Is a PEO Your Differentiator?

Twenty years ago, PEO’s had 3-4% penetration in the small to midsize marketplace within the US. Today, that number has grown to 175,000 clients which represents approximately 15 percent of all employers with 10 to 99 employees. Currently, there are approximately 907 PEO’s in the US and most of us can only recall the name of the larger PEO’s in the industry; however, does that mean they are the best fit for your company? Not necessarily. The reality is there are many smaller PEO’s that provide great value and service to their clients. I want to focus on four important questions that need to be addressed when considering a PEO for your company:

Can a PEO enhance a company’s Talent Acquisition strategy and Employee Engagement?

With small to midsize companies seeking solutions to help fill the gap with their talent acquisition and retention strategies and seeking strategies to enhance employee engagement, a PEO can be a viable option. Studies show that PEOs help their clients achieve better revenue growth and profitability. Clear results also illustrate that they help to improve their clients’ HR policies and practices, employees’ work environment and satisfaction/engagement, and businesses’ ability to focus on factors that drive business success.

If the PEO model can help me address my greatest challenges of being an employer, how do I select the PEO that is best for my company and our employees?

After you and your leadership team determine that outsourcing HR is right for your company, the question becomes, how do I know which PEO is the right for my company? This determination is based on the priorities and objectives of your company and the breadth of services offered by the PEO. There are two mindsets and options available at this point:

Is the DNA of your company one of growth and investment into your company and your employees or are you focused on stabilization and cutting costs?

Are you seeking strategic HR (where you focus on being proactive, planning and preparing for both short and long term objectives), or do you prefer a more tactical approach to HR (where you are focused on the core components like payroll processing, employee benefits, work comp and compliance)?

There are Tier 1 and Tier 2 PEO’s that can fit the needs of both mindsets. There are fewer PEO’s that can fit the requirements to be a ‘strategic business partner” that is focused on providing the infrastructure to help businesses grow and there are many that can provide the more tactical HR services at a lower cost which helps those companies that identify with #2 above.

Over the years, I have found that a majority of companies interested in HR Outsourcing via PEO are focused primarily on cutting costs and only a small percentage of companies are seeking to make their companies better. How do the results of these mindsets differ? Companies that were focused on lowering costs, changing providers regularly because of price and focused on tactical operations grew at a much lower rate than the companies that selected a PEO that provided more flexibility and offered the ability to scale within its model. Several clients grew from 5 – 15 employees and ultimately outgrew the model when they were 150 – 300 employees. Does this mean that the PEO model is outgrown when companies get to this size? No; however, it depends once again on the needs and the objectives of the organization. Some elect to bring HR back in house meanwhile, others prefer to keep utilizing HR Outsourcing due to the efficiency it offers.

How does a PEO establish their Service Fee?

Most PEO’s will require you to provide similar information in order to provide a proposal and pricing. You should be prepared to provide:

  • Employee Census that includes employee and dependent name, age, home zip, pay amount, pay frequency, work comp code, and benefits election.
  • Company profile
  • Copy of current Work Comp rates, codes and 3 years loss runs
  • Copy of current Benefit invoice, plan designs and potentially a copy of the upcoming renewal pricing if you are within 60 – 90 days of renewal.
  • Copy of current State Unemployment rate

Once this information has been provided, the PEO will calculate how much will need to be allocated for:

  • Payroll taxes. This includes the employer’s portion for FICA and Medicare, Federal Unemployment, and State Unemployment tax. These allocations should be consistent between PEO’s; however, the exception to this is the State Unemployment allocation. As with every company, each PEO has their own State Unemployment rate (aka SUI) and it is important to fully understand what the state Wage Cap is and what percentage the PEO is collecting. It is also important to verify that once the Wage Cap has been achieved for an employee that these fees do not continue being collected for that employee and you should see a reduction in fees on future invoices. It’s important to do occasional audits to confirm that you are being billed correctly.
  • Employee Benefits. Most PEO’s will try and map your current plan(s) designs to comparable plans they offer. By using the information on the census and invoices provided, the PEO can calculate the estimated Benefits allocation. They will then divide the monthly allocation into two parts; first is the employee portion which is collected when each payroll is processed and then the remaining is the employer’s portion and these dollars are built into the Service Fee. This is an area where pricing transparency is above average for most PEO’s.
  • Work Comp. This is calculated by determining the estimated payroll for each code and multiplying by the corresponding code rate. The rates are determined based on the amount of risk a job has. An example would be Work Comp code 8810 is for office and administrative positions and it carries a low risk so the corresponding rate is .15 for each $100 in payroll whereas a Work Comp code of 8742 is for the Outside Sales position and since the position has a higher risk of a claim happening the corresponding rate may be .40 cents for each $100 in payroll. As your payroll fluctuates, the work comp allocation will fluctuate.

The Administrative fee is another area where you may see significant differences. Although there can be a wide range in these fees, I want to focus on the two ways these fees are calculated:

  • Fixed dollar per employee per month. Regardless of pay amount, pay frequency, title or position with the company, the PEO will charge a fixed dollar per month for each employee. An example is a company that has 10 employees and the PEO is charging $120 per month per employee, the administrative fee would be $1200.
  • Percentage of Pay. The PEO will calculate the administrative fee based on the amount of pay for that pay period. There are occasions where this can be advantageous, however, it is important to note that as employee pay increases or if bonuses are paid, the administrative fee increases too. My concern with this model is that the more successful a business is, the more a PEO will charge when it doesn’t cost any more to deliver their services.

Do I need a Consultant to help guide me through the PEO evaluation process? It is not required to include a Consultant in this process; however, they can bring experience, expertise, objectivity, and clarity to a somewhat confusing process as every PEO proposal is unique. A consultant can help you define and design an HR infrastructure solution that fully supports the company, their people and solve your greatest business challenges. Based on twenty years of experience, clients have shared that they had clarity and peace of mind as they worked through the decision-making process with a consultant.

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