Preparing for the Future: How Professional Employer Outsourcing Will Help Small and Mid-Sized Employers Cope with an Uncertain 2013.

Preparing for the Future:
How Professional Employer Outsourcing
Will Help Small and Mid-Sized Employers
Cope with an Uncertain 2013.

Looking Back, Looking Forward

Last year was one of the most volatile economic periods in U.S. history. Reams of new
employment legislation were passed into law, the country endured a vicious presidential
campaign, the constitutionality of Health Care Reform was challenged and maintained,
and months of economic uncertainty lead up to the
New Year deadline of the fiscal cliff.

While the worst seems to have passed, business
confidence has dipped back to recession-level lows,
according to the National Federation of Independent
Business (NFIB). Their “Small Business Optimism
Index” for year-end 2012 was the second worst
reading since March 2010.

Consider some of these disconcerting statistics:

 70 percent of owners say it is a bad time to hire or invest.
 No employment changes were made by 76 percent of the owners surveyed.
 Future hiring plans weakened, falling 4 points to 1 percent of employers.
 Political uncertainty stopped one in four employers from expanding. They listed the
top business problems in the way of hiring as taxes (23 percent) and regulations (21
percent). Poor sales came in third at 19 percent.
 30 percent of retailers reported lower sales during the holiday season.
 52 percent of businesses are not looking for new loans

CPE HR, Inc. All Rights Reserved. 2013
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The Cost of Compliance

Beyond the economic uncertainty that is hampering business growth and expansion,
the cost of regulatory compliance impacts employers even more. And according to the
Small Business Administration (SBA), small businesses bear the largest burden of
complying with federal regulations. These regulations include tax and payroll,
occupational safety and health, labor and employment, insurance and other economic
restrictions and incentives. The SBA reports that on average,
Costs per employee
a small business (under 20 employees) spends on average
appear to be at least
close to $10,000 per employee annually managing
36% higher in small
regulatory compliance, compared to large companies (over
firms than in medium-
500 employees) that only pay on average $6000 per
sized and large firms.
employee.
These results are
roughly consistent with
This cost differential is easy to understand, as many
… other studies
expenses relating to compliance are ‘fixed’. That is, a firm of
completed during the
20 employees incurs many of the same base expenses as a
past 25 years.
firm with 200. In large firms, these fixed costs are spread “The Impact of Regulatory Costs on Small
Firms,” SBA Office of Advocacy
over a large employee base, which results in lower costs per
individual. This phenomenon is known as economies of scale
and it results in an obvious advantage to large firms over smaller ones.

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Additional Employment Challenges in 2013

Beyond the fiscal uncertainty and cost of compliance, employers face some unique
employment challenges in 2013.

1. Health Care Reform

As the Affordable Care Act is rolled out in 2013, employers will be confronted with new
challenges. For the first time, W2s issued in January 2013 included the value of
employer-sponsored health care benefits. This almost certainly resulted in increased
costs and time of preparing W2s as a result of gathering and reporting this information.

Small businesses also have to prepare for open enrollment in health insurance
exchanges that begins on October 1. These exchanges will allow individuals and small
businesses with up to 100 employees to purchase qualified health insurance coverage
online. Employers will have to decide what their health care programs will look like
going forward, or whether they’re going to offer coverage at all. And looking towards
2014 when the Individual Mandate becomes effective, employers will be forced to
understand how this law will impact their business.

2. Wage and Hour Issues
In January of this year, former Labor Secretary Hilda Solis resigned following four years
of aggressive Department of Labor investigations and prosecutions of employers who
violated the Fair Labor and Standards Act (FLSA). Unfortunately, the departure of
Secretary Solis is not likely to change the Department’s aggressive enforcement policy.
Current issues range from the relatively simple, such as complying with the minimum
wage increases that went into effect on January 1, to the very complex, such as
ensuring employees are compensated properly for working through meal breaks,
guidelines involved with employees checking company email at home from a mobile
device, putting on (and taking off) uniforms, and booting up their computers in the
morning.

