The amazing adventures of Doug Hughes

Anyone whos ever hired employees for their business knows that it can be an intimidating hurdle to get past. Beyond the difficulty of picking the right person, youve also got a lot of details to take care of. Youll need to make sure you have workers comp insurance, that youre paying unemployment taxes, that youre withholding taxes, that youre doing everything legally within your state, and more. And, when you get into the reality of offering benefits like health insurance, it gets real expensive and difficult to manage very fast.

When Liz (Alagads reclusive VP and my wife) and I decided it was time to start hiring employees we were extremely constrained in what we could do. We knew we needed to offer a competitive salary and benefits. We also knew that we didnt want to have any physical offices. There were several reasons for this, but primarily its because we didnt really have any money.

I also knew that I didnt want to restrict the talent pool to my geographic area. Dont get me wrong; the Triangle area in North Carolina is home to some serious talent. But that doesnt mean everyone here would want to work for me or that Id want to work with them. By not having offices and allowing telecommute workers I could theoretically hire the best talent I could afford, no mater where they lived or worked.

But how to do this?

Our strategy at first was simply to muddle through it. Our first employee was hired in Texas. What we (meaning Liz) did at this time was to go to government websites in Texas and research what we need to do to hire people in Texas and learn what taxes we needed to pay, etc. At this point we also made use of QuickBooks payroll service and, collectively, it worked well enough.

We also used a little known tax strategy to offer benefits. Alagad wasnt big enough to offer a group plan that was affordable so we encouraged our employees to purchase their own health insurance. The company was able to offer a stipend towards this insurance pre-tax.

This approach worked well enough when we were very small, but broke down as we hired more employees in different states. The problem is that each state has different requirements and laws. These quickly became stressful and difficult to manage. For example, we once hired an employee in California. To the best of our research, we determined that to hire someone in California you had to register as a franchise with the state and have a physical address in the state. In all honestly, Im not sure that we ever did get this sorted out correctly.

Around this time we began a good friend of mine was struggling with the same challenges and mentioned that theyd been talking to a company called Administaff. A little research into Adminstaff taught me that they are a class of company known as a Professional Employer Organization, or PEO. A PEO is a class of company that essentially hires your employees for you and leases them back to you.

Administaff already has the ability to hire employees in all 50 states. They also already have thousands of employees. This give them economies of scale that I cant hope to match with only a handful of employees. They can get the best rates for group health insurance, workers comp, and other expenses. Additionally, they have people specializing in all sorts of HR-related details. For example, they can give you guidance through difficult employee situations like hiring and firing to help insure that youre following the letter of the law.

Additionally, they have all sorts of online services to help you find information and manage your employees. They also many optional employee benefits like 401K plans, college savings plans, adoption assistance, and more. Beyond that, they offer their clients all sorts of free value-added services like recruiting. This is really useful if youre trying to hire someone for a job thats outside of your network. To explain, I know a lot of programmers and its easy for me to hire them. But, if I need a good sales person or user experience person its a lot harder for me to find them. Administaff recruiters will do a lot of the grunt work in this area for you.

So, imagine how stunned I was when we asked them what the costs would be to hire on my entire staff. At the time, I think we had maybe six or so people for a total annual salary of more than a half million dollars. I figured the service would be really expensive. I was wrong. Because of the relatively small size of my staff combined with their relatively high annual pay, Administaff could give us a really good rate.

The way Administaff works is they will propose to you a percentage that gets tacked on to your payroll. This rate is somewhat negotiable. I cant remember our final rate, but lets say for the sake of argument it was 17%. We quickly realized in what a fantastic deal this was! When we added up just our hard costs of hiring employees on our own it cost way more than just hiring Administaff. This was true without even adding in the cost of Lizs time.

Thats right. It cost less to get the vastly superior services of Administaff and all of the benefits they offer. And it was a lot easier.

Now there were some challenges to working with firms like Administaff. First off, no mater what, youve got to pay your taxes. Small businesses are tempted sometimes to skip paying taxes so that they can make their payroll payments. The logic is pretty easy: If I dont pay employees they walk. If I dont pay the government Ill get spanked later. Its not really a hard decision to make. Personally, I did that early on when we were handling employees manually, but you cant get away with that with Administaff.

Administaff isnt the only PEO in town. There are lots of other PEOs out there. In my research it seems that a few years ago there was a real boom in this space and many companies came onto the scene very quickly. But, not all PEOs are made equal. Apparently there are a fairly large number of PEOs that charge a smaller percentage than Administaff. However, these cheaper PEOs may not offer the full range of services that Administaff does and they may not be as stable either. There were a number of PEOs that went belly-up back around 2008 leaving their clients high and dry.

So, if youre struggling to figure out how to manage hiring employees in your state or any state, how to offer competitive benefits, and making sure youre doing it all legally, you should really talk to a PEOs. I cant personally speak for any other PEO, but I can say that Administaff has been central to Alagads success.

If youd like to talk with someone at Administaff please let me know and Ill connect you. I do get some sort of referral benefits when I send clients to Administaff, but I assure you I didnt write this article for that purpose. But what the heck, if theyre offering it, Ill take it.

Comments on: "Don't be Scared of Hiring out of State Employees – Here's how Alagad Did It" (11)

  1. @Doug,
    Thanks for sharing your experience with Administaff. I’ll definitely keep this in mind for our next hire.


  2. Isn’t the timing of this post a bit off, considering that you had to dump us all just a short while ago? It sounds more like a paid ad for Administaff than anything else.


  3. @all – I suspect that the so-called Former Alagad Employee isn’t really a past Alagad employee at all.

    Anyhow, I’m trying to start blogging more as a part of my changing role at Alagad and I’m trying to incorporate more business topics rather than just pure development topics. I thought people would want to know about this. In the past I kinda kept it to myself because I felt it was an advantage I had. But why not share my experience with it?

    And, to address the concern directly, no, I wasn’t paid by Administaff to write this. And no, they don’t even know I wrote this.


  4. As somebody who did some recent contract work for Alagad, and is fortunate enough to know all of the employees pretty well, I’d concur that none of them would have left that comment.

    If any of them felt that way (which I also have a hard time imagining), I’d wager that they’d be mature enough to contact Doug directly with their concerns.

    FWIW 🙂


  5. Thanks for the support, Charlie.


  6. I suppose there is some venom… for Alagad or for you doug…. cant figure which but I’d nip it in the bud


  7. I’m doing my best and that’s all I can do.


  8. Hello Doug,

    You are correct, administaff is a great company. However, have you look into a PEO that charges a flat dollar administrative fee instead of a percentage of payroll? It’s is much easier to understand your true cost vs savings . I work for Paychex, which is another national and publically traded company in the PEO market like Administaffs.


  9. Sorry for the late response, but as a former employee I agree with Charlie that this comment was from someone who doesn’t have any real details on the enter workings of Alagad.

    Good to see the business content on the blog. Keep it coming!


  10. I realy liked this angle that you have on the subject. Certainly wasnt planning on this at the time I begun searching for tips. Your ideas were totally simple to get. Im glad to find that theres an person here that obviously understands precise what its is talking about.


  11. Administaff’s ability to get the best rates for workers comp insurance is a huge benefit to any small business owner. Although the economy is struggling, workers comp insurance costs keep rising. There are fewer employed workers paying into the system and medical costs keep skyrocketing. It’s a challenge to find good rates and a bonus of using Administaff.


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