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August 23, 2004
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CALEDONIA — The president of two human resources companies has cautioned modest-sized law firms to outsource personnel functions so that they can focus on being lawyers.

Pursuing that theme in articles he wrote for Michigan Lawyers Weekly and Michigan and Ohio Lawyers magazines was Patrick Montgomery, CEO of Employment Traditions Inc., a professional employer organization (PEO), and its sister company, H.R. Etc. Inc., an administrative service organization (ASO).

And Montgomery told the Business Journal recently that the advice he conveyed to lawyers applies with equal weight to the owners of any small to mid-sized business.

Montgomery's article stressed that lawyers usually are quick to advise clients if they need a specialist.

The rationale, he indicates, is that in many cases, attorneys often feel their clients are best served by lawyers who have mastered the nuances of a particular area of law, rather than generalists who must research every new issue that comes up.

He said the same logic applies in determining how best to run one's own business.

"Too often," Montgomery wrote, "attorneys get so bogged down in the business of running their firms that they gradually stop specializing in being lawyers because they're too busy learning how to be employers. Consequently, they squander precious time wading through personnel issues like payroll, taxes, internal squabbles and benefits — time that could be much more profitably spent on billable client work or business development."

He said the same applies to businesses in other fields that delegate human resources to specialists.

"Outsourcing makes sense for any business function that steals time from our core competencies," he said, "so why not human resources, too?"

He indicated HR outsourcing is a growing trend, noting that the National Association of Professional Employer Organizations reports the number of workers represented by PEOs is increasing some 20 percent annually and now exceeds three million.

Montgomery said the national association points to three principal reasons for personnel outsourcing:

  • Increasing numbers and complexity of federal, state and local workplace regulations.

  • Realization among many executives that their business has outgrown their HR expertise, causing them to question whether they still have the desire or time to manage administrative challenges effectively.

  • Growing demand among employees of small and mid-sized companies for benefit packages that rival those of larger employers.

Montgomery conceded that while large firms often outsource human resources service, the average head count of PEO clients is 16 employees and that PEOs serve clients in every sector of the economy.

He explained that a PEO is its client's co-employer, sharing both the responsibility and potential liability for employee management. Montgomery said the PEO undertakes payroll processing, quarterly tax filings, benefit packages, unemployment and workers' compensation coverage.

"Meanwhile," he added, "your firm retains control of hiring, firing, pay levels, case management and client service.

"In short, the PEO deals with many of the administrative hassles associated with running your firm, while you gain access to HR benefits and expertise typically available only to much larger outfits with elaborate in-house HR departments."

Montgomery stressed that PEOs and their sister organzations, ASOs, don't engage in employee leasing or temporary staffing. But unlike PEOs, ASOs involve no co-employment relationship.

"With an ASO, you remain the sole employer," Montgomery said. "Beyond that, ASOs tend to be better suited to firms that only want to outsource certain HR functions or need help with a short-term project like creating an employee handbook."

Firms wishing to outsource all HR activities, on the other hand, tend to prefer PEOs.

He said HR outsourcing confers several advantages:

  • Enabling business to shed paperwork and other day-to-day HR distractions, it frees time for a firm to focus on its bottom line. "In a recent survey of more than 500 PEO clients," Montgomery advised, "firms with less than 10 employees estimated they save about seven hours per week, while those with more than 100 employees said they save nearly 50 hours per week."

  • Covering hundreds to thousands of employees from many firms, PEOs often can provide employees of small and mid-sized firms benefits comparable to those of Fortune 500 companies. "PEOs create economies of scale that give them negotiating leverage with benefit providers," he said.

He said PEOs typically offer employees a cafeteria-style menu of benefits prohibitively expensive for small and mid-sized firms. "And when employees have questions about their benefits," he added, "they call their PEO."

  • PEO benefits savings may be large enough to more than offset a PEO service fee, meaning HR outsourcing may pay for itself.

  • HR outsourcing delivers the services of a large personnel department without the cost of full-time risk and compliance managers and benefit specialists.

  • Better benefits give employees one less reason to look elsewhere for work. In addition, the expertise available through HR outsourcing can help you implement human resource strategies that elevate your appeal as an employer.

  • HR outsourcing provides professional assistance in complying with the fine print of the increasing number of state and federal regulations. "Unemployment insurance, workers' compensation, ADA, COBRA, ERISA, the Family and Medical Leave Act —  by working with a PEO or ASO, however, you can delegate that job to an outside expert," Montgomery indicated.

  • The co-employment PEO relationship lowers employment liability exposure because the PEO itself assumes some of the employee-management risks that would otherwise fall entirely on your firm.    

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