Until early this year, the Blank Park Zoo was a bit like “Animal Farm” — some employees were more equal than others. The zoo’s municipal employees, through the city’s buying power, had a much stronger benefits package than the administrative staff employed by the Blank Park Zoo Foundation.

In January, the foundation contracted with Merit Resources Inc. of Urbandale to serve as its professional employer organization, essentially outsourcing the human resources, payroll and benefits functions for its 14 full-time senior managers and staff.

“I think it’s very, very good,” said Pat Henson, the foundation’s board-staff liaison. “We have a small staff, and what Merit provides to us is the expertise and experience of a human resources staff that we couldn’t afford. Also, it combines our small numbers with Merit employees to provide a better benefits package.”

The Blank Park Zoo Foundation is among a number of Central Iowa organizations — and companies nationwide — that have chosen to forgo an in-house human resources department and instead access a team of professionals through a professional employer organization.

Client companies enter into a contractual agreement in which its employees become “co-employees” of the PEO, allowing it to handle all payroll, benefits and human resources programs, including the legal liability for compliance with employment laws.

About 700 PEO companies across the country provide a wide array of employment services and benefits to businesses, generating an estimated $43 billion in gross revenues annually. An estimated 2 million employees are now contractually co-employed with PEOs, according to the National Association of Professional Employer Organizations, which represents about 300 PEOs located in all 50 states.

Merit Resources, which says it is the only PEO based in Iowa, bills itself as a “fully comprehensive service,” said Christie Denniston, the company’s marketing director.

“Payroll links to human resources, which links to benefits,” she said. “It’s very hard to outsource your payroll when you need to make employee deductions for their benefits. It really fits together like a puzzle. To not do one piece of it makes it very difficult to do other pieces of it.”

Specializing in serving small businesses with between 10 and 100 employees, Merit contracts with employers in 38 states. Some of its niches include non-profit organizations, which are facing increasing pressure to operate like businesses, Denniston said, as well as companies in the services sector such as health clubs and pharmacies.

Merit currently serves approximately 5,000 co-employees in 225 organizations, more than half of whom work for Central Iowa companies or non-profit groups. To round out the services provided by its 35-person staff, Merit contracts with UBS Financial Services Inc. to provide financial advice for 401(k) plans, Wausau Insurance Cos. for workers’ compensation coverage and Coventry Health Care Inc. for its health plan.

Each Merit client has a “team” assigned to it, consisting of a human resources manager, a client services representative and a payroll representative. The team is supported by Merit’s nine-person human resources department.

Because they purchase benefits for a large pool of employees, PEOs are usually able to provide benefits that smaller companies wouldn’t be able to offer, or provide them at a lower price, Denniston said.

Additional savings come from not having to maintain a human resources professional on staff, Henson said.

“As a smaller organization, you don’t have a need for that every single day,” she said. “That’s why that works so well as an outsource. I would equate it to small companies using a CPA rather than having their own accounting staff – this takes it a step further with human resources.”

According to a national survey of NAPEO members, an estimated 40 percent of businesses in a PEO relationship said they were able to upgrade their total employee benefits packages as a result of their association with a PEO. Nearly 84 percent of employees in a PEO arrangement were offered a 401(k) plan, according to the survey, compared with an average of 19 percent for all companies.

John Tometich, who with his wife, Cindy, has owned the Two Men and A Truck moving franchise in Des Moines for the past eight years, said he discovered Merit when he was investigating outsourcing the company’s payroll function.

“I didn’t even know there were these things called PEOs,” Tometich said. “It fits much better into what I was looking for.”

Tometich uses Merit’s services for both his moving company, which employs about 50 people during the peak season, and his dry cleaning business, Crown Cleaners, which has about 15 full-time employees.

“The benefits they can offer are much more competitive than what I can get on my own,” he said. “They do all the payroll, all the filings. I really consider them to be my HR department. Hiring a human resources person, I feel, would cost me more money than doing it this way.”

An alternative to PEOs

Smaller companies that don’t need a full-time human resources department have the option to outsource a project at a time, or the entire department if they choose, says Mark Koller, president of HRConnex Inc.

The Lincoln, Neb.-based management consulting company, which entered the Des Moines market last year, specializes in human resources screening and placement, as well as consulting services for a variety of HR issues, “all the way up to actually running the human resources department,” Koller said.

In contrast to professional employmer organizations, which enter into co-employment agreements with their clients, HRConnex operates as a fee-based consultant to its clients. Koller estimates that about 10 percent of his company’s clients are effectively outsourcing all of their human resources functions to HRConnex, and he expects that to be a growing part of the business.

“Our subscription service seems to work for companies that wouldn’t need a full-time human resources department,” he said. Also, it allows a non-revenue-producing activity to be handled outside the company, “rather than offloading it to someone in the finance department where it’s not their primary skill set.”