By Jill Babchak with Natalie Dodson, SPHR

Savvy business people sometimes make unfortunate mistakes. Don't we all! When it comes to HR, it’s all too easy for business owners to waive important legal rights and make dangerous assumptions without even knowing they are doing so. This can impact the well-being of a business in its start-up stages, as well as an established enterprise. HR-related mistakes often pass completely unnoticed until they have compounded themselves to create a complex situation with no clear resolution. Like landmines, they can remain innocuous until they are triggered by the impact of a later misstep or even a perfectly sensible management decision.

The most successful business people often struggle with how to properly manage their human resources. In fact, the very business acumen that has earned top executives their success often hinders them when it comes to personnel issues. While relying on instinct and “good common sense” to make business decisions can lead to lucrative outcomes, this approach is quite often unsuitable in Human Resources matters. At best, it can cause setbacks and complications; at worst it can land the company in costly litigation.

It is no surprise, then, that the trend toward HR outsourcing is on the rise. Executives would rather enjoy the success their business savvy has earned them, than deal with the tedium and potential legal pitfalls of HR rules and regulations. And, as we will see, it’s probably wise to leave these matters to the pros.


Entrepreneurs Make Bad HR Managers
An entrepreneur is defined by Wikipedia as “a person who is willing to launch a new venture or enterprise and accept full responsibility for the outcome.” Being a risk taker and an optimist are inherent qualities common to all entrepreneurs. Often, they put their personal financial well being on the line to start their business. In the early stages of a business, staff members may be family and if not, they are commonly regarded as family members versus rank and file employees. There aren’t many of them and the owner is usually on a first name basis with everyone. As a business grows and the employee population grows with it, it can be increasingly dangerous for the owner not to preserve certain boundaries and to pretend he or she knows each and every employee well.

Take this seemingly benign statement: "You'll have a job here as long as we're in business." It has a different impact in writing, where it's rarely ever put (but may as well be once it's uttered). Perceived verbal contracts carry weight; feelings of entitlement can turn to litigious outrage in a blink. It's best not to create them, of course, but that's much easier said than done. We want to lead with decency and common sense. Without knowledge of employment laws, as well as their application in "gray areas", noble intentions can lead smart people into territory fraught with HR landmines.

The important character traits of successful business leaders often play quite poorly in the HR space. Conversely, imagine an HR manager who is a risk taker. They might brush aside the need for government compliance if there is a cost involved. (In fact, many small business owners do exactly this, taking a “head in the sand” approach to potential compliance fines.) They might ignore the possibility that someone from their “happy family” of employees might turn around and slap them with a lawsuit.
A successful HR professional, however, often has strengths that are almost the exact opposite of those of an entrepreneur. Rather than take risk, they are mindfully cautious as they go about their mission to protect the business. Instead of reacting by instinct, they are carefully objective when dealing with employees. These traits, in fact, are what make for effective HR practices.

Case in Point: The Best of Intentions
The following fictitious case study, a composite of real events, illustrates how the misguided good intentions of a business owner led to a serious employee grievance, and litigation.

Mary Steid*, owner of an IT consulting firm with prestigious government contracts, had a long-time employee named Scott Weston*. Mr. Weston was a Senior Backup and Disaster Recovery consultant who had undergone brain surgery for removal of a tumor. He recovered fairly well, but damage to an optical nerve left him blind in one eye.

When he returned to work, Mr. Weston explained to Ms. Steid that with a little extra effort, he'd soon be to speed at his former level of productivity. He mentioned that there was a type of software that could facilitate his work and that he would need to make special transportation arrangements to client sites, but that with these adjustments he could get the work done to his previous standard.

He was glad to be back and determined to pick up where he'd left off. Mr. Weston was very well-liked by the firm's clientele and he knew there was a lot of work to be done. Ms. Steid told him he was welcome back and she would support him in every way possible.

In the weeks and months that ensued, however, Mr. Weston noticed he wasn't being bid on contracts as frequently as before, and that equally (or less) qualified peers were receiving the more challenging and interesting assignments.

Concerned, Mr. Weston spoke with Ms. Steid as his career appeared in jeopardy. Ms. Steid responded in a compassionate manner and explained that she wanted to support his need to take it easy, considering what he'd been through. She assured him that he was a valued employee and that she didn't want him to have too much stress on the job, as his health was more important.

