Have You Ever Thought Of A PEO For Yourself?

This is a professional employer organization (PEO).  You might have also heard it called co-employment, employee leasing or staff leasing.  To me, in the past, it represented more than outsourcing of HR services, although it does that.  But, to us Third Wavers it can possibly make the thought of private practice bearable.

There are about 700 PEOs operating in the United States and they currently cover 2 to 3 million workers.  They operate in all 50 states, and there are individual PEOs that cover all 50 states.

The way the system works, generally, is that you enter into a co-employment contract with a PEO of your choice, and the PEO becomes the employer of record for tax and insurance purposes, as well as other HR services and compliance issues.  They take care of withholding, escrowing and paying income taxes, Medicare, social security, insurance coverages and contributions to 401(k) accounts.

From my experience, PEOs charge about 3% of total payroll paid through the organization.  I can also tell you that the PEO will save you more than this fee in taxes and insurance coverages alone.  After all, many of these PEOs are purchasing insurance and other services for tens of thousands of workers at a time.

The way it works, generally, is that you set up an account from where the PEO withdraws money weekly, every two weeks, twice monthly, or monthly depending on how often everyone is paid.  Then they do all of the appropriate withholding and direct deposit your check, and that of any employees, in the appropriate bank accounts.  You, any employees, any co-workers, associates, of counsel or those sharing in the group are now treated as W-2 employees.  This has some benefits.

These are really more than staffing firms and you should be careful not to confuse a staff firm with a PEO.

What you might not realize is that you do not have to be incorporated or a formal partnership or the most formal of groups to be part of a PEO.  And, even if you have no other employees, you are able to lease yourself back to yourself.

Why would any solo, small law firm or Third Waver do such a thing?

Well, it actually has a lot of practical benefits.  I cannot cover all of them here, but let me list a few.

First, and probably the most important, is insurance coverages.  And, not just health insurance coverage.  The biggest problem for solos and small firms in particular is the acquisition of appropriate amounts and the quality of insurance coverages.  Many of the larger PEOs offer group insurance coverages that they administer.  Group insurance is expensive but it offers a lot of benefits.  For example, you cannot necessarily be denied coverage if you have some pre-conditions, and in most states group insurance providers cannot cancel health coverages or increase premiums too greatly because someone has an extraordinary medical expense.  There is also life insurance, disability insurance, dental insurance, vision insurance, and worker's comp insurance coverages.  Some solos and firms maybe low risk, but they need these coverages.  It is possible, for example, for a lawyer to get hurt on the job.  Like all insurance it is expensive, but PEOs often have cafeteria plans that allow good tax savings to offset part of this expense.  If you chose higher deductible insurance plans, they can help establish health savings accounts and even personal spending accounts, which deal with pre-tax dollars.

Second, are retirement accounts.  Sure you can set up a SEP or other specialized accounts, but these costs money to properly administer.  Many PEOs offer a properly authorized and complaint 401(k) account to which you will have access after a short period of time.  Contributions can come out of your paycheck. 

Third, if for some reason something goes wrong and you cannot hold your law practice of firm together, you are entitled to unemployment insurance because you are a W-2 employee.

Fourth, they maintain all of the bookkeeping for all of this.  You do not have to.

Fifth, many PEOs are associated with credit unions in which you will have membership.  This allows you access to low interest loans, higher interest savings accounts, and buying services.

Sixth, if you actually have employees and things are not working out, you do not necessarily have to fire them.  The PEO will do it.  But, that is just being crass.

Seventh, because you are required to pay in enough money to cover all of your tax, Medicare, social security and insurance issues, it breaks you from playing around with your tax money.  You pay it in each pay period, it is paid over to the IRS immediately afterward, and at the end of the year you get file a tax return based upon you employee status.

Many PEOs have minimum requirement in regard to the numbers of people in a group in order to join.  Some are as little a 3 or 4.  If you do not have three or four people in your firm, then you can form a group with other like minded attorneys and their staff to meet this requirement.

For attorneys, at least in Texas, you are required to sign a statement that the PEO will in no way be involved in the management of the law firm, no information will be disclosed about legal clients to the PEO, and that the attorney, as a leased employee, will make all decision as to legal matters.

So, even if nobody else but you, it might be best to investigate and consider a PEO for you and your closest friends or colleagues.

Comments

[Jim Thibodeau]

Chuck,

Well written blog about PEO's. Operating a PEO out of Colorado your comments are well written and right on the mark for what a PEO can do for small companies. We have some clients with only one person doing clerical work for that office. Some of our clients our small insurance agents, new doctors offices and other new business who are just getting there feet wet when it comes to hiring employees.

Thanks for the Blog about PEO's
Jim Thibodeau
StaffScapes.

[Liz]

Chuck, have you actually worked for a PEO before?

For some people it may be the right model, especially for a small firm with several people plus support staff. But for most independent consultant attorneys a PER (Portable Employer of Record) would be a better business model.

