This article is a guide to ensuring you partner with a PEO that suits your organizational needs. Before diving into that, let’s establish whether your company needs PEO in the first place.
What is a PEO?
A Professional Employer Organization (PEO) is referred to as a co-employer. “Co” meaning there is a shared responsibility for the risk and responsibility of employment— a co-employment relationship. The PEO takes on risk as an employer of record, meaning they’re responsible for things like compliance around payroll, payroll taxes, ACA (Affordable Care Act), benefits administration, local state and federal laws, etc. The client maintains responsibility within employee relations. They hire, fire promote, demote, set pay rates, culture, etc.
Why Would Your Company Need a PEO?
1. To Benefit from Expertise
Typically, a PEO would employ people who are human resources, legal, tax, client services, and benefits experts. Depending on your company’s position, having this expertise available is not viable given the investment needed to do so. Or, you may simply prefer not to have these time-consuming responsibilities in-house so that your staff can focus on other priorities.
Groups with full-time HR personnel can find their team overworked and bogged down with transactional administrative tasks. They’re stuck managing tasks that add little value to the organization and no time to focus strategically. Strategic HR is what turns HR from a cost center to a profit center. A PEO takes over transactional HR tasks freeing up their time and providing resources to be strategic with.
It’s also difficult to hire a full-time HR person that’s great in every area of HR. Outsourcing HR tasks to a PEO can provide a team of specialists, making your HR team more well-rounded.
2. To Maintain Compliance as You Scale
If you engage a PEO, the co-employment relationship is set up so that the PEO is the legal employer of an employee who is working for your company. This means the PEO is responsible for keeping up with the transactional employment laws on a local, state and federal level.
3. Provide Employee Benefits Your Company Can’t
If you have a small or medium-sized business, you may not have the means to provide your employees with a competitive benefits package. Top talent for SMBs normally come from large and enterprise businesses offering a suite of benefits from health, dental, vision, Employee Assistance Programs (EAPs), voluntary insurances, and 401k wrapped up into a user-friendly employee portal.
PEO provides that Fortune 500-level suite of benefits and technology for small businesses.
Choosing a PEO for Your Business
It can be challenging to find a Professional Employer Organization (PEO) that meets your business needs. There are many immediate and long-term factors to consider. Below, we’ll give you a non-biased writeup that will help you make a better decision about who you partner with.
PEO providers are not created equal. You’ll find variety in how they are structured, the services offered, and their pricing. Hyundai and Mercedes are both cars. Both will transport you, but with a different experience. What you value governs what you buy— the same goes for a PEO.
1. Figure Out What the Organization Needs
Let’s say your business is hiring remote employees multi-state and needs help in measuring performance. You’d make nationally competitive plans and good performance management technology a top priority of want-to-haves. You’ll also want to understand what HR expertise is offered around performance.
Perhaps you’re expanding internationally and need a PEO to handle employer responsibility. Your organizational priorities and barriers will dictate what HR services you need from a PEO.
Many variables affect the cost of joining a PEO. Number of employees, workers’ compensation risk, and how your health insurance has performed previously.
PEOs offer different ways of billing for their services. Some calculate their fee as a percentage of payroll. Bear in mind this means your outlay can fluctuate based on bonuses and commissions you pay employees.
Others charge a flat fee per employee regardless of their earnings.
Consider the long-term costs of administration and benefits. An increase as low as $5 to $10 per employee per year in admin fees, for example, could mean thousands of dollars over a multi-year period. A cost-effective solution today can easily become overly costly after one or two of these increases. An inexpensive PEO cost in year one could therefore be more expensive than a premier player’s cost in year two.
Publicly traded PEOs display these long-term cost adjustments as public record. However, ensure that you’re looking at medical only, not a number combined with workers’ comp, or other insurances. With administrative costs, some PEOs increase yearly, some don’t.
They can have multiple profit centers: taxes, admin fees, insurances, payroll float. There can be fees for adhoc items like onboarding and off-boarding employees, health savings accounts (HSAs) and flexible spending accounts (FSAs). Getting a complete list and including each category in your numbers will give a complete picture.
3. Do an Overall Comparison
Although cost is always a factor, picking the wrong provider could lead to other expenses elsewhere. For example, if you intend to build an in-house HR department, you likely won’t need a PEO with a robust HR offering.
