In an environment where employers are searching for answers when it comes to recruiting and benefit costs, PEOs should certainly be under consideration.  There are almost 500 Professional Employer Organizations nationwide that represent 4 million worksite employees.  Yet that only represents about 15% of employer groups with 10-99 employees.  PEOs have grown in popularity, however, after 20 years of working with them it is still surprising to me that many employers do not have a great understanding of how they work. Although they can be somewhat complex, they do hold an important place in the employee benefits landscape and employers can find great value in the services they offer at times.  Many organizations have kicked the tires on PEO at some point, perhaps by entertaining their current payroll carrier.  The trouble with this approach is if they weren’t a fit for that particular PEO, it can sour them from trying others.  Obtaining accurate proposals require a significant amount of data to be collected.   If the results are not as promised or not aligned with what their needs were, it can lead to frustration and resistance to trying again.  Like any other goods or services, we buy, PEOs require a proper amount of due diligence. They differ greatly when it comes to cost, benefits, and HR services. Without a full exploration of the marketplace, there is a high likelihood that an employer won’t get a true depiction of how they can benefit from them.  When doing an evaluation consider using a Broker that has experience with many PEOs and has extensive knowledge of HR and benefits. They can assist with negotiations and a financial analysis comparing costs and services.

What you need to know

PEOs are multi-employer organizations that use a co-employment model to partner with their clients. Typically, they provide payroll services that are mandatory to work with them.  In addition, you will have access to their benefit platforms, technology, Workers Comp., and HR Services.  Most PEOs get paid based on a % of the total payroll or a per-employee per-month fee that can range from $75- $175.  Before starting your search it’s important to determine what your goals are and your most glaring need that is driving the conversation.  Some of our clients state they want a partner that they can outsource HR to because they do not have a dedicated person.  Others are looking for better pricing on benefits, particularly Health Insurance.   PEOs can be vastly different when it comes to the HR services and benefits, they provide.  Once you have assessed your needs it will be easier to narrow down your choices.  

Potential Benefits 

Scale on Health Insurance Costs–

Most of our clients want to look at PEOs to find solutions that can control high health insurance costs. In most cases, they work with large national carriers to provide such benefits as Aetna, United, and Blue Cross Blue Shield.  PEOs pool small businesses to get scale on costs so the potential for savings can be significant, especially when compared to small-group health insurance plans. 

Compliance– 

PEOs provide standardized guidelines that help small businesses stay compliant with payroll and employment laws across many jurisdictions.  This would be difficult for a small employer to manage on their own, especially at a time when more employees are working remotely, and employers have started hiring in states where they haven’t before. 

Human Resource Assistance– When it comes to HR, many small organizations do not have a dedicated or experienced person. With staffing laws being more complex than ever and constantly changing, PEOs can be a valuable resource to assist employers with recruiting and retention. PEOs also provide Employee Practices Liability Insurance that many employers do not have to protect from discrimination lawsuits.

Things to Consider

Co-employment – When working with a PEO you will be co-employing your staff using the PEO’s FEIN. You still control their day-to-day activities but their paychecks will have the PEO logo on them and your quarterly taxes will be filed on the PEO’s 941s.

Benefits– Your health insurance costs will be rated by the demographics and claims experience of your group.  Younger groups will typically receive very favorable rates initially. You may be asked to complete Health Questionnaires at the onset and many PEOs use technology-driven tools to determine if there are potential high claimants in your group.  If you are a small organization even 1 high claimant can impact your rates significantly which can impact future renewals.

Fees– As mentioned earlier PEO’s charge, based on a % of payroll or PEPM. If you are a smaller organization with high-income earners you may benefit from a PEPM model.  If you are larger but with lower wages employees, the % of the payroll model may work in your favor.  Understanding how this works can significantly impact your costs.

As with most PEO’s are not one size fits all.  There is much to consider before determining if it is right for your organization. Employers should at, least be taking them under consideration if they want to explore all opportunities to improve their culture and staffing needs at more affordable costs. Going about this process in the correct way will greatly increase the chances of success.