“No jeweler makes money worrying about the things we worry about.” — S. Cash Nickerson, Team America Corp.
Five years ago, David Geller, president of Jewelry Artisans in Atlanta, got slapped with fines for not paying the correct amount of employee withholding taxes to the IRS. Geller vowed never to face that problem again and began using a professional employer organization (PEO) to handle taxes, payroll, and benefits administration for the nearly $2 million-revenue firm. The price: 2% of payroll for the firm’s 15 employees.
“It was a good investment,” he says. “I’d never want to get behind the eight ball with the Internal Revenue Service again.” The PEO also secured better health insurance benefits and negotiated group rates, saving the company at least $1,000 a month and reducing employee health insurance costs by $50 a month per person. Geller, a well-known specialist on jewelry repair pricing techniques, says he’d never go without the services of a PEO again.
Geller is one of a small but growing number of jewelers who are turning over some or all of their administrative tasks to a PEO. A recent JCK poll showed that 4% of jewelers already use a PEO and that 40% would consider them or want to learn more about them (see chart on facing page).
What is a PEO? For roughly 2% to 8% of payroll, depending on the company and the scope of services purchased, a professional employer organization will handle all the chores associated with being an employer, including payroll and employment-related taxes. That leaves store owners and managers more time to concentrate on often-neglected but important duties such as long-range planning.
PEOs typically provide small companies with expert guidance on employment law and managerial issues. Through their negotiating clout, PEOs also are able to offer small companies access—often at reduced costs—to benefits that can rival those at giant corporations. Packages can be structured so that employees use pretax dollars for copayments for the benefits they select, which may include health insurance, 401(k) retirement savings plans, life insurance, dental insurance, prescription cost coverage, and medical care and dependent care reimbursement accounts.
Charles Lacey of Lacey & Co., El Paso, Texas, began using a PEO three years ago. He says he’s providing a full package of benefits at about one-third of what he’d expect to pay if he didn’t have access to his PEO’s discounts. These benefits also help him attract more and better job applicants. In today’s tight labor market, this has been a boon, he says.
For many small businesses, though, the main attraction of a PEO is that it takes the worry out of complying with all the labor laws in force today. “PEOs would be a major benefit to many, if not most, jewelers, because they relegate the function of HR [human resources] to the professionals and, if nothing else, keep you in sync with the law,” says Joe Romano, president of Scull and Co. Inc., a North Bergen, N.J., management consulting firm. “They force you to hire and fire correctly, have policies and procedures in place, and provide the staff with benefits above and beyond the call of duty.”
According to Milan Yager, a spokesman for the National Association of Professional Employer Organizations, “the only time a PEO wants to prevent someone from doing something is if it’s illegal.” For example, if a business owner wants to fire someone because she’s pregnant, not for documented job-performance problems, the PEO advises the business owner on the law. If the client decides to fire that employee anyway, in violation of the law, the PEO would terminate its contract with the firm so that it doesn’t have to assume liability.
These situations rarely arise, says Yager. More typically, the PEO explains the potential violation, educates the employer on the law, and recommends another course of action. For example, many business owners don’t realize that telling jokes with sexual innuendo can result in a sexual-harassment lawsuit for a “hostile work environment.” “Employers often say, ‘These jokes aren’t a big deal. People think they’re funny,’ ” says Yager. “But we tell them it’s illegal to tell these jokes. The law protects the employee.” Yager notes that the average award in successful harassment suits is $800,000. “PEOs won’t have anything to do with that,” he says.
PEOs also help small firms comply with government health and safety regulations they may not be aware of that would affect, for example, a jewelry design or repair shop where chemicals, high temperatures, and sharp tools are routinely used. This is important because the Occupational Safety and Health Administration is moving toward scrutiny of smaller and smaller businesses as it shifts from tax-subsidized status to generating nearly half its revenues from fines.
In addition to expert legal advice, those who use professional employer organizations cite a number of other reasons for endorsing them:
Higher profits. Mark Blinderman, secretary and treasurer of Jewelers of Maitland in Maitland, Fla., near Orlando, says his business has experienced 25% annual growth compounded over the 10 years his firm has used a PEO. “We’ve had rapid growth, and one of the reasons is that getting the burden of human resources off our back has allowed us to concentrate on growing our business.” Many firms switch to PEOs to lower internal labor costs (associated with payroll, employment taxes, and dealing with benefits issues) and to save money on benefit prices. Nicky Mehta, president of Diamond Days Promotions Inc., a $6 million New York wholesale diamond jewelry manufacturer, says using a PEO for the past four years has resulted in an annual savings of $13,000 in labor costs plus $16,000 to $20,000 for benefits.
