With the January 1st and year-end renewals coming up, employers are looking to find cost savings and the best programs for employees. One option that has lovers and haters is a PEO or Professional Employment Organization.
A PEO has some real technical definitions to know – let’s save that for another time. Let’s just summarize it as when a company shares management of employees with a third party that handles payroll, offers benefits and commercial insurance, and other employment concerns.
PEOs are a great way to streamline employee administration and obtain HR support for a new or small team. And some teams present logistical nightmares for obtaining certain insurances or managing complex, multi-state payrolls.
So why should you join a PEO? It comes down to compliance, bandwidth for HR and admin, and costs.
The math to do when considering a PEO is this
“Will our combination of health insurance and workers comp savings plus HR support and compliance relief offset the administrative costs of the PEO?”
Why should you join a PEO for compliance reasons?
As an employer, you have responsibilities for maintaining certain standards for the workplace to reduce your risk of any lawsuits and meet federal, state, and local employment requirements.
By co-employing your team, your PEO helps you stay on top of HR requirements such as constantly evolving regulations, leave laws, and workplace safety requirements. and help make sure you stay on top of your HR requirements. PEOs are paid to keep your business up to date and compliant with all the policy changes around maintaining your employees.
If you are worried about the risk of falling behind on compliant hiring and employment, you should consider a PEO. Many times this means your organization does not have a dedicated HR leader or part-time HR consultant.
Why should you join a PEO for HR support?
You have many HR and administrative tasks to perform around hiring, employing, and terminating employees today. If you fear the burden this administration will put on your company, you should consider a PEO.
An incomplete list of the HR tasks that a PEO handles include:
- Benefits administration
- Recruiting and hiring, such as job postings and a candidate management system
- Workers’ compensation
- Drug testing programs
- Family and Medical Leave Act
That being said, some companies do want more control over these processes and systems than allowed by a PEO. With a PEO, you are often locked into all-or-nothing and can’t customize your bundle of services to a high degree. Companies who don’t join or leave PEOs tend to cite issues such as:
- Loss of control
- Limited influence on their own culture
- Desire to build a robust internal HR department and take a more active role in building the company’s spirit
- Security and control over sensitive information
- Issues with benefits or functions that negatively impact employees
In my experience, groups who have success moving to a PEO are looking to move fast and spend as little time on HR and related functions as possible. But if you are looking to control your culture and employment experience, you likely don’t want to be in a PEO.
Why should you join a PEO to save money?
Finally, it comes down to the costs of using a PEO vs. not using one.
There is really one cost equation that we weigh whenever considering a PEO – will the PEO generate savings on health insurance and workers’ compensation to a large enough degree to offset the administrative costs of the service? You’ll also have to individually weigh the value of the HR and compliance support as discussed above. This will be different for each group based on a variety of factors.
Most PEOs charge administrative costs on a PEPM basis, which means that your 10th employee costs the same to you as your 35th, 50th, 100th, etc. In comparison, you usually experience scale with your costs and support as you increase in size such that the marginal costs of maintaining your 50th employee are not as high as the marginal costs of your 10th employee. So when we look at insurance costs, we need to find adequate savings to offset the administrative costs or else the arrangement doesn’t make great financial sense.
For many groups in ACA-regulated small-group health insurance, rates are filed for each county across the state and are unrelated to the group’s underlying claims or demographics, aside from age. Since PEOs set separate premiums for each group in the PEO based on their risk, we can see some groups find considerable savings by entering the PEO.
On top of that, PEOs can use the scale of their employee pool to offer benefits that are typically reserved for large and jumbo employers. These can be enticing but don’t move the needle the same way that health insurance savings do for most companies.
On the other hand, I’ve consulted groups with 35%+ health insurance renewal increases due to a few large claims. In the latter case, those groups wouldn’t have such volatile health insurance premiums in the small-group health insurance market. In this case, we can either carve out the health insurance or fully take the group out of the PEO arrangement.
How should you weigh the relative costs and value of joining a PEO or not?
In our work with groups, we use a customizable document to help groups weigh the relative pros and cons of entering or exiting a PEO by comparing over a dozen different points across different PEOs and non-PEO service providers.
This document is unique to each group – how you value HR services or compliance support will be different from another group who are concerned about costs. Taking a high-level approach to this process will help you simply see each option for what it is – a tool to help you and your team take your business to the next level.
If you are interested in comparing PEO and non-PEO options on a level playing field, let’s have a quick chat.
This customizable comparison is a complimentary service you can use at renewal time to help you make the best decision for your team.