10 Critical Tips to Know If You’re Considering a PEO

“So, what do you do everyday?” If you’re a business owner you probably get that question a lot from friends and family.

But if you answer them by referencing all of the time you spend on administrative tasks like HR, bookkeeping and payroll then you’re probably not optimizing your time. An article in First Round Review noted that 70% the time that CEO’s spent on work was sub-optimized.

Many small business leaders turn to a PEO to try and tackle their admin needs, only to realize later that a PEO is a platform – not something that will actually do the work that you need done. Imagine going to a library and asking a librarian to write a book report for you.

We believe that PEOs (Professional Employment Organizations) can be a good option for some businesses, but are not necessarily a good option for every business. We also believe that many business leaders get involved with PEOs after a flashy sales pitch, but once they engage with them, they aren’t sure how to get the most out of the relationship – or where the pitfalls are. And believe us, there are a bunch of pitfalls.

Here are 10 critical tips to know before using a PEO:

1. Check the PEOs Blanket Insurance Coverage

PEOs typically offer blanket business insurance policies for their clients. This coverage isn’t always with the best insurance carriers nor does it offer the most comprehensive coverage.  You may end up having to purchase additional coverage in order to account for gaps or high deductibles. Keep a close eye on these policies, as well as their deductibles, exclusions, and “fine print.” For example, keep an eye out for any requirement(s) that you notify the PEO within a certain timeline if you suspect a potential claim. Note that if you don’t notify the PEO within that timeline your coverage could be affected.

2. Review the PEOs EPLI Policy

Similar to #1 above, many PEOs offer blanket Employment Practices Liability Insurance (EPLI) coverage. EPLI covers claims like wrongful termination, sexual harassment, and discrimination. However, the EPLI policies that PEOs procure and provide for their clients often have deductibles that are extremely high. Sometimes the deductibles are what the cost of a common EPLI claim is! If this is the case, you might as well not even consider yourself as having EPLI coverage – or you should consider purchasing additional EPLI coverage on top of what the PEO provides. Review the PEO’s details of your coverage limits or ask about them during the engagement phase.

3. Consider the PEOs Workers Compensation Policy

PEOs often provide workers compensation coverage to their clients. Small businesses should always make sure that their employees are classified correctly. We regularly hear from PEO users that PEO have incorrectly classified their employees because they don’t know any better. You should also watch out for high administrative fees associated with the PEO’s workers compensation coverage. Companies using a PEO should also review when they have to pay workers compensation premiums (e.g. Pay premiums up front and be audited later vs. a Pay-As-You-Go policy). If it is the former, you’ll need to undergo a workers comp audit at year’s end and possibly need to pay more premiums. Ask your PEO who is expected to perform this audit.

4. Try to Negotiate Fixed Health Insurance Rates

PEOs can sometimes offer small companies competitive insurance rates. These rates can be equal to or better than what those companies could get if they went through an insurance broker who works directly with insurance companies. However, small businesses make sure that their PEO don’t pull a “bait and switch” on them and increase rates or administrative fees after the company’s first year with the PEO. Companies should try asking for multi-year rate guarantees whenever possible (it probably wont be) or they should ask about “Honeymoon Rates” and what typical renewal rates look like for companies that are of similar size to them. You may even want to talk to a health insurance broker to see what they’re quoting companies that are looking to leave ___________ PEO (e.g. are they seeing 10% increases, 20%, 30% or are insurance carriers not even wanting to quote?).

Small businesses should also be cognizant that if they decide to leave a PEO, their new insurance could be rated based on the company being a “large business” (because of their claims experience with the PEO). And once you let a PEO know that you’re leaving them, don’t expect anyone at the PEO to be as helpful as they were when they were signing you up for their services. 

5. Review PEO Fees, Markups, Upcharges, and Splits 

PEOs tend to mark up their product and tack on all sorts of fees, like set up fees, admin fees, usage fees, and enrollment fees. Sometimes they will bundle these fees into other costs and sometimes they will put them right in front of your face in their proposal or contract. These added fees often go straight into the pockets of either the PEO salesperson or the PEO itself.

They will usually charge a base fee for their services, plus a fee per employee per month (PEPM). The PEPM fee can be a flat amount per head (for example $49/mo. per employee), or a percentage of wages paid (for example, 2.5% of wages paid in a pay period). For a company of 20 employees on a PEO, a $400 base fee + $1,125 PEPM fee, you have a standard regular payment of $1,525 per month. Hidden fees can also occur, for example when off-cycle payments need to be made.

Negotiate these fees down as much as you can and wherever/whenever you can. It’s also important to note that as businesses get larger in size, the fees start to become exorbitant. E.g. your large business suddenly becomes a cash cow for the PEO. But you don’t get anything “more” for those fees. Another example, if you paid $1,525 when you were the small company above and grew to 45 employees in a year, your monthly fees become $3,150. That’s roughly $38,000 a year, the same as a junior professional.

