In the wake of the post-pandemic “great resignation,” with unemployment stubbornly clinging to record-low numbers, stretched-out companies are increasingly turning to professional employer organizations and other outsourced labor providers. Some reports place the global value for outsourced business services at more than $250 billion in 2022, with an expected annual growth rate of nearly 10% through 2030; sparking debate about whether the traditional employment model will disappear. NJBIZ spoke with a number of experts to get their take on this important issue.
“The workplace will continue to evolve, and require agility to meet changing needs,” according to Kristen Appleman, senior vice president at ADP TotalSource, a PEO that services more than 20,000 small and mid-sized businesses across the country, employing a total of more than 770,000 workers. A PEO, or co-employer, typically becomes the employer of record for an entire company, taking on payroll and benefits administration and other tasks.
“The traditional employer model will no doubt continue, but more and more SMBs are turning to alternative employer models, notably co-employment,” Appleman added. “With SMBs being the backbone of the U.S. economy, employers will look for ways to grow and be successful, while addressing the complexities of changing workforce needs.”
She explained that co-employment “is a contractual relationship, in which a business and a PEO share certain employment responsibilities. This arrangement is advantageous to organizations that want to mitigate some of the costs and liability associated with being an employer. Outsourcing with a co-employer also allows owners and executive leaders to focus more of their efforts on growing their business and less on HR.”
Initially, business owners sought a PEO to alleviate payroll and other administrative tasks, she noted. “But the rise of social media and a 24/7 news cycle has put employers under greater public scrutiny, causing them to look to their co-employment partners for assistance with more than just HR. TotalSource answers the call and helps our clients develop new business strategies, support diversity and inclusion initiatives, and mitigate the workplace effects of COVID-19.”
Organizations that enter a PEO relationship maintain ownership and control of their enterprise, while “the PEO typically focuses on employment-related areas – such as payroll, HR administration, taxes associated with employment, and benefits,” Appleman said. TotalSource handles a variety of industry clients, but the company’s main concentration is in the professional services segment, she noted, encompassing verticals that include business, consulting, law, accounting, IT/computer programming/technology, specialty trades, real estate and light manufacturing.
And as the overall business environment evolves, ADP TotalSource has been gearing up its own operations to keep pace. The use of data is becoming even more important and a “competitive edge,” or the ability to use employee-related data to make better business decisions, is even more important today, noted Appleman. “With this capability in mind, ADP TotalSource has invested in further capabilities for our clients to make informed decisions. Data driven visibility into a workforce, which is a company’s largest expense, can help a business make decisions and align HCM (human capital management) strategies that will positively impact their bottom line.”
As an example, she pointed to “being able to instantly access your turnover rate in a dashboard format as well as have access to the reasons for that turnover in one spot. In addition, using sophisticated analytics, [predicting] the turnover probability rate for your company so that you can plan for future changes in your workforce by answering the question ‘what are my hot spots of potential turnover and why?’”
The traditional employment model “has its challenges, particularly when you consider the complexities of labor law, but the traditional model does have a future, along with PEOs and others,” said David Pearson, senior vice president of people and culture at ExtensisHR, a PEO and human resources outsourcing provider. Under that model, the client business remains the employer of record, while the HRO typically provides day-to-day HR support for specific areas like payroll and tax administration, compliance and risk management, recruiting and onboarding, and other functions.
The myriad layers of federal, state and local minimum wage and other regulations can easily trip up a business, Pearson added. “They have to be able to live and breathe HR. A PEO or HRO can take on that burden and let the company focus on its core competencies.”
A Clifton-based manufacturing firm that was accused of wage-hour violations called in ExtensisHR to help sort things out, according to Pearson. “The controversy predated our relationship with the manufacturing company, but we investigated it and determined that the issue was sparked by an employee who did not utilize the time clock properly,” he said. “I met the [Department of Labor & Workforce Development] representatives at the manufacturer’s site and, after a few hours, was able to minimize the scale of the violations. Audits like this need to be successfully resolved, since their impact can go beyond the financial pain, and affect a company’s ability to attract and retain employees.”
More than 1,000 companies, “predominantly in New Jersey,” are signed with ExtensisHR for a variety of services, according to Pearson. “We primarily take on professional services firms like legal, CPAs and marketing, although we do others, including light manufacturers,” he added. “Our practices are evolving. For example, the labor shortage is real, so we now use artificial intelligence to scan job boards and screen candidates, which we then pass on to our clients who determine whether they want to move forward with particular candidates. We’ve also upgraded our benefits programs to help attract and retain qualified people.”
The trend toward outsourcing is likely to continue, since multiple changes in the business environment have spurred “many companies to move away from traditional approaches to managing talent to more open models,” according to Brenda Ghitulescu, associate professor of Organizational Behavior and Management at the School of Business, The College of New Jersey. “The traditional model requires systematic investments, typically extended over decades, in employees who stay longer with their organizations, are more attached because of these investments, and are less likely to leave. Companies using this model make significant investments in employee development and provide workers with increased stability with regard to earnings, which helps organizations to retain talent. However, in the context of increased uncertainty, unpredictability, and pace of change over the last few decades, the world of work has seen an increasing trend in the direction of using more open-talent models.”
Still the traditional model of employment, which places emphasis on employees who are permanently attached to the company, “has clear advantages for organizations, which have been documented extensively by organizational scholars,” she explained. “Consider the fact that compelling evidence indicates that simply copying what others are doing or outsourcing important processes cannot create long-term success. Instead, competitive advantage grounded in skilled and committed employees is difficult to imitate and results in long-term organizational success.”
Businesses that invest “in employee training and development and creating mutual commitment and long-term expectations for the employment relationship have been shown to lead to more engaged, attached, and committed employees,” said Ghitulescu. “When employees see that the organization invests in their development and cares about them, they are more willing to reciprocate and put the extra effort to contribute more meaningfully, thus increasing task and innovative performance. This model results in lower employee turnover and higher return on training and development costs, by having highly skilled employees who do their work better and stay with the company longer, which ultimately leads to long-term, sustainable competitive advantage.”
But the so-called open talent model, which is generally defined “by project-based or temporary work performed by workers who are not permanently attached to the organization,” can provide needed flexibility, she observed. Advantages include the ability “to adapt to shifts in labor demand and to access diverse skills that are not available internally. This also includes freelance workers who were part of the Great Resignation during the COVID-19 pandemic and desired more flexibility in employment, including remote work.”
But she cautioned that the open model of employment “is less likely to build the high levels of employee commitment and the engaging, motivating and bonding organizational culture needed to attract and retain talented employees who will deliver a sustainable competitive advantage to the organization.”
Editor’s note: This story was updated at 11:54 a.m. ET on May 8, 2023, to correctly this quote to Brenda Ghitulescu: “Businesses that invest ‘in employee training and development and creating mutual commitment and long-term expectations for the employment relationship have been shown to lead to more engaged, attached, and committed employees.’v