More effective recruiting. Charles Stuart, president of Highlands Jewelers in Sebring, Fla., says his PEO’s benefits helped him recruit a goldsmith. “We offered benefits he couldn’t get elsewhere,” says Stuart. Blinderman of Maitland Jewelers says his benefits package attracted an employee who was considering another independent jeweler. “We blew them away on benefits and compensation.”
Employee retention. It’s difficult to measure, but anecdotal evidence suggests that PEO benefit packages help retain employees as well as attract them. One jeweler says his benefits package helped him keep two people who lost benefits they’d had through their spouses, one because of divorce and the other after a layoff. Frank Yanke, owner of Yanke Designs in Franklin, Mich., says, “Our employees felt that other jewelers were just offering the cheapest insurance and benefits, but they don’t have that sense here.”
Proactive management. Another jeweler, who asked not to be named, benefited from his PEO’s spontaneous offer of counseling after an armed robbery. “Even a month after the robbery, when customers would reach for a wallet, I would see my wife and employees react as if they were pulling out a gun. The counseling helped.”
Better risk management. Many PEOs protect the assets of client firms from lawsuits by providing a legal defense benefit and employee-practices liability coverage. The latter, a policy most stores don’t have, covers sexual harassment, wrongful discharge, age discrimination, and other nasty legal complications. This coverage pays not only for the liability award, if any, but also for legal bills, expert witnesses, and preparation of the case.
Misconceptions about PEOs abound. Even though PEOs have been around for years, they’re still confused with “temp” agencies. Actually, there’s little comparison. They also don’t offer outsourcing or employee leasing (short-term employment arrangements). Nor are they designed to reduce costs by simply changing the structure of employment so that benefits can be curtailed.
There’s also a fear that a PEO will usurp the employer’s right to recruit, hire, or fire as he sees fit. While technically PEOs serve as co-employers of the entire staff, the store owner retains the right to manage the employees, including making all the hiring and firing decisions. The PEO is the employer for tax and benefits purposes only (for instance, checks are cut by the PEO). The organization may also provide management guidance, but only to make things run more smoothly. For instance, a PEO might rewrite a job description to attract the right type of applicant or obtain discounts on want ads.
Another worry is that employees will feel alienated by the co-employer arrangement. But most jewelers using PEOs say this is a non-issue. Creig Sterrett of Sterrett Fine Jewelers in Columbia, Mo., reports that his employees viewed the transition to a PEO “strictly as a bookkeeping thing, like switching from green checks to yellow checks. There was zero reaction.”
Some jewelers also assume there’s a lack of integrity inherent in the co-employment relationship. Jon Bridge, co-CEO of Ben Bridge Jewelers, a major West Coast jewelry chain, is one of them: “When you have an employee, you should be responsible for that person. I worry that people think this is a way to get out of liabilities.” He believes jewelers should use consultants instead of turning to a PEO.
But Tom Tivol, president of Tivol Jewelers in Kansas City, Mo., and Overland Park, Kan., says, “Most jewelers are unprepared to hire and fire properly and deal with day-to-day discipline issues. Human resources is often only superficially organized, and certainly not with the proper knowledge and skill required to protect the assets of a business from lawsuits. PEOs can fill this gap.”
So what’s the bottom line? JCK asked Robert Bridel, executive director of the American Gem Society, that question. He said AGS is so sold on PEOs that it’s been recommending them to its members—both independents and small chains—for five years. And AGS itself uses a PEO. “The greatest testimonial is how we feel the PEO is serving our own needs at headquarters. From saving staff time, reducing benefits costs by approximately 50%, and expanding our benefits, it’s a very valuable service.”
Joe Romano of Scull and Co. is also putting his money where his opinions are. He began using a PEO at his own firm this year. He’ll also be recommending that his nearly 200 retail and wholesale jewelry clients, representing nearly 600 stores, shift to a PEO arrangement.
Though certainly not an impartial source, S. Cash Nickerson, chief marketing officer for Team America Corp., a PEO in Worthington, Ohio, makes a convincing case for his industry’s services: “The jewelers I know are really small. They can either spend their time worrying about government forms, unemployment, worker’s comp, and benefits, or they can focus on how to improve sales. It’s a core competency issue, a matter of letting people focus on making money. No jeweler makes money worrying about the things we worry about. Fundamentally, we’re an intelligent outsource.”
