October 2007 Franchising World

Professional employer organizations can help franchises enjoy the same HR benefits as large companies without the considerable overhead.
By Layne Davlin

When starting out, many would-be entrepreneurs believe that franchises are foolproof. According to the Wall Street Journal’s StartUpJournal.com, one common mistake made by failing franchises is that too little attention is given to human resource practices. This thought is echoed by a recent BusinessWeek article, stating that poor HR practices “can cause entrepreneurs serious legal trouble if their operation is not set up correctly.”
 
In the excitement surrounding a new business, many entrepreneurs fail to give proper thought to all the responsibilities that come with being an employer. The average franchise owner isn’t equipped with either the knowledge or the time to comply with the mountain of regulations required by the government. According to Angie Masters of Fish Window Cleaning, many of the franchisees she works with have little knowledge of HR administration or of the complexities of compliance issues.

“I am frequently amazed at what the government expects our franchisees to know concerning human resources,” Masters said. “Starting a business is a stressful time. Having to fill out loads of paperwork and read up on proper HR practices are the last things on the minds of our franchisees.”
 
According to a recent National Association of Professional Employer Organizations’ study, businesses are spending more and more time on regulatory paperwork than ever before (see chart 1). However, it is smaller businesses that are most adversely impacted by this demand, as these are the companies with fewest resources. While a large business might commit five employees to meeting this challenge, these five employees represent only a small portion of the company’s overall workforce and available resources. For a small business, however, five employees may represent one-quarter of its workforce.
 
HR outsourcing—hiring a professional employer organization to oversee HR tasks—is a solution that not only provides help with compliance issues but can also provide some relief to overworked entrepreneurs (see chart 2).
 
A professional employer organization can offer HR solutions tailored to small and mid-sized businesses in all industries. For an annual fee, usually 2 percent to 7 percent of the dollar value of a firm’s annual payroll, such an organization will take care of everything from managing health benefits to designing employee manuals. Since many small businesses cannot afford to hire an HR professional, an organization can be a cost-conscious option. For instance, if a company has a $1 million payroll, an organization can provide the services of a full HR department for roughly $20,000 to $70,000 a year, considerably less than a fully-staffed HR department or even one qualified executive.

Under a PEO agreement, the organization assumes responsibility for payroll obligations, workers’ compensation coverage and tax filings. Additionally, health, welfare and retirement benefits can be contracted, as well as associated administrative work. Most PEOs target companies that have 150 employees or less.
 
Sometimes, a PEO arrangement is the only way a franchise can offer such benefits as health insurance, dental and vision care, life insurance, retirement saving plans such as 401(k)s, Section 125 cafeteria plans (flexible spending accounts for health care and childcare), job counseling, adoption assistance and educational benefits. Most franchisees couldn’t afford or manage these benefits on their own.

Finding the Right Professional Employer Organization
Ideally, a PEO will relieve its client companies of the time-consuming and money-draining burdens associated with HR. Because these organizations offer many different types of services, choosing the right one is essential. If a franchise company is thinking about hiring a PEO for its business, it should consider the following factors:

• Conduct a basic needs analysis. Lay out exactly what type of HR and risk management concerns the company has.
• Review the services of all PEO firms being considered. Determine which firms can meet all the system’s needs and will do so in a manner that meets—if not exceeds—expectations.
• Check to see if the company is a member of National Association of Professional Employer Organizations, the national trade association of the industry.
• Understand how the employee benefits are funded. Is the PEO fully- insured or partially self-funded? Who is the third-party administrator or carrier? Is the administrator or carrier authorized to do business in the state?
• Review the service agreement carefully. Are the respective parties’ responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit the company or the organization to cancel the terms of the contract?
• Perform extensive background research to find out if the PEOs’ sales pitches are really what they deliver.
• Investigate how long it has been in business.  Such vendors need to demonstrate staying power in order for clients to know that they are well managed.
• How well does the organization manage employer risk? Is there a risk-management department with trained and certified risk-management professionals?
• Check out the company’s staff. Does it have the depth and expertise to deliver on its promises?
• Determine how the firms deliver their services. In person? By phone? Via the Web? A mix of all three?
• Determine what kind of consulting the organizations provide on such strategic HR issues as recruiting, HR procedures and processes. 
• Ask for a few references and check them.
• Ask about upfront fees and how those fees are determined. What about pre-payments and deposits?
• Get proof that payroll taxes and insurance premiums are being paid properly and that any past clients’ legal issues have been correctly and efficiently handled.

Once the company has selected the organization it will be hiring, lay the foundation for a lasting relationship by meeting the people the company will be working with face to face.
 
Professional employer organizations can help franchises enjoy the same HR benefits as large companies without the considerable overhead. Being an entrepreneur is difficult enough without all the accompanying HR hassles.

Layne Davlin is the founder and CEO of Lawrenceville, Ga.-based NetPEO.  He can be reached at 678-376-1212.

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