Companies big and small face a minefield of potential litigation in employee relations, statistics on court judgments and government sanctions show.
From 1981 to 1998, the median damage award in employment lawsuits in California grew from $45,000 to $500,000, according to statistics from Orrick, Herrington & Sutcliffe LLP, a San Francisco labor law firm. Nationally, discrimination charges filed with the U.S. Equal Employment Opportunity Commission rose from 72,302 in 1992 to 77,444 in 1999.
The increasing litigation has meant a dramatic rise in the number of lawyers practicing in employment law matters as well. A perusal of San Diego’s Yellow Pages reveals dozens of advertisements from attorneys specializing in workplace issue litigation.
All in all, employers, in particular those at smaller firms and those that are growing quickly, face strong headwinds when hiring and firing employees, keeping abreast of new government regulation and attracting and retaining qualified employees, said Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations.
– Popularity Of
PEOs Growing
One solution: Outsourcing through a professional employer organization of human resource functions is growing in popularity, he said.
“It’s the new American mouse trap. For years entrepreneurs had to deal with the headaches of being an employer and employees were faced with the challenges of getting adequate benefits,” Yager said. “A professional employer arrangement solves all those problems.”
Under a professional employer arrangement, a company’s employees are hired by the professional employer company and then leased back to their former firm, Yager said.
“A professional employer organization provides payroll, benefits, human resource functions, risk management and help in complying with government regulations,” Yager said. “It’s a growing industry. The average PEO company that’s a member of our organization has been growing at a 35 percent annual rate for the past five years.”
He said there are more than 550 professional employer companies that are members of the organization. Yager predicted that in 20 years PEOs will have changed the way small business operates in as dramatic a fashion as the personal computer has done.
– Large PEOs Lease
Thousands Of Workers
PEOs range in size from small operations that hire only a few dozen employees for clients up to large publicly traded companies such as Texas-based Administaff, which has thousands of workers it leases to client companies, he said. Estimates put the number of employees nationwide who are working under a PEO arrangement at 10 million.
“The government is increasingly passing new labor regulations, changing old ones and imposing additional burdens on small to medium businesses,” Yager said. “These kind of dynamics force business people to reassess their operations.”
Human resource problems occur at all companies, but ones that are growing quickly seem to experience more trouble, he said. That’s because their executives, who may be unfamiliar with the employee-management functions they are assigned, are frequently forced to devote more time to the issues, something they might be unwilling to do. Outsourcing not only helps protect against legal liabilities, it also frees those executives up to devote their time to business development, he added.
“If you want to grow your business and if you’re spending 20 to 40 percent of your time on payroll, benefits, human resource issues and risk management, you’re wasting 20 to 40 percent of the time you could spend on business development,” Yager said.
A PEO can also provide economies of scale because it has full-time human resource experts and payroll accountants on its staff as well as a variety of employee benefits such as 401(k) retirement plans that a small employer cannot afford to provide, he said.
– Executives May Gain
Extra Time And Money
The cost of such a service is comparable to what it costs to do such functions in-house, plus executives in the client company are freed up for other functions, he said.
In San Diego, firms such as EmployerEase, MK Group, Spectrum Professional Management, Summit Employer Group and Semco Management are in the PEO business.
David Ellis, president of Semco Management, said his company helps businesses reduce their liability to workplace lawsuits, because his company handles all of the functions of employment.
“The problem inherent with most PEOs is they have co-employment relationship responsibilities with the company they’re leasing workers to,” Ellis said. “The client would be the employer for retirement program purposes and share employment responsibilities with their PEO. They face joint liability if the PEO fails to make a payment of payroll tax, unemployment benefit insurance for whatever reason.”
His company specializes in staffing medical and dental offices with the support personnel doctors need to run a business.
Since 1987, Semco’s approximately 500 employees have been members of Local 30 of the Office and Professional Employees International Union. He said union officials are impressed with the benefit package offered to Semco’s leased employees.
“We give real Cadillac benefits to our employees, such as a 401(k) plan with employer matching funds, a health insurance package for full-time employees, vacation pay, sick pay and holiday pay,” Ellis said. “We also handle all OSHA, Cal-OSHA and Americans with Disabilities Act issues.”
A PEO arrangement with his firm helps keep client businesses from being sued for wrongful termination, sexual harassment, discrimination and any other claim under law, he said.
JoAnn Lux has worked for Semco as an accounting supervisor at S.C. Wright Construction Inc. of La Mesa for the past three years and said she prefers the arrangement to direct employment by a construction company.
“Most construction companies aren’t large enough to offer a benefit package that competes with what Semco has to offer,” Lux said.
Terri Cutter, a Semco employee, has provided office management services for the office of Dr. Dennis Dominguez of El Cajon for about a year and a half, she said.
“It’s nice for the doctors because they don’t have to deal with the everyday hiring and firing and the legalities of it,” Cutter said. “If people in the office don’t feel comfortable dealing with someone else in the office, they go right to Semco to resolve the problem.”
Miriam Rothman, a professor of business administration at the University of San Diego, sees outsourcing of employees as a major trend affecting American business.
“The increase in the attractiveness of employee leasing is much like the increase in the attraction of free agents in baseball,” Rothman said. “The concept seems to have grabbed hold of the imagination of business organizations because labor is a major cost and fear of litigation has led organizations to use outsourcing more and more.”
She said that the entire issue of PEO use goes to the core competency of a company.
“Some companies are asking, ‘What are we in the business of doing, making widgets or being employers?'” Rothman said. “There used to be a time when a company would hire its own accountants, human resource personnel and building maintenance workers. Now, many companies are no longer doing that because they’re saying, ‘I’m not in the business of accounting or HR.'”
