What is a PEO? What Your Payroll Company Isn’t Telling You


There’s been a lot of buzz around employee benefits the last couple years.  Some of it, like the discourse surrounding the Affordable Care Act (Obamacare) cuts across political lines.  But, one benefits concept is leading the charge for companies that are seeking competitive advantage and cost controls- Professional Service Organizations (PEO).

The concept of PEOs began in the 1970s, when smaller companies needed a workaround for regulations that made it, up to that point, illegal for smaller companies to band together for the purposes of gaining big company buying power for health and other benefits.

This workaround was made possible by a simple concept- co-employment.  With co-employment, the insurance provider became the employer of record.  With co-employment, companies gained huge advantages, including human resource management, reduced worker’s compensation premiums and lower healthcare premiums.

What companies didn’t give up, despite alarmists stating otherwise, was control over their employees.  With PEOs, company managers still managed and leaders still led.

But how did PEO’s gain these pricing advantages?  They pulled together all of the “employees” and negotiated large company pricing from the largest insurance providers.

Fast forward to today and the advantages are even more obvious.  Small companies have a very difficult time competing for top talent when they have outrageous health care premiums and benefits that are viewed as substandard by applicants.

Beyond that, with the Obamacare mandate that employers must provide health insurance benefits to all full-time employees, the savings received working through a PEO are hard, if not impossible, to ignore.

Payroll companies were watching all of this and saw an opportunity.  They would provide PEO benefits to their payroll clients, increasing profits while also gaining a tactical advantage.  The further entrenched a supplier is, the more painful and expensive that moving to another supplier becomes.  Ask Oracle how this strategy of horizontal spread has benefitted them.

But, as your payroll company offers you PEO services, they aren’t telling the whole story.

Typically, a payroll company will build their own PEO.  But, building a new division doesn’t mean that any expertise a company might have will automatically translate to the new entity.

But, for the payroll clients, the losses will typically outweigh the wins.  Let’s look at a few of the losses that you can expect if you source your PEO through your payroll company:

1.       Payroll companies have limited Benefits and HR experience.  

2.      Payroll companies typically want to price their PEO as a percentage of gross payroll.  Do that math for a minute.  If you don’t add any employees, but you give your current staff a raise, you now pay more for the same benefits that you had prior to handing out payroll increases.  Taking it one step further, it means that you are penalized for being successful.

3.      Payroll company PEOs don’t offer customized solutions.  Your company is unique.  Shouldn’t your PEO fit your company, instead of the other way around?

And, companies and their employees aren’t afraid to speak their mind, when it comes to payroll company PEOs.  

So, if you don’t like the idea of lack of choice, no price competition and no customization, what are your options?

You can head into the marketplace and hunt for a PEO on your own.  There are currently about 700 PEOs operating, so how much time to you have to solve the PEO riddle?  Each PEO will have its own request-for-proposal (RFP) and its own process.  Some will have sales people and some won’t.  Some will only give you the ability to communicate via email and some will only work with you by phone.  This means that hunting for your PEO on your own is, by far, the most time-intensive option.

Or, you can submit a quote request via one of the online portals.  This doesn’t seem like a bad idea, since many PEOs will be looking at your information.  But, if you’ve ever applied for anything via a portal site, such as Lending Tree or Credit Card Yes, you know the downside of this method.

You will be called and emailed by dozens of PEOs.  Your voicemail will pile up and your inbox will be buried.  And, you’ll essentially be back to the first option, completing each PEOs RFP and following their process.

But, smart companies have figured out how to maximize their opportunity while minimizing the time that they spend hunting for the right PEO for their company.  They use a specialized broker.

With a PEO broker, you complete one RFP and the broker goes to work for you, based on their industry knowledge and understanding of your business.  The broker will typically return to you with 2 or 3 options that are a great fit.

You’re still in charge, but your broker will be able to guide you through the differences.  Plus, they’ll set up demos of the PEOs software tools and often an introduction to the team that would be responsible for providing your HR services and benefits.

Imagine how much simpler the process becomes when a broker who isn’t contractually obligated to any PEO goes into the marketplace and expects PEOs to earn your business.

Your payroll company won’t offer this level of service, in part because they can’t and in part because they don’t want to lose your payroll business.

But, as you consider your employee costs, which one costs more, the cost of preparing your payroll or the cost of your employee benefits.  And, not surprisingly, PEOs are often also better and handling your payroll needs.

Your PEO will work with you to build, launch and maintain policies that are good for your team and good for you.  Remember, the PEO has a vested interest in eliminating employee and employment issues, since they’re on the hook to handle them.

So, ask yourself, which way do you want to go?  You can do it yourself or accept the single solution that your payroll provider will offer.  Or, you can work with an independent broker who works for you, saves you money and delivers the best possible solution.  To us, the answer seems pretty simple.

Rodney Steele