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Additionally, employee classification issues, such as exempt versus non-exempt and the
distinction between an employee and an independent contractor, continue to trip up
even the most well-intentioned employers.

3. Discrimination and Equal Opportunities Regulation is likely to
On Dec. 17, 2012, the U.S. Equal Employment Opportunities pose a significant
Commission (EEOC) approved a strategic enforcement plan, challenge for employ-
beginning in 2013, with a requested budget of $373 million. The ers in 2013. To meet
plan outlines six enforcement priorities, such as eliminating this challenge, it’s
discriminatory hiring practices, protecting immigrant workers, important to stay on
enforcing equal pay laws, and preventing sexual and religious top of what’s happen-
harassment. Additionally, the employment of individuals with ing on the regulatory
disabilities has received a lot of attention recently, and front. Once you fall
compliance with the Americans with Disabilities Act (ADA) is also behind, it can be hard
likely to be a priority for regulatory agencies in the year to come. to catch up.
- Stephanie R. Thomas, Ph.D.,
The result of these changes is apparent, as the Equal CEO of Thomas Econometrics.

Employment Opportunity Commission (EEOC) reported that a full
70% of all 100,000 claims reported in 2012 were alleged violations of Title VII which
prohibits discrimination based on race, sex, national origin, religion and color.

So, with uncertain economic days ahead, growing financial burdens, and the never-
ending flow of employment regulations and compliance challenges, what hope is there
for small employers to succeed in the near future?

The Answer: Human Resources Outsourcing.

5

Human Resources Outsourcing:
More Than Just an Idea Whose Time Has Come

In recent years, Human Resources Outsourcing has grown from merely an interesting
idea, to a way of doing business. Despite the current economic woes, HR Outsourcing
continues to grow as employers look to consolidate vendors, cut costs and improve
efficiencies.

Global Industry Analysts, an international business strategy and market intelligence firm,
conducted a comprehensive survey of 274 major-market human resources outsourcing
firms in mid-2012. They report that the global HRO market could reach $162 billion by
2015, up from $103 billion in 2007 and $61 billion in 2002.

In the United States, Everest Research Institute, an independent research and analysis
organization, states that North American HR outsourcing transactions reached $25.4
billion by the end of 2009, an increase of 19 percent over the previous year.

At a global growth rate of 300%+ over the past decade, HR outsourcing is now the fastest
growing sector in the broad “business process outsourcing” market.

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Key Outsourcing Drivers
According to Global Industry Analysts and Hewitt Associations, a world-wide provider of
HR consulting services and research data, the most common reasons for engaging an HR
Outsourcing firm are to reduce overhead and improve efficiencies. Companies also
recognize the value of utilizing an outside resource to conduct various business-related
activities, as compared to maintaining these functions internally.

Other reasons to outsource include:
 Provide cost effective healthcare benefits
 Access to outside expertise
 Ability to offer quality HR service to improve recruitment and retention
 Need to focus on core business competencies
 High cost of remaining up-to-date with rapidly changing environments
 Eliminate high volume of low-value transactional activities

From the Experts
Experts from across the human resources and human capital spectrum have expressed
opinions on the growing popularity of the Human Resources Outsourcing industry. Here
are several selections:

“HRO started off as a cost reduction move for some companies. It has
expanded well beyond that to become a driving force for creating
business value. We expect even greater emphasis on business outcomes,
as companies explore HR Outsourcing as a way to meet business needs
and improve business performance.”
- Jill Goldstein, HR BPO offering lead at Accenture.

7

“The market for HR outsourcing may benefit from a weakened economy
as buyers look to lower costs and trim staff.”
- Lisa Rowan, program director, HR and Talent Management Services Research.

“HRO is providing more of a strategic support for clients, while still
providing line leaders with tools to improve day-to-day talent
management. This stands in contrast to the older notion of HRO as
simply a way to reduce the tactical burden on HR.”
-The Aberdeen Group, 2011 HR Outsourcing Survey.

