General Business News for March, 2001
A Resource to Outsource
It’s time for a little slight of hand this month.
Several months ago, we told you that your single most important resource was probably your employee(s). We then went on to tell you how to keep those employees so you wouldn’t spend a fortune hiring replacements.
…This month we are here to tell you there is a good possibility that you don’t need to have any employees – not even yourself.
Have we got your head spinning now? If we do, don’t worry, we aren’t quite as radical as we sound. We are, however realistic and well aware that some employee benefit solutions are too expensive for smaller firms.
Let’s face it, if you are General Motors trying to provide health insurance or 401(k) plans for your employees, you are going to get a much better deal than you would if you have only two employees. In fact, some of the better 401(k) solutions require minimum annual deposits that are impossible for small employers to meet.
So what’s the solution? In a word – outsource. Or, if you are a professional organization, maybe PEO (Professional Employee Organization). Sometimes this outsourcing is called employee leasing, but all it boils down to is you pay someone else to take care of your human resource needs.
How does employee leasing work?
An employee leasing organization basically hires the employees for you and pays all of the associated costs for the employee. In turn, you pay them for the costs of the employees plus a percentage to cover the administrative overhead.
If you already have employees, many employee leasing organizations will hire those employees as their own. Then, the employees (including you, if you wish) are leased back to your company. You get the best of both worlds.
On one hand, you no longer have the headache of finding insurance companies or tax table updates for withholdings. You don’t have the weekly or monthly payroll checks to calculate and write, nor do you have the administrative burden of accounting for all the paperwork associated with payroll.
On the other hand, you still have the employees you want. You may be able to provide them with better benefits to boot!
For example, take a company with 13 employees. After running through the numbers, this company could increase the employee’s take home pay at a net cost of approximately $15,000.
“Hold on, you said this would save me money,” you may say. At first blush, this doesn’t tie in with what we have said previously. However, in this actual example, most of the savings comes from a reduction in health insurance costs. If you factor in the average health insurance cost increase for this company versus that of the staffing agency, the net savings to the employer in year two would be $20,000 to $40,000, if past experience holds true for the future.
Staffing agencies can also provide better options for health insurance policies than can most small employers as well as providing stronger 401(k) and other pension plans.
Other benefits are often available with staffing agencies that aren’t generally available with small employers. Availability of affordable group life insurance, credit unions and group disability can add up to a big advantage in attracting and retaining employees in a tight employment market.
All in all, at a relatively small cost or no cost at all, staffing agencies can do wonders for small employers and their employees.
How do I decide if employee leasing is for me?
There is no magic answer as to what is the best route to take – leasing verses directly employing personnel. On a case-by-case basis you simply have to run the numbers.
You can scan the web to find out what leasing agencies are available in your area and have the products you need. Ultimately, however, you are going to need a quote from several vendors to determine if the costs are reasonable. Then, you talk to other clients of the agencies that interest you.
If these steps lead you to the decision leasing is good for you, then you speak to your key employees and sell them on the idea. Remember, employee buy-in on any major organizational change is critical in your company’s success.
Don’t have the time for all the investigation and numbers crunching? Don’t worry, we do. Give us a call and let’s discuss whether people are a resource you can outsource. After all, that’s why we are here.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.