Choosing the right Professional Employer Organization (PEO) for your business can be complicated and a bit overwhelming. It can feel very similar to picking out a new car. PEO firms come in all shapes, sizes, colors and price ranges. They all have different features and approaches to tackling the evolving landscape that is human resources. Some PEOs are shiny, new and come standard with all of the “bells and whistles,” while other firms are more established, reliable and dependable.
So how does a busy business owner take the time to figure out which PEO firm is best suited to solve their unique business needs? How do you decide which PEO is going to provide the most value for your company? Is this a good investment? Unfortunately, you cannot simply “test drive” each PEO and see which company has the perfect blend of services and features to satisfy your precise needs and wants.
The best way to make this decision easier is to look at the four main areas of service that PEOs provide. Then, look at where your business’s needs fit into those areas. After you have determined your level of need in each area, you will have a better understanding of the services to look for in your PEO.
For example, do you simply need workers’ compensation insurance coverage and a payroll provider to increase efficiencies? Are you looking for some high level, high touch human resource services? Do you need custom training, policy development, and a strong benefits package? Are you looking to increase staff or decrease staff? No matter what your situation is, there is a PEO firm right for you. First, let us look at the four areas of service and see what is the most important to you.
Human Resources is at the core of every PEO, but each does it a little differently. The ultimate goals of the PEO relationship are to add extra layers of protection to your business by reducing employer liabilities and increasing operational efficiencies by offloading HR administration tasks. Some have addressed this by moving to a more automated/self-service model, giving their clients the resources and technology to handle human resource issues themselves. Others take a more “hands-on” approach and assign each client a Human Resources Manager to handle anything and everything that falls under the human resources umbrella. Still, others have adopted a service model somewhere in the middle between high touch and self-service.
The reality of the situation is that almost all PEOs will require some sort of point person on your end to help facilitate the PEO relationship. You as a business owner have to decide how much time you would like this person spending interacting with the PEO firm and how much time you would like them focusing on the revenue-producing aspects of the business. Another thing to consider is the credentials of your point person. Does this person have a background or experience in human resources? Is human resources something they were hired to do, or was human resources simply assigned to them? Your employees are often your greatest asset and your greatest liability, so you definitely want the human resources functions of your company handled properly.
It is important to take into consideration the price aspect as well. While price is usually not the deciding factor, it should be taken into consideration. Normally, the price goes up as you move toward higher personal customer service and less automation. On the other hand, you should really weigh how much time, resources and money that you are spending to handle everything internally. This can be very hard to do, and most business owners underestimate the true cost of handling everything internally. You will need to take a good, hard look at the cost of your internal operations, the cost and capabilities of your internal human capital and the goals of the company. Once you have done that, then you can decide the price and level of human resources expertise and automated technology that best fit your company needs.
Benefits and Benefits Administration are the number one reasons that most people initially consider collaborating with a PEO. Because of the structure of the co-employment relationship, PEO firms are able to pool their employees together for more buying power when it comes to products like health insurance, dental insurance, vision insurance, 401(k), and many other Fortune 500 type benefits. This allows the PEOs to spread your health insurance risks out over all of their employees, which provides better plans and better rates over a longer period of time. The lure is that small businesses can have access to big business benefits by utilizing a PEO. While this is very true, there are some things to consider.
Most PEO-provided health insurance plans have a minimum enrolled employee number as well as a minimum employer contribution. In addition, despite pooling their employees together, they will underwrite each company individually. This means that PEOs do not have to take everyone, which is often a key reason why their health insurance rates remain more competitive than what most companies can find on their own. PEO firms use a variety of carriers. A few common carriers are Blue Cross Blue Shield, Aetna and United Health Care. Make sure you know which health care provider the PEO offers and the specific doctor networks in your area. It is also important to note that many PEOs do not offer a “master health plan” (a national health plan) and may simply use independent brokers to quote small group policies. These small group policies are the same types of policies that you could have underwritten by using your own independent insurance agent.
Aside from the benefits themselves, the benefits administration is another huge advantage to working with a PEO. Almost all will have a section 125 plan that clients can adopt. This plan allows the PEO to take all of the payroll deductions for benefits pre-tax, which is a nice little savings for the employee. PEOs will also handle the open enrollments and onboarding of new employees if you are utilizing their sponsored health plan, so make sure you know when those dates are. They will also do reconciliation of your bill if you are utilizing one of their sponsored plans. If you are keeping your own health insurance, then most firms will simply make the payroll deductions and credit them back to the business for reconciliation.
Overall, when considering benefits the real question is “what type of benefits do I need to offer to attract and retain the type of employees I need to run my business successfully.” Once you have answered this question, it will give you a better idea of the types of benefits to look for in your PEO.
Workers' Compensation and Risk Management
Workers’ compensation insurance and risk management is another big draw for PEOs. Like the health insurance mentioned above, they can pool their employees together and offer competitive workers compensation insurance to small or mid-sized companies that would have trouble getting coverage on their own. It provides long-term cost-containment strategies on a “pay as you” go basis. This allows for better cash flow and eliminates that dreaded end of the year workers compensation insurance audit from your independent insurance carrier. All PEOs have a different appetite for workers’ compensation insurance risk. Some prefer to go after the higher premium “blue collar” codes, while others prefer the conservative “white collar” codes. It is important to know where you fall so you can choose a PEO firm that specializes in your industry. They will often have better rates, better experience and better service to support your particular workers’ compensation insurance needs.
Risk Management is often an overlooked benefit of outsourcing your human resources functions. Because you are coming onto the PEO’s workers’ compensation insurance policy, they have a vested interest in keeping your company safe. These services range anywhere from safety inspections to help with OSHA compliance to workers’ compensation insurance claims management and training. Depending on the nature of your business, risk management may be a service that you utilize or not. Be sure to ask your PEO about the risk management services that they offer.
Last, but certainly not least, is payroll. Just about every PEO has moved to a robust HRIS (human resource information system) for payroll, onboarding and employee management. Usually when using a PEO firm, the payroll piece consists of a combination of their on-line time and attendance software, biometric time clocks and the HRIS system mentioned above. The days of paper timesheets are over, and each PEO should have a wealth of options for collecting and submitting payroll. Always ask the PEO to walk you through the entire payroll process before signing the contract. It is a good practice to demo the software that you will be using on a daily basis and make sure that you are comfortable with its functionality.
It is also very important to check the credentials of your PEO firm. Remember, they have access to all employee and business banking information and social security numbers. You are trusting them to properly handle your payroll taxes, so make sure they are SSAE 16 certified (certified by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) for ensuring correct compliance controls) and maintain both the CPEO and ESAC accreditation.
In summary, it is important to do your homework before jumping into a partnership with a PEO. The deeper you go in your internal evaluation and research, the better fit you will find.
Remember to review your business’s unique needs in the following four areas:
- Human Resources
- Benefits Administration
- Workers’ Compensation Insurance & Risk Management
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