TO PEO or Not to PEO?

The lure of getting all of your employment needs met, under one umbrella and for a flat fee, may sound attractive—but it may not be the best solution for your company. In today’s world, business owners face the challenge of maintaining compliance with complicated federal and state laws (especially in California) and managing their human resources and payroll programs. Is a professional employer organization (PEO) the right option?

A PEO provides outsourcing of payroll, workers’ compensation, human resources, and employee benefits administration. If elected, a PEO becomes the employer of record and then leases employees back under contract to the original employer. This practice is known as co-employment, employee leasing, or staff leasing. The client company continues to direct the employees’ day-to-day activities but pays the employee wages to the PEO, who in turn pays the employees.  
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PEOs charge a service fee for taking over the human resources and payroll functions of the client company. Bob Reynolds, cofounder of Innovative Business Solutions, says, “PEOs grew in popularity when employers who had a bad workers’ comp experience were being hit with double-digit rate increases year after year. A PEO offered a refuge where they could essentially start over and be rated with the rest of the PEO’s employees, thus reducing short-term costs.” 

Considerations
Following are several key areas to consider before switching to a PEO.

• If a company elects a PEO, all employees are transferred to the PEO’s payroll and the company is now “leasing back” its employees. By doing so, the company gives up control over what benefits are offered and will pay a premium. Paychecks come from the PEO, not the client. 
• The company loses control to select customized benefit plan designs, PEOs lure customers by stating “employees receive all the advantages of working for a small company combined with the quality-benefits and services usually offered only by big companies.” But PEO clients can only get access to the PEO’s standard packaged options. In some cases, the company gives up the option to choose plans that are customized to what its employees want or need.

In 2011, Barbara Wilson, a benefits consultant and broker of record for Creative Insurance Solutions, said, “There’s a certain restrictiveness to bundled solutions, namely that client companies don’t have the flexibility to pick the services they really need. All PEOs require clients to use their payroll administration services, accept coverage of their workers’ comp insurance and select from their benefits offerings, it’s an all-or-nothing proposition.” Although years have passed, her statement still applies today.

• A PEO may not necessarily decrease the time spent on administrative tasks. The allure of decreased administrative management is often replaced with different processes to report changes and actions to the external PEO. Your company will still need someone internally who’s responsible for collecting and reporting data to the PEO (payroll changes, non-exempt hours, new hires, terminations, benefit plan changes, commissions, bonuses, etc.) and using their HR/payroll software,  as well as fielding HR concerns. The PEO may offer a handbook template, but the client will have to read it, customize it and settle discrepancies with the PEO.
• A PEO’s one-stop shopping fee can be more expensive than keeping services unbundled if the business doesn’t fully need or use all of the PEO services. If a company conducts a cost-benefit analysis and calculates the individual cost to administer all the functions a PEO offers, it will probably find it’s paying a high premium to use a PEO. 
• In some cases, employers have moved to a PEO only to learn their expectations were not met and then have switched back to a non-PEO format (unbundled). Wilson cautioned employers to think about the process of termination before signing up. She stated, “Termination of the co-employer arrangement can be complicated. Some PEOs make it difficult by slowing down the process of transitioning out. “The client company needs to fully understand the requirements for severing the relationship because it isn’t always simple.”

A PEO may be helpful in certain circumstances, such as for companies with excessive workers compensation claims or with very little administrative support. Otherwise, it’s important to evaluate the cost, loss of control, limited choice of benefit plans and required use of the PEO database, systems and processes.

To make your decision, you can list each expense related to managing services (costs of payroll, benefits and so on). Ask the PEO to give you a breakdown of its fee so you can compare it with your current costs.

To successfully manage your company’s human resources and payroll functions, there are various options. Companies can either hire their own internal staff or can outsource all or just parts of it to a human resources outsourcing (HRO) company, such as HR Matrix. Use caution before you decide to put all your eggs in one basket with a PEO.