The 21st century HR manager is juggling tasks from all levels within an organization. From manifesting the perfect culture, hiring and onboarding employees, to managing and enrolling employee benefits. HR managers are commonly taking on an impossible balancing act on a daily basis. Realizing the overwhelming amount of tasks expected of HR and the fear of the unknown with compliance, organizations often look towards a Professional Employer Organization (PEO) as the ‘easy button’ to streamline these functions.
PEO’s combine the employees of several companies into one large pool in order to offer better rates on healthcare and workers compensation. When an employer enters into a PEO arrangement, its employees become employees of the PEO, leaving the employer to lease their employees back from the PEO conglomerate. The human resource functions are generally split between the PEO and the employer. The PEO often provides an all-in-one dashboard for payroll, onboarding, and benefits administration while also taking care of reporting wages, employment taxes, and compliance. There are dozens of PEO vendors in the marketplace. The most commonly known PEO vendors I see in the marketplace are ADP TotalSource, Insperity, and TriNet.
Companies of tomorrow must be streamlined and efficient to excel in today’s business environment, and a PEO appears to align with this business strategy. Though it may very well be the best option for a particular employer, there are considerations which are often missed in the vetting and assessment process. Employers who are contemplating the move to a PEO should answer these five questions before entering an arrangement and before choosing a PEO provider:
1. What does the PEO look like from the employee’s point of view?
Employees are your number one customer. They are the driver of innovation, culture, and customer success. When they are working, they are your brand ambassador. When they exit the doors each day, they are your brand ambassador. So how does the PEO platform look and feel for them? Do they have an application on their phone where they can easily access benefits or enter PTO? When they have a question about their health plan do they get a human voice to talk to? Is that human voice responsive, helpful, and empathetic? I recommend creating a focus group within your organization who can provide feedback on the user experience of the PEO options you are vetting and go ahead and talk with other employers who have already made the transition to see what their employee experience has looked and felt like.
2. How does the PEO affect your health plan?
An initial attraction to a PEO is lower healthcare costs. There is an advantage of economies of scale when an employer joins a plan which covers thousands of employees. The rates look great now, but how does this play out for renewals and future healthcare costs? Though employers can receive lower premiums under a PEO, they are still rated and renewed based on their individual demographics and claims experience. I worked with an employer recently who received a 34% increase in their health plan inside of a PEO. If this employer would have been in a self-funded or level-funded plan, outside of the PEO, we would have received data to support the increase, and the opportunity to make changes within the health plan to target the areas which are driving up the costs. Instead, the employer received no justification and was left with the options to take on the increase, transfer the cost to the employees, or lower the value of their health plan. The group ended up leaving the PEO at renewal. This is an extreme example of an increase, nonetheless, an employer can still expect to have a bad claims year every few years and face a renewal which is much higher than the trend. At what point does the lack of control and premium increases trump the initial low health care premiums?
3. What does leaving the PEO in the future look like?
There is a mental sigh of relief hearing that business insurance, retirement, and healthcare can be wrapped into one vendor and technology platform. Now consider the opposite feeling you could experience in deconstructing this bundle. If your organization thinks they may outgrow a PEO then it’s important to consider what an exit would look like. It is easily a 3 to 6 month process of planning, quoting, and implementation. Employers often run into the obstacles of double taxation and deductibles which re-start off renewal cycle, along with taking on the search for new technology for payroll, benefits administration, and COBRA. Take a look at the termination clause in the contract to see what an early cancellation will look like for fees and how much of a notice you are required to give. I highly recommend hiring a consultant to manage the exit of a PEO. There are too many moving pieces at risk which can cause disruption to the employee experience and the bottom line of the company.
4. How important is transparency in the PEO relationship?
How important is it for you to know what you are paying in fees each month to the PEO? Are they charging a per employee per month fee or are they charging a percentage of payroll? Are they receiving a commission from carriers such as UnitedHealthcare and MetLife for brokering their products? This is a conversation which should happen before an employer enters into a contract with a PEO. It can often be negotiated and altered depending on the services needed and the number of employees. I recommend a per employee per month fee to ensure you are not paying more in fees simply because you hired a highly compensated individual. The pricing should be given up front and audited on a monthly basis. The average employer in a PEO arrangement is around 19 employees. Though I have seen companies from 5 to 300 employees inside of a PEO, the fees often outweigh the advantages once an employer is over the 30 employee mark.
5. Who has your back?
Imagine your company is on one side of a conference room table. The other side seats the PEO administrator, health insurance carrier, retirement carrier, workers compensation carrier, and a PEO-provided HR and benefit’s consultant. Who is doing the checks and balances of the PEO to ensure you are receiving the level of coverage and service you are entitled to from all parties? I often see in a PEO situation that there is no one looking out for the sole interest of the employer. Who is providing benchmarks and doing employee surveys to figure out the best benefits to offer? Who is auditing the EPL insurance to ensure it can cover a realistic claim? In a transparent and modern broker/employer relationship, the broker will act as an advocate for the employer with all carrier and technology vendors. Within a PEO, there can be a conflict of interest when the involved parties are feeding each financial incentives.
An employer must be comfortable with the answer to these five questions in order to enter or choose a PEO relationship. The best way to know whether a PEO is right for your company is to hire a consultant, who you trust has your company’s best interest, and have them go through the process of assessing the questions above with a recommendation that can lead your organization to a path of growth and prosperity.
Jessica Du Bois is an Employee Benefits & Healthcare Consultant in the Washington DC region. Jessica helps companies reinvent their benefits program by creating an enjoyable user experience and implementing cost- containment strategies. Reach out to Jessica by email at firstname.lastname@example.org or schedule a call here, https://calendly.com/jessicadubois.