“In many ways, this is the golden era of human resources outsourcing.”
-Josh Bersin, CEO and president, Bersin & Associates

“The report points out that while compliance and core HR programs
continue to be business-critical, they often do not add enough value in
today's global business environment. Chief HR officers (CHROs) and
their teams who have found a way to automate, streamline and
outsource such "non-strategic" parts of their operations and focus on
more strategic initiatives will likely outperform their peers.
- Deloitte, “Predictions for 2013: Corporate Talent, Leadership and HR”

8

Professional Employer Outsourcing Gains Strength
When considering whether or not to outsource human resources, employers should
review all aspects of their employee administration, compliance and strategic needs to
determine which elements should be outsourced, and which can be maintained in-house.
Some employers may be only looking to outsource a specific function or process, such as
payroll administration, recruitment or benefits administration, while others may find it
more productive to outsource the entire spectrum of their human resources function. For
those looking for the broadest and most comprehensive solution possible, Professional
Employer Outsourcing (PEO) is the answer.

“ The growing urgency among companies to lower costs,
enhance revenues, and stabilize operations is driving
companies to seek tools that offer support for HRO
requirements. A Professional Employer Organization
(PEO) is one such tool that facilitates access to HR
management solutions, and skilled HR professionals.
”
“Human Resource Outsourcing: A Global Strategic Business Report, 2012.”
Global Industry Analysts, Inc.

PEOs, were established in the early 1980s, offering insurance and payroll services to small
and mid-sized employers. In the early days of the industry, PEOs were also known as
“Staff Leasing” or “Employee Leasing” firms.

However, as employment laws became more complex in 1990′s, the need arose for a
more comprehensive employment solution. The PEO industry expanded to include many
new elements relating to employee relations and human resources compliance.

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How Does It Work?
In a Professional Employer Outsourcing relationship, the PEO shares many employment
responsibilities with their clients. While the client maintains complete control over all day
to day operations – such as hiring, directing the employees and setting wages – the PEO
assists with the management of complex administrative functions relating to the
employees. Examples of these back-office HR functions include:

 Assistance with labor law compliance Companies that seek
 Employee handbooks & policies HRO services essen-
 Health insurance plans & administration
tially require cost
 401 (k) and Cafeteria 125 Plans
reductions, process
 Payroll processing
 Tax administration
improvements,
 Governmental form submissions external knowledge
 Safety consulting and skills and the
 Workers’ Compensation Insurance ability to concentrate
 Management Training on strategic activities.
 Recruiting services
- “HRO: A Global Strategic Business Report,
 Assistance with unemployment administration 2012.” Global Industry Analysts, Inc.

With a PEO, the employer can turn to them for clear direction, guidance and support. A
team of experts are assigned to assist the client in complying with all relevant
employment laws and regulations, on both the state and federal level.

These experts also help businesses comply with the multitude of employment forms,
documents, and employee management. They begin by reviewing the client’s current
corporate policies and employee handbook, and update them as necessary. By taking a
hands-on, proactive approach, clients enjoy increased protection against unnecessary and
expensive employment litigation.

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Included in this team of experts are trained Benefits
Specialists who are familiar with Health Care Reform and
can provide accurate, timely information and education.
These specialists invest the time to review the legislation
with brokers and industry experts, and can focus on
relaying this information to clients when changes to the
law arise.

Economies of Scale
As mentioned previously, economies-of-scale offer large employers tangible advantages
over their smaller competitors. Businesses with low payrolls and less than 500 employees
are often limited when shopping for cost-effective workers’ compensation insurance,
have fewer employee health insurance options and typically have less flexibility in
negotiating better rates administering these plans.

“ The management of costs through outsourcing is achieved
not only through cost-cutting measures, but also by
enabling companies to shed fixed operating costs in favor
of vendor offered variable pricing. ”
“Outsourcing Services in the Face of an Economic Downturn,”
Morrison and Foerster LLP.

