Your construction company no doubt excels at its stated purpose. Where you might struggle is with some of the “other stuff” — such as recruiting and hiring, payroll processing, and employee benefits and workers’ compensation.
At some point, if these obligations become overwhelming and cash flow allows, you may want to engage the services of a professional employer organization (PEO).
Nature of the relationship
When you partner with a PEO, a “co-employment” relationship is established. You retain control over hiring and firing decisions and employee management, but the PEO acts as an employer for purposes of many administrative functions. This doesn’t mean you’re relieved of legal liability in these areas, though you may share liability with the PEO.
Employers of all stripes, including contractors, engage PEOs for various reasons. A PEO familiar with the construction industry should be able to competently assume the burdens associated with tracking hours, paying employees, withholding taxes, and handling other payroll administration and tax compliance matters.
The right PEO can support your existing HR department or take over the role entirely, assisting with everything from employment verification and drug testing to preparing employee manuals to “onboarding” and training. In addition, by pooling clients’ employees, PEOs can often provide access to medical, retirement and other benefits that are superior to and/or less costly than those your construction company can obtain on its own.
A PEO may help you with workers’ comp challenges as well, from providing insurance to resolving claims to designing safety programs. A well-run program should lower costs.
Using a PEO has its risks. For example, not all business owners are comfortable sharing certain decision-making responsibilities — such as selection of a benefits provider — with an outside party. Also, bringing in a third party to handle HR functions can sometimes create a culture clash with existing staff.
There may also be liability issues. For instance, if a contractor hires a new worker and delays reporting the new hire to the PEO, there may be a gap in workers’ comp coverage until the worker is added to the PEO’s employee list.
And, as noted, using a PEO doesn’t relieve your firm of liability for tax and other compliance obligations, so it’s critical to ensure that your provider assumes contractual responsibility for these obligations and that you oversee their performance. You’ll still need to track payroll-related job costs internally, which will entail some work.
Outsourcing payroll tax obligations can be particularly risky. You give up control over the process, but at the same time your firm’s “responsible persons” — including certain owners, executives and employees — remain liable for a PEO’s failure to collect and remit payroll taxes in many cases.
One way to avoid this liability is to use a certified PEO (CPEO). Unlike an ordinary PEO, a CPEO is treated as the legal employer of your workers and is solely responsible for withholding and remitting payroll taxes. The IRS provides information and a list of CPEOs at: irs.gov/tax-professionals/cpeo-public-listings.
When considering a PEO or CPEO, evaluate whether a prospective provider can offer the specific kinds of employment support you need. Are they a good fit for your construction company’s culture? Can they grow with you? Also, be sure to check a prospective provider’s client and professional references, as well as its track record of adherence to industry and legal standards.
Last, but not least, consider the costs. How much will you have to pay for the services? Does your budget allow for it? Your CPA can help you project the costs of bringing in a PEO or CPEO and calculate whether you’ll likely get a good return on investment.
When the time is right
If your construction business has had to slash costs recently because of the economic challenges related to COVID-19 or other reasons, engaging a PEO right now may not be the right move. However, it’s a business management strategy to keep in mind when the time is right.
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