The PEO Model
An elite PEO can turn mandated business expenses into an investment with superior ROI.
Businesses in the United States are required to provide workers’ compensation insurance, create compliant HR policies, remain in regulatory compliance, have a safe work environment and pay their employer payroll taxes. Businesses with over 50 employees have the additional responsibility of remaining within ACA and ERISA compliance. The common move for employers is to secure standard market insurance policies, run payroll in house or use a service and hire HR and safety professionals. There is a cost associated with all of these required functionalities of business. Ideally, there is a level of ROI with these moves as well.
If a business is researching ways to better achieve the aforementioned requisite responsibilities, there are options in the form of a professional employer organization (PEO). Too often this model is positioned in a poor light, either by marketing, sales or preconceived notions. This is unfortunate, as the model itself is brilliant. In this article, we will take an objective look at the PEO model, inclusive of the benefits and areas in which to be aware.
The professional employer organization model is a hybrid of an outsourcing and consulting model coupled with insurance platforms and ancillary benefits. High level, most PEOs will offer: HR consulting, safety consulting, payroll and tech platforms, employer payroll tax filing, retirement plans, workers’ compensation insurance, health insurance and employment practices and liability insurance (EPLI). A PEO may also offer ancillary services to better serve its industry verticals of focus. The PEO enters into a co-employment agreement with the client to provide its services and cover the insured for insurance purposes.
The Rationale of the Model
PEOs provide a cost effective solution to appropriately handle the administrative and liability risks of a business. The majority of business owners did not get into business solely to employ a workforce. Business owners get into business to provide a superior product or service. However, employing a workforce is exactly why a PEO owner got into business and as such, it should be their sole focus with the company offering. The next section will illustrate, per offering segment, the benefits and warnings of partnering with a PEO.
Pros & Cons of a PEO
The evaluation tools section of this article will take a look at the benefits of a superior PEO (pros) and the things to watch out for when evaluating a potential partner (cons). Ideally, a well-run PEO will possess benefits in each area while minimizing the cons. When viewing this information, be sure to focus on the areas that are most important to your business. For example, if you have a financial services firm, safety consulting is probably not high on your list of priorities whereas HR and benefits would likely be important.
To properly evaluate a PEO option, a company should first identify what is most important to achieve from the relationship. Illustrated below are tools to help business owners make an informed decision when selecting a PEO.
If HR is important to a company, it should select a PEO that has the following:
Client facing HR Manager: the PEO should employ degreed HR professionals with advanced certifications (PHR, SPHR, CA-PHR). The client should determine the face time desired prior to making a decision to move forward with a PEO.
HR Technology: Online HR tools may be available including HR libraries with resources in English and Spanish, human resource information systems (HRIS) and online portals. A demo should be requested prior to committing to the PEO.
Legal: some PEOs offer attorney services that will go beyond the traditional PEO offering. If this is important to the client, it should first check the qualifications of the legal team and review any additional expenses that may be incurred.
Cons: PEOs where the majority of HR Managers have a short tenure with the company can be a red flag. Also, PEOs that solely rely on an online HR portal without the support of a qualified HR Manager will likely provide a lesser offering than PEOs with a focus and infrastructure of HR support.
The purpose of workforce management technology is to allow a client to run more efficiently. A cumbersome system, unless absolutely required, is not conducive to business efficiency. If Technology is important to a company, it should ensure the following:
Interfacing systems: PEO systems should speak with one another (HRIS, CRM and Payroll) and ideally to the client’s remaining systems also. If the systems cannot interface with remaining client systems, make sure that files can be exported in a format that will allow uploads to the client systems.
Online functionality: most PEOs today have online systems. This system should have security features in place to protect the client’s workforce privacy. Make sure that the system fulfills the company’s needs without adding increased work to the client’s employees.
Cons: a PEO with antiquated or cumbersome systems will be a constant headache to clients with a technology focus. Request references from comparable industry clients and ask the necessary questions prior to committing to the relationship.
