Is A PEO The Right Fit For Your Business? Considerations And Alternatives

by Laurie Howell 

What Is A PEO?
In case you don’t know, PEO stands for professional employer organization. According to the Society for Human Resource Management, “A  professional employer organization (PEO) is an organization that enters into a joint-employment relationship with an employer by leasing employees to the employer, thereby allowing the PEO to share and manage many employee-related responsibilities and liabilities.” As the National Association of Professional Employer Organizations points out, PEO’s typically provide “HR solutions for small and mid-size businesses.”

Before You Jump In
Whether to manage costs, maintain control over a workforce, or obtain local and customized quotes and services from trusted providers, companies are realizing that employee leasing and co-employment isn’t necessarily the best way to manage their human capital. Companies utilizing a PEO model pay a cost in more than just fees for allowing a PEO to “manage” their employees. The prudent executive wisely “looks under the covers” to see what value is truly being received for the fees associated with utilizing a PEO and if comparable or even better options exist. Below are some important things to consider before deciding if a PEO arrangement is the best solution for your company.

Legal Priorities:  If your company enters into a PEO arrangement, do you understand how your company will be protected with any legal actions an employee may bring, and are your company’s interests and executives protected first or does the fine print of the PEO state they protect their interests first? Perhaps there are measures dictated to you by the PEO in how you have to handle an employee situation or termination in order for the PEO’s interests to be protected.

Co-Employment Challenges:

    • PEO service agreements typically include language that your company also has co-liability for employee’s actions.
    • The PEO will provide a handbook to all your employees, which are technically the PEO’s new co-employees. This is great if your company aligns well with and is prepared to enforce the policies the PEO has in place, but what if you disagree with their approach? Yes, you can have your own handbook, but remember that your employees are now co-employees, so there’s going to be some grey area between your company and the PEO. Maybe your company just becomes a bigger target because you’re aligned with a PEO that may appear worthy of legal action. At the very least, something like this could be a huge distraction.
    • What happens if your company’s executive is being terminated and the company needs to utilize specific severance language? Whose separation or severance agreement should be used? Even though the PEO has legal coverage, wouldn’t company leaders being sued be inclined to use their personal chosen counsel?
    • What if you’re a small company with cash flow peaks and valleys, and you want to forgo executive salaries or make some other type of compensation adjustments an owner may need to make for the company? PEO’s don’t allow this latitude because you and your leadership team are now their employees too.
    • If applicable, are there credits in rebates or funding or other incentives that would benefit your company directly that would be passed to the PEO as employer of record?

Human Resources Support:  If your company has employee issues and challenges or your managers need sound readily available HR guidance, will your PEO be able to provide the level of service you’re needing? Will they be able to support your needs onsite? Will they understand your culture and nuances the way you need them too? Will they help solve your issue or point you to a link to read and figure out yourself?

Technology:  HRIS platforms utilized by PEOs are sparse and lacking at best. If your company needs to rely on a robust HRIS platform for engagement with its employees, it’s important to know there are limitations within PEO HRIS platforms. Keep in mind, PEOs are not in the business of perfecting their technology with upgrades and new features like the many national and even regional payroll providers do.

Fees and Long Term Costs:

    • What will be the maximum that your benefits, workers’ compensation, and administrative fees could go up each year incrementally? Is your company grouped into a pool of companies with more unhealthy than healthy employees so that your rates are affected by others’ census and demographics? Are you large enough that your company could self-insure and perhaps save thousands if not millions in premiums?
    • Are you aware that as your company scales, the PEO’s revenue scales exponentially while your company’s costs increase unnecessarily and, possibly, your co-employment risks increase as well? Further, your company will no longer have a claims history for underwriters to fairly quote rates by experience. At some point, exiting becomes almost impossible without a huge expense on the back side, resulting in essentially being held hostage from leaving.
    • We find that once in a PEO, many companies then spend years moving from one PEO to another in chase of the better deal whether directed by their broker, due to issues with their current arrangement, or in search of better benefits for their employees.

Not all PEOs offer the same services. It’s best to not assume anything and ask these questions and more because your decision will typically lock you in for a year, possibly longer depending on how things are structured. So, before making the leap into a PEO, we highly recommend thinking through these and other considerations before determining if a PEO is the right answer for your company. While a PEO can be a brilliant solution for a company needing to access certain levels of benefits and resources for their small size, there are tradeoffs and there can be a price to pay for these solutions. The question becomes what’s the best answer for your company? 

 

When It’s Time to Leave

What if you’re already in a PEO arrangement? In addition to the financial and legal considerations mentioned above, here are a few more signs that it may be time to leave:

  • Your company has grown beyond 50 or even 75 employees, and you may now find benefit offerings in the market similar to or better than what the PEO provides.
  • The employee onboarding experience, employee handbooks, and leave policies have been determined and managed by the PEO, but now you want to customize the employee experience to suit your company’s unique culture and values.
  • When your HR team grows as your company grows, it may no longer be necessary to outsource the HR function like before.
  • Your business has outgrown the standard PEO technology and support system, and it’s time to upgrade your systems to align with your strategic growth plan.
  • The PEO owns the employee data, making it difficult for you to access and use the data to make executive decisions, shop other outsourced options, and/or minimize risk, e.g., workers comp claims/loss runs.

 

Deciding To Exit A PEO: What to Do

The APW team is uniquely experienced in PEO exits and unbundling, and we have the knowledge and ability to replicate all the needed or required services outside of a PEO through a variety of trusted vendor relationships. Here are the steps we and our partners walk clients through to first determine if exiting the PEO is the right move, and, if it is, provide support at every stage of the exit:

  • Conduct a cost-benefit analysis as an apples-to-apples comparison to determine if there is a savings available and, if so, how much.
  • Determine what costs or penalties would be associated with making a move and when is the best time to make the move (i.e., PEO termination fees, FICA, SUTA, FUTA, 401(k) taxes, fees, etc.).
  • Obtain quotes for benefits’ & EPLI coverage, 401(k)/retirement options, workers’ compensation, HRIS & Payroll Processing and HR fractional consulting to do a true cost comparison.
  • If it’s determined best to exit, provide the required termination notice in writing to PEO and select and engage various new vendors to coincide with timing.
  • Craft and provide communication of upcoming changes for employees.
  • Work through implementation process with assigned implementation team.

 

Choosing To Partner With APW

As mentioned, our experienced team of HR experts are fully equipped to support PEO exits and unbundling. Clients share that they see the following advantages in working with us to exit a PEO. We help them:

  • Assess and determine if better options are available.
  • Improve their bottom line through controlled cost management.
  • Empower themselves to choose health insurance and benefit plans uniquely designed for their company’s needs and wishes.
  • Gain access to all major carriers and providers in the open market for competitive benefit quotes.
  • Implement customized policies, forms, etc., specifically to their company through our enhanced HR support and guidance.
  • Integrate our guidance on HR related matters specific to their culture.
  • Incorporate customized training programs and processes for maximum productivity.
  • Maintain the ability to keep things in-house for a more personalized approach to employment.

APW has a proven track record in providing professional services and affordable solutions. If you’re thinking of leaving a PEO, contact us at https://austinpeopleworks.com/contact. We can assess your situation to help you decide, and if it’s time to exit, we can offer the full spectrum of unbundled services sold a’ la carte, as well as transparency in fees – “buy only what you need and know exactly what you’re paying for.”