Firms thrive on headaches

What is a professional employer? A professional employer contractually assumes employer rights, responsibilities and risks of a company’s workers. Professional employers essentially assume varying human resources duties of a business - from payroll, taxes, workers’ compensation insurance and health benefits to retirement benefits, hiring and firing. Employees are transferred to a professional employer’s payroll and sort of leased back to the business where they work. The business is called employee leasing.

Kermode isn’t a temporary worker. He was hired by Vuich and has been with the firm for about two years. Kermode is one of a growing number of employees whose paychecks, taxes, workers’ compensation, health insurance and other benefits are handled by professional employers.

The industry, known as employee leasing, provides human resources services for mostly small- to medium-size companies. Services vary. Besides payroll, taxes and insurance, services can include safety training and compliance, hiring and firing, 401(k) plans and employee assistance programs.

Using a professional employer is often a way of avoiding high workers’ comp rates, obtaining better benefits at lower costs, re-employing valuable workers who have retired, or eliminating human resources hassles.

"It basically keeps a company clean of doing the mundane things of human resources, and it’s a nice deal for some smaller companies that aren’t able to get some of the 401(k) or cafeteria plans larger companies are able to," said Vicki von Stroheim-Seay, general manager of Staffing Partners, a Honolulu-based worker placement agency. Staffing Partners has provided payrolling services since 1992 and has about 35 employee-leasing clients.

Employee leasing has been around for about 20 years, but has only grown popular in the last few. According to HR Logic Inc., the nation’s largest privately held professional employer organization, the roughly $18 billion nationwide industry is growing 20 percent to 30 percent annually.

HR Logic, a 4-year-old company, said about 3 million U.S. workers are "co-employed" by professional employers, a number expected to grow to 10 million in the next two years.

Paperwork reduced

According to U.S. Small Business Administration statistics cited by the National Association of Professional Employer Organizations, the average small business spends 7 percent to 25 percent of its time handling employee-related paperwork. That paperwork, plus regulation and tax compliance work, costs firms with fewer than 500 employees $5,000 per employee annually on average, compared with $3,400 for larger firms.

Some businesses in Hawai‘i that co-employ workers with professional employers: All-Star Cafe Arthur’s Limousine Service Hawaii Agriculture Research Center Hawaii Vinyl Fencing Inc. Kauai Electric Quick Qourier Starwood’s W Honolulu-Diamond Head hotel Tesoro Hawaii U.S. Army

Additionally, as administrative and regulatory burdens increase along with a growing small-business sector, employee leasing is expanding rapidly.

In Hawai‘i, there are at least 700 businesses outsourcing human resources work for more than 5,000 employees with an aggregate payroll of $100 million, estimated Barron Guss, president of Hawai‘i-based Altres, which has assumed the payrolls of 350 local businesses employing about 4,000 people.

Guss and other colleagues say the industry has grown here largely because so many businesses faced pressures to cut costs and concentrate on core operations to survive the poor local economy of the last decade.

The growth, they add, has been surprising because state tax regulations apply the 4 percent excise tax to gross payrolls, insurance premiums and other outsourced services - stifling employee leasing.

Partly because of that, Guss said, locally founded Altres has expanded its professional employer business faster on the Mainland where the company co-employs 12,000 people, or three times what it does here.

Neither of the nation’s two largest professional employers, HR Logic of Boston or Staff Leasing Inc. of Bradenton, Fla., do business in Hawai‘i. But other firms, both local and national, have been expanding recently.

Carole Kooy, a former construction comptroller and Maui accountant, unwittingly took her first step toward starting Kilakila four years ago by helping a client. Since then, her five-person business has assumed 400 employees of about 50 companies with an aggregate payroll of $4.6 million last year.

Kooy said the business evolved from a relationship she had as an accountant. One of the construction companies for which she did year-end bookkeeping couldn’t afford a $40,000 workers’ comp deposit that had ballooned because of a big project the year before.

"They would have had to go out of business had they had to come up with that kind of deposit," she said. Kooy transferred the construction firm’s employees to her company, which required a lower workers’ comp deposit.

What she did was essentially become a professional employer, and other Maui contractors transferred employees as word spread.

"I thought I was just providing an accounting function for my clients," she said. "They thought of it as an extension of their business. I didn’t even realize there was an industry."

Business expanding

Business grew as the Maui economy, especially the construction industry, improved over the last few years.

"People are building so fast or taking on new clients that they really need help in the organization of their business," Kooy said. Recently, Kilakila has taken on clients on Kaua‘i, Moloka‘i and O‘ahu. Big Island business is next, she said.

Kilakila predominantly works for companies with fewer than 10 employees. Kooy does not perform hiring or firing, but does offer a 401(k) in addition to payroll, workers’ comp, and other benefits. Fees are based on a sliding-scale percentage of the gross value of services processed.

A more recent entry to human resources outsourcing in Hawai‘i is ADP, also known as Automatic Data Processing Inc.

A $6 billion New Jersey-based company with 500,000 clients, ADP opened a local office about six months ago and has contracted with more than 100 clients. Globally, the company provides a variety of services, including employee leasing. Locally, ADP does not co-employ client workers. Instead, it sells payrolling and other human resources services without assuming responsibility for client employees.

"We help employers manage the employee in every way," said Craig MacCleverty, ADP’s area sales executive. ADP viewed Hawai‘i as one of few untapped markets with a mature business community, according to MacCleverty, who said human resources outsourcing can be beneficial for companies in any industry.

Guss of Altres, who likes to see competitors spreading an awareness and understanding of the business, notes that it is often hard to convince local companies of the benefits of relatively new management concepts such as employee leasing.

Indeed, the arrangement can unsettle employees if explained incorrectly. "I had one client who told employees they were being fired and hired by (Kilakila)," Kooy recalled. "They’re not fired and hired. We usually don’t even meet the employees that we provide services for."

Explained Jackie Leckie, office manager for Vuich, the company using Kilakila to co-employ Kermode, the environmental scientist: "Even though they are our employees, Kilakila employs them."

Leckie, who is administratively employed by Kilakila, too, said the partnership saves the Pukalani firm money on workers’ comp and frees her up for other work.

"Doing payroll is a real time-consuming thing," she said. "To have them (Kilakila) do that helps me. It takes a lot of burden off me."

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