Workers’ Compensation and, in many cases, health benefits is an employer mandate. These mandates come at an expense to the organization. Often, for a comparable price to the standard market, a PEO can provide the required insurance and a portfolio of aforementioned services. This allows a business to turn a mandated expense into a platform with superior return on investment (ROI). When selecting a PEO insurance platform, a company should consider the following:
Workers’ Compensation: premium price is important but do not discount claims mitigation and management. Poor claims mitigation practices and inferior claims management will yield a low price today for a higher price in subsequent years. With a penalty of three elevated premium years for one poor loss year (experience modification formula), businesses cannot afford to align with a substandard partner. Consider the fact that most PEOs operate on a high deductible program internally and the profit of the PEO heavily hinges upon superior claims handling. Businesses should make sure that the PEO has a proactive strategy for claims mitigation. It is advisable that a company requests references from employers whom have experienced lost time claims while with the PEO.
Health Benefits: Is the price too good to be true? If it is, there may be a correction coming soon. PEOs that underbid on medical premiums often get hit with an adjustment in future policy years which will impact a company’s future rates. Rates should not be the only consideration when evaluating a PEO’s health benefits platform. The network and plan design must fit within a business’ specific needs. Additionally, a company should identify if the PEO files the requisite employer forms mandated under the ACA for regulatory compliance. The plan options should have minimally qualifying plans and robust options depending on the needs of the business. Open enrollment and online service platforms are additional areas that should be clearly defined prior to making a decision.
Employers Practice & Liability Insurance (EPLI): EPLI has become commonplace within the PEO offering. When reviewing the EPLI offering at a PEO, a company should evaluate the following three items:
- Coverage limits
If an insurance broker introduced the company to a PEO, utilize the broker’s expertise to evaluate the coverage and price versus market alternatives. Make sure that the areas that need to be covered are covered through the PEO EPLI policy.
Cons: not all PEO models are created equally. Careful evaluation of a PEO insurance platform is essential to ensure that the organization will benefit from the relationship. If any riders, endorsements or additionally insured requisites are needed, specify this to the PEO prior to partnership.
Safety & Risk Management
Safety is an important aspect for companies in higher risk industries. Safety information and training can be disseminated in many ways; some more effective than others. If safety is essential in a company’s business, the following should be considered:
Safety Professionals: the knowledge-base of the safety professional assigned to a company is important to drive superior results. A company should review the background of the safety professional to make sure that the education and experience is in line with the company requirements. A phenomenal safety professional without experience in the client’s industry can drive results but is not ideal. Ensuring that the safety professional has the desired certifications, experience and industry knowledge will yield superior results.
Safety Resources: To gain clearer insight, a company can ask a two simple questions. What information is readily available for the PEO’s clientele in the areas of safety? Does the PEO share resources internally or is the scope of safety offering limited solely to the assigned safety manager’s knowledge? A PEO with a robust online library that is segregated by industry is ideal. Also, PEOs that compensate the safety team on a performance basis and share knowledge among the safety professionals internally will generally have a superior offering.
Involvement: Does the safety manager visit weekly, monthly quarterly, biannually, once a year or never? Identify the frequency the PEO provides. A PEO that visits their average account twice a year is likely short on safety professionals. A company should determine the frequency appropriate for its organization and align with a PEO that offers this frequency on a regular basis to its existing clientele.
Cons: A PEO contract may state that the PEO has the right to mandate certain safety measures to its clientele. It is understandable why this verbiage is often contained within the contract since the PEO has insurance exposure due to its internal high deductible program. However, the parameters of these potential mandates need to be defined prior to partnership.
Interestingly enough, payroll is a common objection that PEO sales professionals face. Companies inherently don’t want to go through the process of switching payroll providers. A PEO can be a valuable resource in payroll, assuming that all necessary topics are covered prior to partnership.
Demo: a payroll demonstration or webinar is recommended prior to making a decision. This process allows the client to understand the features and functionality of the payroll system prior to implementation. The payroll professionals of the prospective client should always be on this demo. Too often, the details of the deal are initially discussed solely between the PEO representative and the client ownership. This may lead to implementation issues because the payroll teams weren’t properly aligned prior to close.
Functions: online payroll functionalities are a must for most businesses. System capabilities which allow systems to speak to one another through interfacing or data export/import should be discussed prior to partnership. Some PEOs offer multiple systems (payroll, HRIS, CRM) that can truly benefit a business. Dashboard analytics have come a long way and can provide valuable insight to business owners with data on their work force.
Cons: Some PEO systems are antiquated or some may not utilize the full potential of a good system. A business should not assume that because two PEOs utilize the same payroll software that the features are equal.
