There are two kinds of companies, ones that use a PEO and ones that don't. Companies that use a PEO have their reasons, and it's usually because it makes life easier, and they save money. When I meet a company, that doesn’t use a PEO it’s either because they have never heard of it, don’t understand it fully or have a misconceived notion of how it works.
For those of you are unfamiliar with PEO, a Professional Employer Organization and it helps SMBs streamline their payroll, gain access to Fortune 500 benefits, gain discounts on Workers’ Compensation insurance and HR compliance. PEOs do this by co-employing their client company's employees for payroll and employee benefit purposes. PEOs have been around since the 70’s and are regulated by the Department of Labor and beginning in 2016 the IRS.
Now that you understand the gist of how PEOs work for those of you, not in a PEO, let’s focus on the topic of this post. If you’re in a PEO currently are you getting the best deal and better yet how do you know? Most likely you encountered a PEO in one of these ways, you either were solicited by a PEO directly, someone referred you to one or you contacted a PEO directly to see how they could help you.
All of the above ways are perfectly sensible and kudos to you for making a smart decision but let’s look at each scenario. If a PEO contacted you directly, obviously they were only selling their PEO solution, so you had no point of reference. If you were referred by someone to a PEO, the same applies and possibly whoever referred you offered their expertise as to why you should join that PEO. Last but not least if you contacted the PEO directly it’s likely you were already interested and if you chose to join it was based on whether or not you were saving money based on your then current solution.
Luckily for us we have the internet and competition has never been more fierce, now you can compare pretty much anything you can buy with a myriad of other providers. When I started Dinsmore/Steele, my goal was to bring that same flexibility that almost every other industry has to the PEO market. As you can imagine, it was met with trepidation and misunderstanding. Even now that is strange to me considering you can compare cans of food, shampoo, airline tickets, mortgage rates, and even pet sitters.
It still baffles me when I met a group that is in a PEO, and they joined the first one they met and have never once compared what they are paying to the open market. Now I understand no one likes filling out multiple forms and crunching numbers, but often the hardest things are the best ones for us. So let’s look at how do you know if you are getting the best deal on your PEO and what to look for.
In a PEO your employee benefits should be provided through a National carrier, the premiums should be manageable, and the annual renewals should be as close to single digit as possible. In the rare instance that you are not using a PEO’s medical plan, the above should be the standard.
As well The PEO should offer a comprehensive suite of Ancillary coverages including dental, vision, life insurance, short and long-term disability and so on.
All PEOs charge administration fees for their services, that is how the PEO makes money. Administration fees range based on the size of a company, geographic area and what the PEO charges. One thing to know is that a PEO should never charge you a percentage of payroll for your administration charges, your administration fees should be transparent and not part of a bundled cost.
A lot of the big box PEOs charge a percentage of payroll for their administration charges and then bundle those fees together with taxes and Workers’ Compensation cost. It's completely absurd and is done so the PEOs can charge outrageous administration fees. If you are in a PEO that is charging a percentage of payroll for administration cost, do yourself a favor and let’s talk.
WORKERS’ COMPENSATION INSURANCE
If you are a white or gray collar company, then chances are your Workers’ Compensation insurance cost is already low and unlikely to be a driving factor in joining a PEO. However, if you are a blue collar company or have high-risk WC codes it very well could be the main reason you joined in the first place. Either way you should have a Pay as you go policy that is true to exact amount of employees you have per payroll. PEOs eliminate the need for year-end audits and paying upfront money to bind coverage.
If in the rare case any of the above isn’t occurring in your PEO, then it’s time to make a move.
PEOs will never replace or be a full-service HR solution, they aren’t designed to be one. They are built to complement or to create HR infrastructure. PEOs should keep you abreast of state and federal changes that are occurring and that are going to happen. So if you are a startup, a PEO should help you establish an HR infrastructure, including employee handbooks, policies and your “way” of doing everything employee related. If you are, an established company PEOs will take a look at what you are doing and ensure it’s compliant, as well as offer HR administrative support. Such as W2, I9 completion and so on.
If any of the above isn’t happening, or your PEO is charging you every time you ask a question, directing you to call centers- it’s time to look for another solution.
Overall PEOs make life easier for their clients and as with anything PEOs aren’t right for everyone. If you are not looking to attract and retain the best talent, or you don’t believe that your employees are your greatest asset, then a PEO won’t make any sense. A wise man once told me that if you have more than two choices, then you have the option to win. Considering there are over 700 PEOs throughout the US, it’s safe to say you have more than enough options to win.
Choosing the right PEO is not an easy task, but it doesn’t have to be a hard one either. The best advice is to compare various PEOs, base your decision on more than just the numbers and do your homework. Do a demo of their HRMS/HRIS system, speak to their existing clients and if at any time their numbers aren’t transparent then it’s time to move on. If you would like to do a review of your current PEO, drop us a note and we will be happy to help you.