Comparing PEOs & Selecting the Right Fit
This article will provide information on variation within PEO models and criteria to compare/contrast options. It will also provide insight into areas which require focus when evaluating a PEO option to ensure the best deal.
First, we will review the common offering that most PEOs provide. This common offering includes; HR Consulting, Safety Consulting, Payroll, Payroll Tax, 125 cafeteria plan, Workers’ Compensation Insurance, Health Benefits Insurance, 401(K). There is more which a PEO may offer but the above is offered by most PEOs.
Additional offerings above and beyond the common offering may include; HRIS system, CRM, ACA compliance and reporting, business consulting, vision and dental insurance, legal services, DOT assistance, staffing and recruiting, bookkeeping services, disability plans, investigatory services and more.
Trending & Developments
We have noted some trends in recent years with PEO offerings. Outlined below are a couple that should be reviewed.
Micro Deductibles: While PEOs may operate on a high deductible for their workers’ compensation insurance, historically they provided a guaranteed cost program to their clientele. In recent years, we have noted a trend towards offering varying levels of micro-deductibles. These may range from $1,000 per occurrence up to $50,000 or higher. Depending on the deductible size, collateral may or may not be required. A stop loss or aggregate cap may be negotiated to provide an out of pocket ceiling. Using a micro-deductible allows for a reduction in upfront premium to the client and shows the PEO that the client is willing to have skin in the game.
ACA Compliance: Due to the Affordable Care Act, ACA compliance and reporting has emerged as an offering. This laborious process is being offered by many PEOs as a value added service to clientele whom either don’t have the knowledge or the manpower to handle the reporting requirements.
White/Grey Collar: PEOs that target white and grey collar industry generally have a focus on health benefits, human resource consulting and the technology offering. While risk management and workers’ compensation may be part of their offering, it is generally less of a focus compared to the first 3 mentioned.
Blue/Grey Collar: A PEO that focuses on middle risk industries, i.e. blue/grey collar business will have a greater focus on risk management consulting, workers’ compensation insurance and claims management. This focus may also include HR consulting, health benefits and technology but the greater focus is generally on the first 3 areas.
Service Infrastructure Design
Regardless of model focus, PEOs vary in infrastructure design. Below will provide a contrast on service infrastructure differences. There are hybrid of each of the below but the contrast will provide a good starting point for evaluation when choosing a PEO.
Local/Regional PEO: A local/regional PEO may only have one location and therefore their entire team is housed in one corporate office. Depending on their geographic reach, this may or may not be beneficial. If the clientele is local, having the entire service team inclusive of the executive team locally can prove beneficial. If their reach is longer geographically, having only one location can prove detrimental for in person service.
Branch Structure: The branch structure may be utilized by a larger PEO to ensure local presence to clientele serviced. A branch may include all service personnel to the client. The benefit to this structure is a local touch. The con to this type of structure may be variation in service levels per branch office.
Regional Cost Center: This model generally has scaled down branch locations (account manager, sales, and implementation) and utilizes regional hubs to provide service support. Larger PEOs generally use this model to have a combination of local presence while capturing economies of scale with service hubs. The pro to this model is that the client still has somewhat of a local service team but is able to capture better pricing through the efficiencies that PEO captures through a hub model. The con is that the in person offering is not as high touch as the branch structure.
There are two pricing models. Bundled annualized rates and bundle tiered rates.
Bundled annualized rates essentially estimate your annualized employer payroll taxes and add the insurance premiums and administrative fees. The benefit to this model is predictability with a consistent charge throughout the duration of the contractual year. The con is a lack of transparency with charges. What amount is taxes, premium, and admin?
Tiered bundles rates is the most commonly used pricing structure and the most transparent. Tiered pricing is a bundled rate of premium, administrative fees and taxes. However, once the employees meet the SUTA/FUTA cutoffs, the bundles rates reduces commensurate with the tax reduction. The pro to this model is better transparency with pricing and real-time costs. The con to this model is that when turnover occurs and new employees are hired, the higher bundles rate justifiably applies.
Ancillary fees should be uncovered prior to signing the contract. Request information on any charges that may or likely will be incurred throughout the contractual year. This may include: set up fees, delivery charges, employee add/drop charges, waivers of subrogation charges, EPLI deductibles, W2 fees, etc. Ask for a rate sheet that will give insight into ancillary charges to properly weigh the total costs.
Billing transparency will vary depending on the pricing structure. With an annualized bundled rate, the billing is a flat percentage of payroll. It is easy to understand but difficult for a client’s controller to appropriate the funds into the proper columns for financial reconciliation. With tiered bundled pricing, billing is generally segregated per cost factor and therefore easier to input into a general ledger.
Contracts or client service agreements should be reviewed and scrutinized. Items to review will include: short rate penalties, PEO vs. Client responsibilities, penalties, indemnification parameters, client requirements, PEOs power over workforce decisions/mandates, legal jurisdiction, rebate parameters (if applicable), payroll dates, collateral, deposits, State specific addendums, tax incentives, etc.
To sum up, it is recommended that when evaluating a PEO, ensure that the PEO representation is knowledgeable and tenured. Know the model and service platform that best aligns with the business needs and be thorough in understanding the pricing and contract. Competition breeds better results and flushes out incorrect information, so reviewing 2 to 3 options is not a bad idea.
Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting company to the PEO space. He works in PEO evaluation, consulting and due diligence with PEO and Private Equity in M&A.