Mr. Weston responded that he'd never asked for reduced challenge on the job. He reminded Ms. Steid that he'd only communicated that he needed to rely upon transportation to and from client sites, and that his work would be facilitated by the special software he was now using. He'd told her that he was no less capable than before. Ms. Steid responded that she knew his work ethic was fantastic and she had no doubt he could be successful; she just didn't want him to jeopardize his health.

Unfortunately, Mr. Weston was soon passed over for another premium (and challenging) assignment. Shortly thereafter, the company was forced to implement a furlough for any employee not currently engaged in billable work. Consequently, Mr. Weston filed a claim with the Equal Employment Opportunity Commission (EEOC) on the grounds of discrimination under the Americans with Disabilities Act (ADA).

The firm's attorney is attempting to settle the case out of court. However, the company will spend tens of thousands of dollars defending this claim and potentially much more for damages.

Allegedly, Mr. Weston's career was harmed by his company's perception that he "needed a break" due to his disability, without having been given a chance to demonstrate he could perform his essential job duties to a satisfactory level with reasonable accommodation.

It goes to show, even perceived disability and good intentions can lead to inadvertent violation of the ADA.

Case in Point: Good Deeds Gone Bad
Another example of a seemingly harmless action causing major troubles is illustrated by John Cameron*, owner of a landscaping business. Mr. Cameron, wanting to inspire loyalty and security while taking good care of his workforce, made some unusually generous compensation decisions that were, as he would later find out, not compliant with the Department of Labor's Fair Labor Standards Act (FLSA).

He chose to award a supervisory title and a salary to a good employee who otherwise would have suffered the ups and downs of seasonally-dependent work volume. This exposed Mr. Cameron to fines and penalties for failing to pay overtime when the employee worked more hours during the peak season, exceeding his State's overtime thresholds.

The employee eventually became upset over an unrelated matter and sued Mr. Cameron for back-overtime. Ironically, the employee's salary had been calculated to exceed the highest amount he had previously earned in base pay and overtime combined. Nonetheless, litigation ensued. Why? Because Mr. Cameron had in fact violated Federal law. The nature of the employee's job duties did not qualify him for Exempt status from overtime.

Don’t fall victim to good deeds gone bad; do your homework before you make a decision that affects your employees, no matter how well-intended it might be.

So where's the happy medium between caution-induced decisional paralysis and come-what-may risk-taking? What's a good rule of thumb? Each time an unfamiliar situation arises, however inconsequential its resolution might seem, do a little research into what other business owners have done in similar cases. Get a sense of what to avoid, and some established "best practices" you could follow.

Remember that each decision you make with regard to your people resources sets a precedent that can speak as loudly as policy. Don't contradict your policies at any level of the company, and know that practice is just as important as what's in writing. Be thoughtful and consistent while practices are established.

If possible, let people who know the rules and regulations review your initiatives and incentives to provide you an extra layer of protection you need as a business owner.

The Wicked Web of Compliance
EEO, ADA, HIPAA, Workers’ Compensation, harassment, discipline, discrimination and training are just a few of the regulatory entanglements facing employers today. Business owners who have worked hard to build their companies deserve to focus on what they do best and leave figuring out the HR compliance aspects of their business to specialists resting assured that avoidable errors are prevented, practices are compliant and staff time is used most productively.

Many business owners, especially of small and mid-sized companies, believe that they will save money by handling the HR aspects of their business themselves. For example, HR service providers will often approach prospective clients only to be told that their “Aunt Suzy” handles their payroll and it’s been working just fine. But what about sourcing benefits, managing enrollments, assuring compliance and dealing with various employee-related issues? What brave “do-it-yourselfers” don’t take into account, is not only the time investment involved in all these tasks, but also the ramifications of even the slightest error, miscalculation or improper response.

When true costs are considered, even the financial argument for keeping HR functions in-house tends to dissolve. While HR outsourcing could initially seem like a “spend more to save more” proposition for smaller businesses, it is not a luxury. It is arguably an investment in a smoother path to financial success. For a mid-sized business, it may represent immediate cost savings in several areas; the service may more than pay for itself right off the bat.