In the PEO relationship, small employers gain access to the PEO’s pool of hundreds, or
even thousands, of businesses. By aggregating health benefits, workers’ compensation
insurance, retirement plans, and legal expertise, the PEO is able to offer these small
businesses systems and products at a much more competitive rate. Additionally, the PEO
has established relationships with large regional insurance companies and can provide
better plan selections with lower premiums.

11

Proven Systems and Robust Resources

Beyond negotiating rates and plans, PEOs maintain the internal resources to manage
routine employment tasks efficiently and cost effectively as the necessary talent and
infrastructure are already in place. When a small employer engages the services of a PEO,
they simply access these existing programs and can hit the ground running, thus reducing
start-up time and costs.

PEOs also offer programs that are very effective in keeping insurance premiums low in
the future. Many offer health and wellness programs, work/life balance incentives, and
discounts at local health clubs and gyms. Research consistently indicates that a healthy
and balanced lifestyle can have a significant, positive impact on the future cost of health
insurance premiums.

Similarly, in regards to safety and risk management, the PEO is able to implement
successful programs that results in fewer workplace injuries and more competitive
insurance premiums. Sample safety services include the creation of effective injury and
illness prevention plans, conducting on-site safety inspections, and offering employees
safety incentives to reduce the frequency of workplace injuries.

12

In Summary
The economy remains flat, fiscal uncertainty abounds, employment regulations continue
to grow, and small businesses are struggling to keep their head above water. Short of a
miracle turnaround in the immediate future, employers can expect much of the same for
the duration of 2013. As such, thousands of businesses currently outsource human
resources functions to Professional Employer Organizations. PEOs have the size, strength
and stability to weather these turbulent times, and enable small employers to ride along
with them.

PEOs assist small employers by:

1. Reducing employment risks through proactive HR support, compliance and training;
2. Providing economies-of-scale to reduce insurance premiums, cut employment
overhead and simplify administrative processes;
3. Guiding and directing business through Health Care Reform compliance;
4. Offering robust employee benefit and health care plans;
5. Helping create safe and productive work environments.

If you want to prepare your business for the future, it is time to take a long, serious look
at the PEO industry and uncover the benefits that await your company.

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About CPEhr
Celebrating its 30th anniversary this year, CPEhr is one of California’s leading Human
Resources Outsourcing and PEO firms. With corporate headquarters in Los Angeles, CPEhr
provides human resources solutions to over 75,000 employees throughout California, and
in over 20 states nationwide.

CPEhr began as a small payroll and HR provider, with 10 corporate employees. Over the
past thirty years, CPEhr has grown to employ close to 100 corporate professionals in the
areas of:

 Employment Administration
 Labor Law Compliance
 Management Training
 Safety and Risk Management
 Employee Benefits
 Retirement Planning
 Payroll and Accounting

Unlike many other firms, CPEhr offers a flexible HR Outsourcing solution, wherein clients
select the service model most appropriate for their organization:

The PEO Solution offers a consolidated solution providing payroll and tax administration,
access to large insurance products for benefits, workers’ compensation, EPLI, and a wide
range of human resources and employee relation services to meet your employment needs.

The HRP and HRO Solutions are a more flexible variation of the complete PEO solution.
These allow clients to pick a pick-and choose which services make the most sense to
outsource, and which they wish to keep in-house.

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Contact CPEhr
We encourage you to contact us and schedule a complimentary HR consultation.
In this no-obligation consultation a senior consultant will analyze your current human
resources practices and offer a customized HR Outsourcing solution.

Call us: 877-842-4987
Email Us: info@cpehr.com
On the web: www.cpehr.com
Corporate blog: www.cpehr.com/blog
Twitter: www.twitter.com/cpehr
Facebook: www.facebook.com/cpehr
Corporate Address:
9000 Sunset Blvd. Suite 900
West Hollywood, CA 90069
For more information:

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Preparing for the Future: How Professional Employer Outsourcing Will Help Small and Mid-Sized Employers Cope with an Uncertain 2013.

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Preparing for the Future: How Professional Employer Outsourcing Will Help Small and Mid-Sized Employers Cope with an Uncertain 2013.