Is the professional employer organization option right for you?

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When consulting with clients in a risk management capacity, the PEO option comes into play from time to time. A professional employer organization (PEO) arrangement is best described as a co-employment relationship between you as the business owner and a third party as the PEO.

The general idea is that you can outsource certain processes or problems — like payroll, tax reporting, HR, workers’ compensation insurance and benefits management — in exchange for a fee.

There are a ton of different PEOs out there, many of which are geared towards specific market segments. Finding a PEO that specializes in your industry niche is the easy part. The harder and more important aspect is finding the one that aligns with your unique business needs. So, is a PEO right for you? Perhaps.

Let’s explore that by looking at some of the most common features offered by PEOs:

Payroll
At the heart of all PEOs is the payroll issue. Without transferring employees from your payroll to the PEOs, there is no co-employment relationship. To what extent do your employees become their employees? On paper, it will appear that your company has no employees. The PEO cuts the checks, issues the W2s, and reports your employees under their state and federal tax number. Payroll is the one thing that all PEOs have in common, and it’s also one of the biggest hurdles for business owners to overcome. Often, the business owner becomes uneasy about the idea of someone else controlling their payroll. While the employer does give up payroll processing, he or she keeps the direction and control of employees and the right to hire and fire at will.

Human resources
Think of everything that goes into hiring or firing an employee. Now think of everything in between. Many PEOs have a turnkey solution, or at least an aid, for solving these problems. Depending on the PEO, here’s what you can expect when outsourcing your HR operations: Recruiting, employee handbooks, orientation, termination assistance, legal advice, leave of absence management, drug testing, employment verification, performance reviews, manager training and a host of other tasks. Most PEOs will tell you that their services do not replace, but rather augment, your current HR department. If your company doesn’t have an HR department, it probably means that you as the business owner or other key employees are handling HR tasks in addition to many others. As a business begins to scale up, the need for an HR partner from a time and compliance perspective becomes impossible to ignore, prompting many businesses to take a harder look at the PEO option.

Insurance and benefit solutions:
Almost every PEO will offer some combination of workers’ compensation insurance and employee benefits, such as health insurance and 401K. For many employers, the cost savings associated with insurance and benefits becomes the biggest incentive for adopting the PEO model. The PEO achieves more competitive workers’ comp rates most often by self-funding the first $1 million to $5 million of any workers’ comp claim. The PEO essentially becomes the insurance carrier by setting the rate, administering the claims in house or by a third party, and performing most of the administrative functions typical of insurance carriers. On the benefits side, PEOs are able to leverage their economies of scale to influence pricing on health plans. The result is often a richer benefit at a more competitive premium along with more stable pricing year over year.

So far, we’ve covered some very broad strokes regarding what a PEO does and how it works. As with anything else, not all PEOs are created equally. While a PEO might be right for you, it might not be right now. If you’re considering a PEO option for your business here are a few questions that need to be asked:

1. Why am I considering a change and what are my other options? Many business owners are first introduced to the PEO option in the face of skyrocketing worker’ comp costs. If your comp rates have increased drastically over the last few years, it’s probably because your experience mod has been increasing, which is symptomatic of poor claims experience. Chase that rabbit further down the hole and we might find that you have a systemic problem with workplace safety or employee training. While the PEO option might stop the bleeding, it might not address the underlying issue. A PEO won’t deliver a culture of safety overnight, so it’s important to take an honest look at the root cause of your problems, and then find a PEO or other risk management solution that meets your unique needs. Entering a PEO should be a long-term decision that cannot be evaluated fully just a week before your workers’ comp renewal. If your insurance broker is presenting a PEO option alongside other standard market workers’ comp carriers, be sure to start the discussion early. I would recommend a review of PEO options at least three months before your workers’ comp renewal to ensure a robust period of due diligence.

2. Do I understand the pricing model and am I comfortable with the cost? PEOs generally charge a percentage of gross payroll or a per employee fee for their services. If your PEO fees are more difficult to understand or any less transparent than that, you might want to pause. Some PEOs are notorious for hidden fees, so you will want to look for complete transparency regarding fee structure in the interview process.

3. Do I know anyone else enrolled in this PEO? It’s critical to engage a PEO partner who understands your industry. Be sure to ask around, because if the PEO claims to be a leader in your industry there should be no shortage of references available. If there are any unique facets of your business, be sure to ask how the PEO addresses those issues. For example, if you are a union company you will need to understand how the PEO service agreement jives with your collective bargaining agreement. Another important reason to verify the PEO’s niche in your industry is because the PEO should be offering loss-control services that are tailored to your unique risk profile. You will gain the most from a risk solutions advisor who truly understands your processes and can develop specific programs to keep your employees safe.

4. Does the technology platform meet my needs and expectations? Since the PEO does not staff an administrative or HR professional at your location, some sort of virtual interface is required to pass information between your business and the PEO. Tasks such as uploading timesheets, onboarding new employees, making benefit selections and other HR functions are routinely performed through an online portal. It’s important to take that portal for a test drive as part of your PEO interview process.

The PEO option is becoming increasingly attractive as an alternative solution for insurance, benefits and various HR functions. When evaluating whether this option is right for you, don’t forget to consider your long-term business goals. A good co-employment relationship should save you time and money, and it should also transfer some of your risk as an employer to a third party. Your business goals should be the centerpiece of any discussion with a PEO. Don’t forget to map out where you want to be five and 10 years from now. Want to grow or start business in another state? Be sure your PEO can scale with you and follow your business no matter where you land. Thinking of selling your business? Be sure that the service agreement is either transferrable or cancellable. Want more time to develop your business rather than manage your business? Be sure that your PEO has a robust enough service offering to truly free you up to do what’s most important. When consulting with my clients on PEOs, I always remind them that this option works best when we do our homework first, then jump in with a wholehearted commitment to change.

— Nelson Aldrich is an insurance broker with WISG Insurance, headquartered in Turlock. He can be reached at [email protected]

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