How much do Your Employees Really Cost?
According to Salary.com, the national average salary for:
·       HR Generalist is $59,720
·       HR Manager is $85,970
·       Payroll Administrator is $51,511
·       Payroll Clerk is $35,465
·       Workers’ Compensation Administrator is $56,545
·       Workers’ Compensation Manager is $81,368
·       Benefits Administrator is $49,812

Additionally, studies show that the average cost of administration, training, employee benefits, benefits management, and other mandated costs and liabilities can amount to as high as 45 cents for every dollar spent on payroll. That ratio is sure to rise as the costs of health insurance and other benefits continue to spiral upward. In calculating your true payroll costs, also be sure to include the following:

1.       Social Security (FICA)
2.       Federal Unemployment (FUTA)
3.       State Unemployment (SUTA)
4.       Workers’ Compensation
5.       Administrative Costs

Below is a helpful formula to determine your total labor cost per payroll:
(FICA % + FUTA % + SUTA % + Workers’ Compensation Rate % +
Benefits + Administrative Costs %) X (Gross Pay) = Labor costs per pay cycle

Why Hire when it is Cheaper to Outsource?
The simple question then becomes: why spend $60,000 to $90,000 to hire an HR Generalist when any form of HR Outsourcing can cost less. When you employ the services of a HR firm, you pay a simple service rate (either a flat fee or a percent of payroll). This reduces your per-pay-cycle fees, saving you thousands of dollars a year, not to mention saving you the hassle of administering all of these items.

Some HR issues can’t be avoided, but an outside Human Resources expert can help navigate them as smoothly as possible. This is especially beneficial in today’s ever-shifting legal landscape. “As regulations and compliance challenges are evolving at such a rapid pace, we have found it tedious and difficult to remain updated,” said Lillian Harris, President of Man-Machine Systems Assessment. “We are confident knowing that our third-party HR partner possesses the knowledge and experience that is necessary to understand and sidestep these complex issues.”

A third party HR organization will often have experts on staff who are trained to stay updated on a variety of business regulations to assure their clients are in compliance with the latest affecting their industry. In some instances, if a compliance issue is left unchecked, the liability falls on the HR partner, not the employer.


What are the Options?
There are three primary options that business owners have when it comes to outsourcing their Human Resources, depending on their needs and budget:

1.       Professional Employer Organization (PEO)
2.       Administrative Services Organization (ASO)
3.       Human Resources Consulting

1. Professional Employer Organization (PEO)
A PEO is a business that provides comprehensive Human Resources outsourcing services by entering into a co-employment relationship with the client. This allows the PEO and the client to share and manage many employer-related liabilities and responsibilities. The client maintains control of their company including hiring, firing, on-site supervision and daily business operations, while the PEO provides HR services, employee benefits administration, payroll administration, workers' compensation and compliance.

Employee wages are reported under the PEO’s tax ID, thus they assume the majority of employer-related liabilities, drastically reducing the employer’s legal responsibilities.

Additionally, PEOs are often able to use the buying power of thousands of worksite employees to offer Fortune 500 style benefits to even the smallest company. This is extremely attractive to job candidates and allows businesses to attract and retain top-quality applicants.

Some PEOs can also dramatically reduce the risk of nuisance employee litigation by implementing an “Alternative Dispute Resolution” program. This means employees agree to mediate a potential dispute instead of immediately bringing in an attorney.

The concept of the PEO is especially beneficial for companies that want to “set it and forget it”.

2. Administrative Services Organization (ASO)
ASO is an alternative for clients that like the concept of PEO, but are not sure if they want to enter into a “co-employment” agreement. In an ASO arrangement, there is no co-employment and wages are reported under the client’s Tax ID. This eliminates the sharing of liability provided under the PEO model. Clients can outsource some or all Human Resources functions, or simply enhance their existing support capabilities.

ASO can eliminate many administrative burdens and provide you with expert support from HR professionals and benefits administrators, while offering more flexibility in the services you want to outsource. However, all employment related liabilities fall completely on the client.



3. Human Resources Consulting
If the PEO or ASO solution doesn’t fit your needs, HR consulting might be the way to go. HR consulting allows you to address your HR needs by letting you pick the areas where you need support and stay the course with the business practices that are working for you. An HR consultant can perform an assessment to review key HR functional areas and see where improvements can be made or where compliance might be an issue.

A good HR consulting service should bring a variety of expertise to the table including assistance with HR policies and procedures, compensation management, discipline and termination, compliance regulations, training, employee orientation, and employee handbook creation/review. Your HR consultant should be knowledgeable, accredited and highly responsive to your requests.

There is a common misconception that HR is all about paperwork and people-care. In fact, the profession has evolved impressively over the past decades and today, a senior HR professional is a trusted business partner at the Executive level of every sophisticated and successful enterprise. If you want your business to have a strategic edge, the administrative aspect of HR is just the tip of the iceberg. Well-planned HR initiatives can be an invaluable tool in optimally aligning people resources to your business goals.