The Growing Burden Of Employment Regulation
Nowadays, it’s virtually impossible to keep pace with the growing burden of laws, regulations, and government agencies relating to employment taxes and practices.
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© National Association of Professional Employer Organizations — reprinted with permission
Even though 90% of PEOs’ clients renew their contracts, problems do occur. One jeweler told JCK his PEO neglected to inform him he’d been switched to a new health care provider. Another jeweler, who now uses a payroll processing firm, says his former PEO made a mistake three years in a row that resulted in his 401(k) contributions being refunded to him unexpectedly at the end of each year. Another jeweler found a mistake when he audited his worker’s compensation insurance premium.
If you’re considering a PEO, start with this checklist. Though PEOs can solve a lot of problems, you don’t want them causing new ones.
Perform a self-assessment. How much outside help with benefits, payroll, and management do you really need? If you’re happy with the quality and cost of human resources expertise available in-house, payroll processing may suffice.
Research PEO providers. Develop a reasonable short list of PEOs to consider. Find firms that serve your region among the nearly 2,000 PEOs on the National Association of Professional Employer Organizations’ Web site at www.napeo.org, or call (703) 836-0466. A short list of 14 accredited PEOs is posted on the Web site of the Institute for the Accreditation of Professional Employer Organizations at www.iapeo.org, or call (501) 219-2045. The accreditation process is rigorous, but accreditation fees ($20,000 annually) tend to weed out strong local firms.
If you are a member of the American Gem Society and the Independent Jewelers Organization, ask about the PEO recommended by these organizations and request referrals to members who are using a PEO.
Check references. Ask for client and professional references. Talk to as many jewelers or other retailers as possible. Find out about the qualifications of the company’s principals as well as of the people who will work most closely on your account. Ask how the services provided have changed in the past two or three years: Does the firm have the necessary expertise, continuity, and proactive management culture? All this may sound like a lot of trouble, but taking on a PEO is an extremely important step. It’s like turning part of your business over to someone else.
Charles Lacey, co-owner of Lacey & Co. in El Paso, Texas, spent eight years looking for a PEO that met his requirements. He was looking for a stable company well-versed in Texas employment laws that had a long-term track record and was large enough to negotiate discounts on benefits. “A lot of firms are too good to be true. That’s why it took me so long,” he says.
Discuss fees. Are they monthly, quarterly, or annual? Call around to make sure that the fees are competitive with those of other PEOs and with costs you would incur if you purchased benefits directly.
Ask about à la carte services. One example: Does the firm provide criminal background checks and pre-employment drug tests? These are advisable screening processes since jewelry is so valuable and portable, but these tests are difficult to manage properly.
Ask your accountant to check the PEO’s financial background. This should include bank and credit references. Ask for proof that it pays its own payroll taxes and insurance premiums on time.
Find out if your state requires PEOs to be licensed or registered. If so, make sure the company you’re considering meets all requirements.
Confirm the scope of insurance coverage available. Verify that the PEO’s employee bonding, workers compensation, general liability, professional liability, and fiduciary responsibility coverages would cover your firm.
Get expert advice. Once you have a short list of two or three firms that meet your criteria, ask your attorney, accountant, and insurance broker to critique each firm’s proposal to make sure the arrangement makes sense for you. It’s well worth the investment, given the scope of the PEO co-employment relationship. Find out what your liability would be should the PEO declare bankruptcy.
Monitor the PEO’s performance. Meet with your PEO account executive every year to review the services provided, the result of those services, and whether the PEO recommends additional services. This is the time to provide feedback on the quality of service given by the PEO. It will help keep the service relationship on track. During the year, do spot checks. For example, check with employees to confirm that health insurance claims are being paid promptly.
Manage employees more actively. Tom Tivol, president of Tivol Jewelers in Kansas City, Mo., and Overland Park, Kan., warns that jewelers sometimes rely too much on the PEO, forgetting their shared liability and mistakenly assuming that most of the employee management function can be delegated. “PEOs should be used not as a substitute for management but as a teacher of proper management techniques,” he says.
“Human resources [at most jewelers] is often only superficially organized, and certainly not with the proper knowledge and skill required to protect the assets of a business from lawsuits.” —Tom Tivol, Tivol Jewelers
For more information, contact: National Association of Professional Employer Organizations (703) 836-0466, www.napeo.org
Institute for the Accreditation of Professional Employer Organizations (501) 219-2045, www.iapeo.org