Employer payroll taxes include FICA, Medicare, FUTA and SUTA. Each tax, with the exception of Medicare, has a wage limit per employee that is updated annually. A business must be comfortable with how a PEO collects and remits employer payroll taxes prior to partnership. Some of the important areas include:
Tax Collection: There are two ways a PEO may collect employer payroll taxes. The first is tiered pricing. The second is annualized pricing. Tiered pricing allows the customer to pay taxes and realize the tax cutoffs per employee. Annualized pricing is when a PEO provides an annualized tax percentage that remains constant throughout the calendar year.
Tax Remittance: Many PEOs subscribe to accreditation requirements like those of ESAC to verify its tax remittance, among other auditing procedures that ESAC provides. In addition to accreditation organizations, the IRS has a voluntary program to become a Certified Professional Employer Organization (CPEO) that affords additional oversight with tax remittance.
Cons: Prior to partnership, make sure that the tax collection and remittance is clear and understandable. If the employer payroll tax charges are difficult to understand, that is problematic.
Implementation / On-boarding
In recent years, PEO organizations have begun to migrate towards employing implementation teams with a sole focus on client on-boarding. A smooth transition onto the platform is important and it requires superior communication by both the PEO and the client organization.
On-boarding: An experienced PEO implementation team can make the on-boarding process much more comfortable than in years past. A business should request a “road-map” of the implementation process prior to partnership, inclusive of any requisite paperwork or electronic information needed.
Cons: poorly run implementation processes with undefined information requisites can be chaotic and start the relationship on the wrong foot. Review the implementation process ahead of time, define the responsibilities of both parties and have a timeline associated with the requisite steps needed for a successful implementation.
Rebates & Deductibles
Safety rebates and micro deductibles are options that some PEOs offer which can provide a cost benefit for superior safety and claims performance.
Safety Rebates: an incentive rebate is a desired option within the PEO model. It financially rewards clients for a superior claims year. Not all rebates are created equally and the parameters of the rebate should be reviewed carefully.
Micro Deductibles: a micro deductible is generally a per claim deductible that will range between $1,000 and $50,000 per claim. A micro deductible is a good option for a business with low claims frequency that is looking for additional savings on its workers’ compensation premium.
Cons: both rebates and deductibles should be spelled out clearly prior to partnership. The calculation of a rebate and the way in which the benefit is disseminated are points of interest. Some rebates are a dollar for dollar detraction based on claims closed, others are formatted with a claims snapshot and loss development factor (LDF) applied. Some rebates come in the form of checks, others in the form of discounts on renewals. Micro deductibles will either be paid out on an incurred or paid basis and a business should understand what each option means. Understanding the framework and timing of deductibles and rebates is important.
The facets of the PEO offering covered in this article may seem daunting at first. While a standard market policy for workers’ compensation and/or health benefits may have an easier implementation, a company’s return on investment for premium spent is solely insurance coverage. A good PEO gives a business owner a plethora of resources, driven by industry experts and integrated with a technology platform that will drive superior ROI to the organization. A PEO may have a higher price point than standalone insurance policies or it may come at a savings. Based on the ROI, a PEO certainly should have a higher price that is commensurate with the value it drives through the resources it provides. PEOs are often able to offset some of the price associated with its value proposition by utilizing a high deductible insurance platform, though poor claims management can erode the cost efficiency over time.
A business considering a professional employer organization should not look for the cheapest PEO nor should the company make the assumption that higher priced PEOs automatically equate to higher value. Price should be commensurate with value. Since a PEO is able to offer value in a multitude of areas, a company should review the facets most important to its organization and align itself with the appropriate partner. They may then contrast the PEO value proposition with available alternatives in the marketplace to determine the best solution for the company. This exercise will provide the business with the necessary information to make an informed decision and accurately compare pricing based on the PEO offering and commensurate alternatives. More often than not, with a superior PEO, the service a client receives will provide tremendous ROI, just pick the right one.
Author: Rob Comeau is the CEO of Business Resource Center, Inc. BRCI is a management consulting company that works with PEO companies, investors, investment bankers and private equity firms. For more information on BRCI, please visit them on the web at www.biz-rc.com.
2 thoughts on “A Closer Look At the PEO Model”
Thanks Bob! Hope it’s helpful.
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