough said. Today, more of them are familiar with the concept, and overall there's "a lot more activity" in the PEO business, he said.

Automatic Data Processing six years ago started providing coemployment services in Ohio; revenue from those services hit $3.2 million last year, up from about $1 million three years ago, said Adrian Spires, who oversees the Ohio and Kentucky markets as vice president of sales for ADP Total Source, the Roseland, N.J., company's PEO business.

The growth of PEOs is just beginning, he said.

"The PEO concept is in its infant stages in Ohio," Mr. Spires said. "Our penetration is very minute compared to what it will be."

A change in senior leadership within ADP Total Source, the country's second-largest PEO, helped drive its growth, but broader industry trends were an even bigger factor, Mr. Spires said.

Fuel to the fire

Getting companies interested in handing off their employees to a PEO has been easier lately for a few reasons, according to those interviewed for this story:

▶ Businesses don't want to deal with the complexities of health care reform and other regulations.

"We're seeing a really big push right now because of the increase in government regulations," said Mike Kahoe, president of Group Management Services Inc., a PEO in Richfield with 14,000 employees under management.

▶ Many companies using PEOs are looking for a way to save money on workers' compensation insurance. Some PEOs are allowed to provide payments to injured workers themselves instead of relying on the Ohio Bureau of Workers' Compensation.

▶ Rising health insurance premiums also have helped drive the popularity of PEOs, because they can pool their clients and shop around for better rates.

Milano Monuments of Brook Park started doing business with Minute Men's PEO division in 2011 and since then has seen its workers' compensation rates fall, said Jim Milano, president of the company, which designs and makes gravesite monuments.

Not so fast

Still, Steve Oddo worries that the growth will be short-lived. The owner of Diversified Employee Solutions, a PEO in Medina, said he thinks the business will be hurt by Senate Bill 139, which the state passed in December. Among other things, the bill will increase financial oversight of PEOs.

Mr. Oddo, who fought the bill for three years, provided a summary from labor law firm Fisher & Phillips LLP, which said the law will result in "additional administrative burdens and costs to Ohio PEOs."

However, the National Association of Professional Employer Organizations backed the bill, as did the Ohio Chamber of Commerce. Mr. Lucarelli supports it, too, saying higher standards will help prevent fly-by-night PEOs from hurting the reputation of the broader coemployment business.

"It certifies the fact that this is a legit industry," Mr. Lucarelli said.