Why Consider a PEO?
Updated: Jun 6, 2019
Let's start by addressing what actually is a PEO? A PEO (Professional Employer Organization) is a company that will join you as the co-employer of record for your employees. This usually means the end of year W2 and pay stubs will show the name of the PEO rather than your company name.
Why would a company wish to enter such an agreement? If you are a smaller company you may struggle with day to day HR compliance issues and not have internal resources to help solve more complicated matters. Joining forces with a larger employer has many advantages to justify the administration fees they charge. These advantages can be large group pricing on employee benefits, combined workers compensation policies, improved HR technology, legal advice and best practices being shared.
Benefits: For companies with less than 100 employees (in most states), the company would have age-banded rates, meaning a 28-year-old would have a different price than a 29-year-old or a 64-year-old for medical insurance. By moving the group to be part of a larger account, you can jump on the PEO medical plan and get composite rating plans where everyone gets the same price on medical. This can really help when budgeting for new hires regardless of wages. Normally younger people will come up in price, and older people will come down to meet a new average price for all employees. Large group pricing on medical is usually 5-15% better than small group pricing so if your company spends a lot on medical premiums, these savings could really help be used to pay for the PEO admin fees. It should also be noted that some PEOs hang on to your pre-tax benefit savings. Depending on how much your employees are contributing out of their own paycheck towards the cost, this could end up being rather substantial and is often not part of the net cost calculation PEOs go over in the proposals.
Workers Compensation: Since most PEOs will put you on their workers' compensation policy, they will want to make sure you are a good risk compared to their other clients. They do this to avoid a large increase in claims that may drive up the cost to their other clients at renewal and make them less attractive cost wise. The good news is that some PEOs will have verticals which place similar risks together so if you have an accounting firm you won't be subject to the high cost of claims from a roofing company. This is certainly worth checking though. If you do have a claim, the good news is that will be buffered by all of the other companies under the larger policy so the rate increase to you will not be as severe.
Improved HR / Legal: PEOs have HR advisors on staff that are there to help you. Remember, they are also listed as the employer so if something goes wrong, they will also be named in potential employee litigation. Having a large company's HR resources at your disposal will get in front of potential problems before they happen. If they do happen you can be assured the PEO team will step in to help to mitigate any damages to both of you in mutually served interest.
Technology: All of the major PEO vendors have the technology to help you streamline employee management. At the very least this will include payroll, on the upper end it will be an all in one solution for payroll, benefits, time tracking, performance reviews, applicant tracking, expense tracking, onboarding, off boarding and more. Some PEOs have a true all in one solution whereas others have patched several different systems together through APIs of other systems they have acquired or partnered with. Regardless, the goal here is to get access to a system that will improve your workflow and make managing your human capital easier on you and your team.
Costs: Costs range greatly between the different vendors and can be negotiated. A lot of the price will depend on your needs but will typically fall between $1,000- $2,000 a year per employee for most companies. We often look to save enough money on the services, benefits, and taxes under a PEO to minimize the net cost to the client.
When evaluating PEO options it can be useful to have someone help with this process who knows the ins and outs of the major players and how they will align with your true best interests rather than being pushed into an 'almost good enough' solution by a sales rep. Some brokers focus exclusively on PEOs, some don't partner with them at all and some do both traditional benefits and HR services and PEOs.
It's important to look at the whole cost of PEOs comparing them to what all of those same features or plans purchased on their own would cost. We find PEOs are usually the best fits for companies with less than 100 employees who sponsor a significant cost of the employee medical premiums and are looking for additional HR support.
Some of the more common PEOs are TriNet, Justworks, Insperity, Oasis (now part of Paychex), HROI (also part of Paychex), ModernHR, ADP Totalsource. For a list of the vendors we work with please visit https://www.brystra.com/vendors and scroll to the PEO section.