Why Consider a Professional Employer Organization or PEO?
There are many reasons to consider using a PEO. Depending on the type of company you are running, a PEO can bring value in various ways. Of course, the best way to understand fully how a PEO can help your company is to conduct an analysis and see if it makes sense for your particular situation. In an effort to answer the question of WHY, we have addressed all the common areas our clients have had concerns and seen a need to start working with a PEO.
A PEO has the experience of dealing with thousands of companies like yours. This gives them an broad perspective enabling a PEO to provide best practices for your company. They bring many services, advice and value to the table to help you run your business efficiently.
If you are currently not offering benefits to your employees, working with a PEO could be a good way to get an employee benefits program started. If you already offer employee benefits, it only makes sense to periodically take a look at other options. The landscape of health care has changed dramatically and continues to change. If you haven’t looked at other options in the last 12 months you may be missing out on a potential cost savings and increased value. Since a PEO has the ability to buy insurance on a larger scale, they can potentially offer your company a cost savings.
Let’s dig a little deeper.
If you were working with a PEO, here is some insight into how they would work with your company. As an employer you need a benefits package. When you go out to the open market you might find it very confusing. Shopping for benefits is not necessarily intrinsic to your role as CEO or CFO. You will invariably find a lot of plans to sort through but you will ultimately not have the buying power to get a package of benefits that offer a lot of value and are affordable. As an individual company your group’s rates are based on the census that you submit to the carriers. This if very limiting. To take the idea one step further, let’s say your group was under 50 employees. If 15 different agents submitted your group’s census to a number of carriers on the open market, they would all come back with the same rates in the state of FL. When you work with a PEO you get composite rates. This means you get four rates instead of age rating, no matter what size your group may be. Also, these rates are part of the big picture. There are multiple rate tiers and the PEO will put your company in a tier that makes the most sense. PEO's have their own master policy which means they set their own rates - your rating tier could be substantially less than the open market rates you were quoted.
A PEO has a Fortune 500 selection of benefit plans. For example, on the open market you may have 2 or 3 medical plan options and with a PEO you may have as much as 14 different options that you can offer just for the medical benefits. Most importantly the PEO will manage the entire process from quoting to enrollment as well as full ACA compliance
Ultimately, you want to use your employee benefits package to attract and retain good employees. A PEO might just be the tool that can help you do it more efficiently and at more affordable price.
Cash Flow Efficiency
As you can probably see by now, a PEO can potentially help your company save money in many different ways. Their goal is to help you streamline your labor costs which creates efficiency that ultimately become cost savings.
A PEO will interact with your company in these various ways:
- Payroll Processing
- Benefits Administration & Retirement Planning
- Act as an HR Department
- Risk Management
If you truly utilize the services they have to offer, depending on the size and make-up of your company, you may be able to eliminate labor costs associated with managing these aspects of your business. An initial economy of scale savings by being able to buy your benefits on a larger platform is great but when you can streamline your administration and add other savings, that is even better.
Unfortunately for some companies, they hire a full time person to manage their HR functions but end up having them working mainly on processing payroll. We’ve seen some companies that will spend as much as $50,000 on a salary for this type of person and end up with very little for them to do because their company isn’t big enough yet. When they realize they can eliminate this position and the PEO will handle the processing of their payroll online, they start to understand the value of the PEO.
The PEO will analyze and aid in many facets of your business. Workplace safety is a major area of concern for business that have higher workers' compensation premiums and claims. PEO's, since your company would be on their workers' compensation policy, have added incentive to make sure you have a safe work environment. They are funding claims up to "X" amount out of their own pockets.
One of the great benefits of working with a PEO is establishing a relationship with a company that has a motivation for you to succeed and grow. A PEO will be working very closely with you on many levels, helping to provide you will all the tools you need.
Compliance is one of those key areas a PEO can make a huge difference. As a co-employer with your labor force, a PEO will share in the liability to make sure you stay complaint with all of the relevant tax and insurance standards. Since your employees would fall under the PEO’s FEIN, they become legally liable to make sure all of the payroll taxes are paid on time, workers' compensation is in force, FMLA and COBRA are administered etc.. . All these areas fall under their responsibility and they are accountable to the appropriate government agency for compliance.
Even if a PEO doesn't take on a certain liability related to your employee benefits package or worker’s compensation, they will be there to advise you on what the current standard is for staying compliant. Again, their success is based on you being successful. They are focused on helping you administer correctly an employee from the time they are hired through their entire life cycle as an employee.
The difference between a PEO and being alone on the open market is that you are building a relationship with a company that shares an interest in your success. Every pay cycle they will be in front of you in some capacity. Whether it’s a payroll specialist or the service person who is coming in, you will be seeing someone or talking to someone every month.
Buying Power for Workers’ Compensation
Depending on the type of company, the type of risk you are taking and where your employees fall under the workers’ compensation NCCI codes or class codes, there could be a possibility for insurance arbitrage. This is where the PEO pulls you into their book of business and has the ability to offer you a deductible program and bigger discounts. They have the flexibility to do this because your workers’ compensation would be under their master policy. They are paying the claims and can price your insurance where they feel most appropriate based on the risk they are taking irrespective of where your open market rates may fall. This arrangement usually results in lower pricing for their client than they would experience with their own policy.
As we mentioned before, talking about compliance and liability, the PEO has an incentive to make sure your workplace is safe because they are paying the claims out of their own pocket. Technically they will re insure a certain amount but if you have a $5,000 claim, they will be on the hook for that claim. So, their incentive is high to make sure you don’t have an accident or that claim. Part of this effort involves the PEO sending safety managers and risk managers in deliberately to create safer work environments, so they can reduce their claims exposure.
Bottom-line, the PEO becomes a valuable partner as you move through the life cycles of your business. Click here to connect with one of our experts to walk through your next steps.
Want to learn more?
Download our free ebook: An Employer's Definitive Guide to Increased Savings with a PEO