For small to midsize construction businesses, recruiting and retaining employees is a challenge. There’s not only a shortage of qualified workers, but also the inflation-driven rise in the costs of providing an attractive benefits package. Plus, dealing with issues related to human resources (HR) can distract management from its core business activities. One potential solution is to use a professional employer organization (PEO).

How does it work?

A PEO is an HR outsourcing provider with which your company forms a “co-employment” relationship. Your business retains control over hiring and firing decisions, as well as day-to-day employee performance management. Meanwhile, the PEO acts as the employer for purposes of most HR and benefits administration functions. Working with a PEO in this manner typically offers a variety of advantages, including:

Better employee benefits. Because PEOs pool their clients’ employees, they typically have access to high-quality health care and retirement plans, as well as other benefits, that would probably be too expensive or difficult to administer for a smaller company.

Assistance with payroll and tax administration. A PEO can relieve your business of many of the burdens associated with payroll processing — including tracking hours, withholding and remitting taxes, and distributing checks.

Reduced workers’ compensation costs. When you partner with a PEO, your employees are covered by its master workers’ comp policy. Premiums are based on the PEO’s experience modifier rate, which can translate into substantial savings for your construction company. The PEO can also save you time and money by handling all claims.

HR expertise. Many PEOs provide end-to-end HR services, helping you search for talent and recruit employees, and even handling onboarding and training.

Compliance assistance. PEOs typically have the expertise to help your company comply with various federal and state laws related to retirement plans, health care plans and protected information, and safety. They can also handle unemployment claims. Some PEOs even provide safety audits and training programs.

What are the risks?

As with any outsourcing arrangement, the biggest risk involved in using a PEO is that you relinquish control over certain activities while remaining liable for any related compliance issues.

One area where you may be able to shift liability to a PEO is tax compliance. Ordinarily, a firm’s “responsible persons” — including certain owners, officers and employees — are personally liable for any failure to collect and remit payroll taxes, even if that responsibility has been delegated to others. There’s an exception, however, for PEOs that have been certified by the IRS. These certified PEOs are solely responsible for their clients’ payroll tax obligations, allowing those clients to avoid liability for payroll tax compliance issues.

Additional note: Because job costing must be done at the company level, many construction businesses may have to do their own payroll. This could limit the practicality of a PEO arrangement.

Is it the right move?

A good PEO can give a small to midsize construction company a competitive advantage in having top-notch benefits and HR services. But, as noted, there are risks and substantial costs to consider. It’s critical to thoroughly vet the reputation, references and financial condition of any potential partner. If interested, discuss the idea with your leadership team and professional advisors.

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