If I understand correctly, some PEOs may be able to handle the support for a sole practitioner, however that typically only works if you have just one client you are billing to. Most independent attorneys will have a handful of clients.

Also, I am not familiar with any PEO that would allow you to take all the same business expense deductions that you would be eligible for on your own. A PER, in contrast, mimics in nearly every way the condition of self-incorporation, and you can deduct both your business expenses and your medical expenses from your taxes.

A PER allows the flexibility of incoming billings, so your "pay" is based on whatever you bill, from any number of clients, and also allows for an infinite number of different bill rates according to the work actually performed (different rates for research versus contract review, for example). In a PEO, each person in the program would need to be on a set salary or hourly rate.

The original PER, and the only one to my knowledge that handles independent legal professionals, is MBO Partners. Anyone reading this article on PEO's would do well to compare the two business model options -- PEO versus PER -- and make an informed choice based on the particulars of their unique business situation.

All that said, when your time is valuable, burning hours on non-productive busy work is silly. Intelligent and talented people should always be looking to outsource tasks that are outside of their core competency. Thanks for bringing the conversation into the public space!

[Robert Rice]

Lawyers considering entering into a PEO arrangement should first consider whether their state bar ethics committee has taken a stand on the issue. The last time I looked, about a dozen states had, with most (but not all) approving of this kind of arrangement. Texas now has an ethics opinion expressly allowing for PEO arrangements, and finding no problems with fee splitting, conflicts and the like.

In evaluating potential PEO providers, you want to make certain that your PEO holds any required state PEO license or registration. A majority of states have some kind of licensing or registration process. Texas has had PEO licensing since the early '90s.

Licensing is significant, as the state licensing law typically provides definite answers to important questions, for example how unemployment taxes are to be calculated and paid and how the exclusive remedy rule under workers' compensation law will apply. You also want to check that the PEO's insurance carriers are licensed to write business in your state.

NAPEO membership (www.napeo.org) is a good sign that a PEO is active in its industry, interested in staying up to date, and involved in legal and government affairs. Of course, not all PEOs are NAPEO members, and there are good operations that choose not be. You may also want to look at the list of PEOs that hold accreditation from the Employer Services Assurance Corporation (www.esacorp.org). Roughly speaking, ESAC is a sort of privately created FDIC for the PEO world. ESAC holds insurance backed bonding in case an accredited PEO were to fail causing a customer financial harm. The more direct benefit of ESAC membership is that accredited PEOs have to meet operational and compliance standards, in effect a set of best practices.

Solos may find their business too small to interest some PEOs. The PEO's overhead and fixed costs may make it difficult to provide services to very small shops. Also, some PEOs may look carefully before taking on sole proprietorship businesses as opposed to small shops that are incorporated.

As to the question of clients. This has nothing to do with a PEO arrangement. The PEO has nothing to do with delivery of legal services or whether particular expenses incurred by the law firm are tax deductible. The PEO takes on certain HR, payroll and benefits functions, as a co-employer. The lawfirm continues to run its business, earn income, incur expenses and pay taxes. The lawfirm entity continues in existence after entering into a PEO arrangement.

A PEO arrangement will be the same whether the lawfirm has 10 clients or 100. Nothing about a PEO arrangement will change whether the lawfirm has one client or more than one. This is simply not a factor in the PEO arrangement. PEOs do not normally have any role in billing and collections for their customers.

In a PEO arrangement, the employees are employees - just jointly employed or co-employed by both the PEO and the PEO's customer (here the lawyer/law firm). The customer typically sets the pay rates for the leased employees. Those pay rates could be hourly, salaried, commissioned or something else entirely. How you pay your employees is between you and the employees, although the PEO has to agree and has to be able to efficiently administer the pay system.

"Portable employer of record" - this is a new one on me, and I have been serving as legal counsel to PEO firms since about 1992. The descriptions I can find sound exactly like a PEO arrangement, although priced and pitched to solos. Also, it looks like some providers will take on (for a fee) the billing and collections function for a lawyer, consultant or other independent business. This is not a common PEO function.

Given my background in the PEO world, these "portable employer of record" operations sound like PEOs and might have to be licensed under state PEO licensing statutes. I'd check if I were considering doing business with one. If the "portable employer of record" is not a licensed PEO, I would ask on what basis they are able to pay the unemployment taxes, sponsor your 401K, and provide you with workers' compensation. These are all employer based functions, and it is not obvious that a "portable employer of record" actually has an employer-employee relationship with its solo practitioner consultant clients. But, as I say I am not familiar with this kind of business.

[John Hensley]

Chuck,
You are right on the money regarding how a PEO can help a small law practice. There is no doubt that having employees is a burden and can take your eye off of the prize. A PEO can allow business owners to refocus their attention at revenue generating projects and let the PEO take away this burden. This economy is forcing companies to streamline and one way is to get rid of the payroll, HR manager, Benefits manager and hire a PEO for about the cost of one minimum wage employee. Sounds like smart business to me.

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