Credit: Illustration: Peter Hoey

Home improvement company owners are usually not lawyers or human resources professionals. Most often they worked in sales, sometimes in installation, occasionally in marketing. So they're unlikely to be familiar with the laws governing sexual harassment, or what might or might not constitute grounds for a discrimination suit.

Fred Finn, president of Euro-Tech, a 15-year-old Chicago-area window and siding company, is a case in point. In 2003, Euro-Tech had already been through three lawsuits, including one for sexual harassment. Finn says the reason is simple: His focus was on marketing and selling windows and siding.

He was, Finn recalls, “just not able to get my arms around the idea of an employee manual, of rules and regulations.” And what he didn't know proved costly.

It's easy enough to make mistakes when handling human resources issues. Those with an entrepreneurial mindset are especially unlikely to want to be bothered with it. Human resources is “high-risk and low-return,” says Dan Donovan, a partner in HRSystems, in Toledo, Ohio. “Make a mistake and everybody's bitching.”

So in 2003 Euro-Tech contacted Administaff (, a professional employer organization.

WHO MANAGES HUMAN RESOURCES? When it comes to human resources, there are three choices: You can manage it yourself; outsource it to a human resources service provider; or you can hire an HR professional at $60,000 to $75,000 a year.

If you manage HR yourself, count on committing 20% to 25% of your time setting up and maintaining files, negotiating for and securing benefits programs, and processing paperwork. Apart from the time consumed, you also run the risk of blundering into a suit or public relations disaster through ignorance of employee law.

Not many home improvement companies have a professional human resources person on staff, since most employ fewer than 50 people — a threshold for making HR a full-time salaried position.

The alternative is to contract some or all of human resources to an outside firm. One of the most popular service providers is a type of company called a professional employer organization, or PEO.

At the moment, more than 100,000 companies in the U.S. outsource some portion of their human resources to one of about 700 existing PEOs. Businesses that use PEOs typically employ 15 to 17 people. The cost includes a one-time startup fee and, after that, monthly billings that amount to between 2% and 7% of payroll — though it can be as much as 15% of payroll — depending on workers' salaries and the services you need.

Payroll and taxes would be the minimum. You set the pay rates and report the hours, the PEO cuts the checks and pays the taxes. But PEOs also set up and manage retirement plans such as 401(k) accounts and will negotiate for benefit plans. Edie Clark, a spokeswoman for NAPEO (, the PEO trade association, points out that PEOs can typically arrange for less expensive health benefit plans because they're negotiating on behalf of not just one company but many. That's a big reason why small companies join PEOs.

But many small companies are clueless when it comes to the finer points of human resources. There, too, PEOs are useful.

“If they say: ‘We need a new sales manager,' then in this particular part of the country we will do the background search, the drug testing, the felony check,” Donovan says. “If someone's being fired, we make sure it's done correctly. And if it's contested, we will go to the hearing.”

One important difference between PEOs such as HRSystems and other service providers is that PEOs are co-employers, and are therefore empowered to hire and fire. Non-PEO service providers advise management, rather than act as managers.

NAPEO argues that PEOs afford employees better benefits and give owners more time to work on selling and marketing strategies rather than being tied down managing.