Most business owners lack the time and resources to build infrastructure and processes that don’t relate directly to their bottom line. A seasoned Human Resources consultant not only addresses day-to-day HR questions, but also tackles human capital strategy to find solutions that increase revenue by streamlining internal processes.

Many HR consultants will provide a free initial consultation, allowing you to see if they are a good fit for your needs.

Does Size Matter?
Businesses with less than 100 employees can not usually justify a full-time internal HR manager, yet having even one employee gives rise to important HR questions. HR outsourcing, especially with a partner that offers customizable solutions, is a perfectly scalable resource. It provides access to top-notch HR services without supporting the overhead of a full-time HR employee. A plethora of the tedious, non-revenue producing aspects of running a business, from creating or revising employee handbooks, to dealing with payroll, insurance and benefits issues, are taken off the CEO’s plate.

Employees will be grateful that the company has the proper protocols in place, and business owners will be relieved that they can sit back, relax and not worry about compliance, benefit enrollment, office politics, etc. Hence, outsourcing HR is a win-win situation for employers and employees alike.

Once a company exceeds 50 employees, the administrative demands, burdens and legal requirements placed on the organization increase drastically. A third party HR company or HR consultant can be a tremendous support in this scenario to help increase efficiencies, offer expert advice, and ensure compliance. For these larger organizations, using a third party to supplement internal Human Resources staff affords them the is a surefire way to ensure the diverse needs of the business are being met.
In a recent survey conducted with the assistance of the Society for Human Resource Management (SHRM) & the National Association of Professional Employer Organizations (NAPEO), the average PEO client saved $12,000 per year (an average of $600 / employee) and 9 hours per week because they used a PEO. The study goes on to break out the savings by number of employees:
·       Clients with 1 - 9 employees saved $5,000 per year and 7 hours per week.
·       Clients with 10-19 employees saved $10,000 per year and 13 hours per week.
·       Clients with 20-49 employees saved $18,700 per year and 23 hours per week.
According to a 2010 study by the Small Business Administration (SBA), the annual cost of federal regulations per employee, including economic, environmental, tax compliance, Occupational Safety and Health (OSHA) and homeland security is:
·       Fewer than 20 employees: $10,585
·       20-499 employees: $7,454

Take these costs and variables into account when considering the pros and cons of outsourcing your HR functions.

Beyond Cost, a New Realm of Success
By freeing you of peripheral concerns and complications, outsourcing allows you to focus on your core competencies, (the offerings that distinguish your business) and to attract the higher level of talent you need to propel you to the next level of success.

Outsourcing is especially beneficial for small and mid-sized businesses, as noted by AllBusiness.com,

“Frequently a PEO arrangement is the only way a small business can offer benefits such as health insurance, dental and vision care, life insurance, retirement savings plans such as 401(k), Section 125 cafeteria plans (flexible spending accounts for health care and child care), job counseling, adoption assistance, and educational benefits. Most small businesses could neither afford nor manage these benefits on their own.”

Candidates who previously would only have considered a large company may find combination of a smaller-company atmosphere with world-class benefits very attractive.

What’s the Bottom Line?
While top executives are obviously savvy business people, there are dangers in relying on those business instincts in the realm of HR. Even for executives who are wise in HR best-practices, time and energy could be better-spent on propelling the business forward. There are high-value resources that cost less than what they are worth and can remove much from your plate in terms of administrative headaches and untold future burdens. Is it time to take a fresh strategic look at where money, time and energy are being spent? If so, your business partners, your employees, your bottom line, and your legal counsel will be glad you did.

*Fictitious names.

References
Survey conducted with the assistance of the Society of Human Resource Management (SHRM) & the National Association of Professional Employer Organizations (NAPEO) by John McClendon, Associate Professor of human resource management in the Fox School of Business & Management at Temple University; Thomas Gainey, assistant professor in the Richards College of Business at the State University of West Georgia; Brian Klaas, Professor of Management in the Moore College of Business at the University of South Carolina.

Small Business Association. (2010, September). The Impact of Regulatory Costs on Small Firms. Retrieved March 22, 2011, from http://archive.sba.gov/advo/research/rs371tot.pdf.

AllBusiness.com. Professional Employer Organizations: How Your Business Can Benefit. Herbert, Tim. Retrieved March 22, 2011 from http://www.allbusiness.com/labor-employment/human-resources-personnel/7067907-1.html.