In addition to pocketing these fees, the PEO may be getting commission payments or overrides on the insurance you have with them. They may get a fee split on 401k fees or vendor partner kickbacks. They may be (legally) taking additional money out of your pocket without you knowing by engaging in something called scooping.  Lastly, note that many PEOs are so large that they tend to not budge on modification requests made regarding their service agreements. So, consider this before you hire an attorney to review the PEOs contract.  

6. Consider the PEO’s Resources 

We often hear from companies who review and use PEOs that they chose to go with them because of the amount of resources that the PEO has. That is kind of like going to a library because of the number of books that the library has (can you tell that we like ‘library’ analogies)? Try to determine which resources your company will need from the PEO. See whether or not you’ll actually use them. Check whether or not the resources are effective and/or applicable to your company, industry, location, and line of business.

Access to a virtual training library is great, but only if the trainings aren’t from 1999. And these days you can access something like Lynda.com pretty quickly. Access to a template document library is only valuable if those templates are up to date and applicable to your company (And if you understand how, when, and why to use them). What we’re trying to say here is this: you might only use 15% of what’s available, but you’re paying for 100% of the service. Think about the return on your entire investment when considering a PEO. 

7. Rethink Co-Employment 

Companies should make sure that they understand the co-employment relationship that exists between the PEO, the company, and their employees.  Remember, with co-employment, the employee is employed by the company AND the PEO.  They should make sure that they are able to explain this to employees as well as candidates they are recruiting.  While co-employment isn’t necessarily a bad thing, there can be downsides to it that aren’t immediately recognizable.  This could include having to explain to employees why their W-2 has a different company name on it. And why employee reference checks or mortgage verification requests can run into to issues related to who the employer of record is. And why an employee’s offer letter has the PEO’s name on it.  

8. Review PEO Usage

In order to get the most out of a PEO, your company MUST have a trusted employee managing and interacting with the PEO. This person will need access to salary and payroll information. And we’ve found that this designated person usually has very little experience (or interest in) payroll, benefits, and HR. This setup can sometimes lead to disaster, or at least significant frustrations on the side of the company.

Many small businesses think that they can sign on the dotted line and then never have to touch payroll, benefits, or HR again. This is definitely not the case. A PEO is only as valuable as the time that you are willing to devote to it. A good rule of thumb is that you should only consider using a PEO if you plan on using 80% of the services that they offer. This includes using their training modules, applicant tracking systems, expense management systems, and talent portal(s).

9. Screen the PEO’s Vendor Partners 

Different PEOs use different vendors for their services (like 401k, insurance, HR materials, perks, and discounts, etc.). Companies that are using a PEO should understand who the PEO vendor partners are. Find out what sort of value these can provide. Sometimes these vendor partners only provide value to companies who have employees that are in certain locations. What good is a discounted membership to a Boston-based gym chain or a bike share in New York City if the bulk of your employees are based in California and Texas?  What good is a PEO with advantageous insurance rates if your employees can only access an expensive 401k plan that eats their gains in admin fees?   

10. Review the PEO Limitations for Yourself

When engaging with a PEO, make sure to ask them what sort of limitations they have as far as their system and service are concerned.  You may get an honest response and you may not. You may get an informed response and you may not.

Some PEOs can run international payroll and some can’t. Some will not touch independent contractor relationships like processing payments for 1099s and consultants, and some will. We’ve found that some PEOs will not touch business insurance, while others will provide referrals or basic coverage. Some PEOs will give you direct access to an HR professional. Others will force you to jump through various hoops in order to talk to anyone with even an ounce of HR experience. Some PEO systems will sync up with your bookkeeping and accounting system, and some won’t. 

A common limitation that we see is companies having to play by the PEO’s rules.  This isn’t a good thing if your PEO is a massive bureaucracy.  For example, we recently came across a PEO that takes two weeks to convert a worker from independent contractor status to employee status. As a point of reference, most competent companies (not using this PEO) could accomplish this task in roughly 15 to 20 minutes. 

So, what is it that you all do?

The idea is that you can finally do what you do, and not have to manage more. Before engaging with any PEO, review them. We recommend trying them out. It’s not always possible to do this directly. For example, you can’t say to a PEO “let me try out your insurance and your product and see how good it is.” But you can check references, do a search on social media, or look at review sites. 

Sites like G2 can give you insight into the service. Glassdoor can give you insight into how well the PEO itself is functioning (by way of internal employee reviews). And sites like Reddit and Yelp can give you unvarnished opinions into how employees of PEO clients perceive the PEO.  Or you can even call into the PEO itself to see how long of a wait you get. Or how competent and professional the people on the other end of the line are. 

These are just a few tips on how you can get the most out of a PEO. It’s important to remember that not every tip above applies to every PEO. Believe it or not, there are some good ones out there. Reach out to us at Suitless if you have questions about engaging with a PEO or are looking for more advice around Payroll, HR, and Bookkeeping.

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