If you don’t have an HR person right now and don’t plan on getting one, but end up paying $20,000 per year in employment attorney fees for HR-related items, that’s likely because you didn’t pick the right PEO. Training resources might not be important when you’re 10 employees, but will it be important next year when you’re 30? If you plan on hiring, does the PEO HR rep write job descriptions or does the client write them?
The main idea is ensuring your current and future needs will be met between what you can do in-house and what the PEO can do for you. If not you’ll end up managing multiple vendors again which defeats one value of going to a PEO. Some PEOs can add on and remove services or tech as well as you need them.
4. Meet the Service Team
A PEO sales rep you speak to initially might be very knowledgeable about their product offering, but if you sign with them that person probably won’t be your main point of contact. Before settling on a PEO, insist on meeting the people you’ll be working with. In this meeting, you can establish expectations such as:
What does acumen and involvement look like?
Are they reactive or proactive in updating laws and regulations, handbooks, HR best practices, etc? How strategic will they get on things like culture initiatives, training, employee relations, etc?
How much work do they do and how much will land on your team anyway?
Some PEOs will create custom job descriptions and present them to the client, while others only give templates and want you to customize them. Some will come on-site for employee issues, some won’t.
What are the options for communication?
PEOs handle client interactions through self-service portals, call centers, or dedicated teams. Are you ok submitting a ticket or would you prefer a 1-1 relationship?
What are their credentials?
First and foremost, is the PEO Employer Service Assurance Corporation (ESAC) certified? If so, this means they’ve passed a series of tests to ensure solvency and reliability.
Within the service team certifications American Payroll Association (APA) has two levels. The Fundamental Payroll Certification (FPC) and the Certified Payroll Professional (CPP). HR Certification Institute (HRCI) has six certifications that show experience and HR acumen— Professional in Human Resources (PHR) and Senior Professional in Human Resources (SPHR) are the most common.
To gain these credentials, HR professionals must meet experience and education eligibility requirements, pass a comprehensive exam, and get recertified every three years.
What is the staff-to-client ratio?
The staff support ratio is the number of the PEO’s service team members to the total number of their client companies’ employees. A PEO that provides one service team member for every 1000 client employees may be slower to respond to your requests than a PEO that provides one service team member for every 100 client employees. Think of it like a hotel star rating.
How does the HR team get paid/ranked?
Compensation and rewards drive behavior. Some PEOs’ do incentivized compensation based on customer retention, responsiveness, etc. Some just get a straight salary.
How long have they been employed there?
Nothing is more frustrating than onboarding a PEO account manager only to lose them a few months later. Movement within the PEO can be highly disruptive to your organization’s HR function, so you want to play the odds. If every HR person on the call has a low tenure with the PEO, it could be a red flag that employee turnover is common.
5. Get Social Proof of Customer Satisfaction
Ask for a few PEO client referrals of similar companies in size and industry and ask specific questions.
- What do they like and dislike about HR outsourcing with the PEO?
- How long do they foresee staying with them and why?
- What did their average annual medical increase look like?
6. Research the Company’s Reputation
Almost every service provider claims that they provide a world-class service. Instead of asking them about their service, ask questions specifically about the companies’ successes. Strategically speaking, if an organization doesn’t have success in an area you’re looking to grow in, they can’t help you.
For example, if increasing employee morale and satisfaction is important to you, how well do they operate in that area? What awards have they received? Third-party awards like Best Places to Work by LinkedIn, Glass Door, and Stevie Awards, are good references.
7. Consider EPLI and Risk Management
Does the PEO carry Employment Practices Liability Insurance (EPLI)? What coverage would your company gain from this, or does the policy only cover the PEO?
Some EPLI policies offer “conditional insurance”. Meaning the PEO extends coverage to the client, provided they followed their recommendations for managing an HR situation. Some PEOs write the policy in both the client's and the PEOs name, so whether the client followed the HR team’s recommendation or not, they have coverage.
Also, determine how much ownership interest the PEO has when an employee lawsuit is pending.
Who Should be Involved in Choosing a PEO?
It is best practice to have at least two people on the project because there are a lot of moving parts.
People filter information based on their experience and roles, so ideally these should be two people from different departments within the organization. You also might involve a trusted business advisor like a strategic financial consultant, your insurance broker, or an HR consultant. Keep in mind, not all are experienced enough in PEO to hold viable advice.
Finding a PEO can be difficult, but it can be a well-rewarded task if you go about it the right way. Hopefully, this tutorial makes your journey a little bit easier.