The Pros, Costs, and Misconceptions of PEOs

AbstractOps interviewed Denise Gelfand, Executive VP at PostPEO, to understand which
companies should consider using a PEO, and which should look for other alternatives. To learn
more about AbstractOps, visit https://abstractops.com/

We interviewed Denise Gelfand, Executive VP at PostPEO, to understand which companies should consider using a PEO, and which should look for other alternatives.

For folks new to this, what is a PEO?

A PEO, or “professional employer organization”, bundles HR administrative tasks like payroll, workers comp, benefits, and compliance regulations for small companies.

The three most common PEO’s I see companies use are ADP TotalSource, Insperity, and Trinet.

Tell us about PostPEO

We started PostPEO to help companies in a PEO (professional employer organization) understand their costs, evaluate the benefits they’re receiving, and find alternative solutions that are typically more cost effective and better aligned with their business.

We know that transitioning out of a PEO requires a lot of preparation and can be overwhelming. There are so many moving parts, and they need guidance to do it successfully with minimal disruption to the business.

That’s where we step in. We take a deep dive into a company’s HR, payroll, and insurance needs. Then, we team up with different providers in each area to sketch out a roadmap and guide them through all the complexities.

Throughout the whole process, we’re right there by their side as their personal guide, making sure everything runs smoothly throughout the transition.  We want their exit from the PEO world to be as painless as possible. 

Describe why you love your role

I love my role because, after spending eight years at a PEO, I gained insights into the pros and cons of the co-employment relationship. 

I’m able to use this knowledge to help companies evaluate their PEO relationship and educate them about some of the alternatives, and ultimately save money in most cases.

We take a consultative approach. It’s not just about giving them answers; it’s about walking alongside them, sharing what I’ve learned, and helping them make the best decisions for their business. It’s that hands-on aspect that really makes it all worthwhile for me.

Denise Gelfand, Executive VP at PostPEODenise Gelfand, Executive VP at PostPEO

Why should a company consider going onto a PEO?

I think PEOs can make sense for startups or really small businesses, for several reasons.

The convenience of bundling the HR administrative tasks can make them appealing for businesses during their early growth stages when resources are limited and they lack an in-house HR department or dedicated HR staff, 

When I was working at a PEO, I often saw situations where a company was having a difficult time obtaining a competitive rate in the standard workers comp market because they had a high experience rating on their own, so going onto a PEO made sense.

It can also be a good option for small companies wanting to provide benefits to their employees.  The PEO’s access to economies of scale within a pooled environment means they can often negotiate better rates and broader coverage than what small individual companies could obtain on their own.

However, companies need to be aware of a few drawbacks. While the master plan provided by a PEO may offer economies of scale, there’s also the risk of rate increases if the overall pool experiences a bad year, regardless of the individual company’s claims history. It’s a balancing act between the benefits of pooled resources and the potential downsides of shared risk.

Why should a company decide against going onto a PEO?

You know, I get really surprised when I see companies with over 50 or 75 employees in a PEO.  

The thing is, PEOs are super expensive, and if a company values control, flexibility—especially with benefit plans—and more robust tech solutions, companies should think twice.

Another issue is transparency—or the lack thereof. 

With PEOs, everything’s bundled into one bill rate, making it impossible to know exactly what you’re paying for. Plus, companies need to watch out because the PEO’s client service agreement shifts the liability for employment compliance, ACA penalties, and OHSA regulations to the company.  

The majority of companies in a PEO are under the misconception that the PEO insulates them from these liabilities.

And then lastly – the PEOs one-size-fits-all benefits plan lacks the flexibility to tailor benefits to a business’s workforce demographics. 

And that’s really a very critical component now in today’s marketplace to attract and retain employees.

When a company is on a PEO, what should they consider when deciding to continue or leave?

When a company is contemplating whether to continue or leave a PEO, there are several factors I usually suggest they think about. 

First, they need to look at the financial implications. PEOs typically charge either a percentage of payroll or a per-employee rate for their services.  

If it’s a percentage of payroll, every raise or bonus given to employees, increases the fees paid to the PEO.  If it’s a per-employee rate, with fees averaging between $1,500 to $2,500, the costs can add up significantly, especially for larger companies. 

Additionally, there are typically other hidden fees companies need to look out for.

Beyond the financial aspect, companies should evaluate whether the PEO aligns with their long-term goals and objectives. Are they receiving sufficient value in terms of service and benefits relative to the cost? Is the payroll system equipped with technology to streamline processes, or does it require manual workarounds? 

Assessing the efficiency of processes such as applicant tracking, employee onboarding, expense management, and payroll entry is just crucial.

Lastly, companies should consider the overall employee experience provided by the PEO. Does the PEO contribute to shaping the company’s culture and policies? Are initiatives in place to enhance employee satisfaction and engagement? 

These aspects are essential for fostering a positive working environment and retaining top talent. In essence, evaluating the relationship with a PEO requires careful consideration of both financial factors and the overall alignment with the company’s objectives and employee experience.

What tools and people are in place when a company leaves a PEO?

I think it depends on the company, right?

Larger companies, say with 75 or more employees, might already have an HR generalist on staff to handle HR tasks. However, the specifics depend on how well-equipped the company’s HR department is and its overall level of HR savvy.

That’s why we dive deep into a thorough needs analysis to understand if additional HR support will be necessary and what form that support might take.

Many companies transitioning away from a PEO turn to comprehensive HCM (Human Capital Management) vendors like Paycor or BambooHR

They all offer robust HRIS platforms that go beyond just payroll. They streamline various HR processes, providing tools for everything from employee management to benefits administration.

The company will also have their own workers’ compensation and benefits insurance once they leave the PEO.

When it comes to state payroll tax compliance, what risks should people watch out for when leaving a PEO?

So it’s an interesting question because sometimes the company comes under the PEO’s state tax ID. 

If it’s under the PEO’s state tax ID, transitioning away means the company needs to register with the state on their own behalf well in advance.

Even if the company has its own state tax IDs, it’s essential to ensure that the PEO is up to date with the state’s payroll tax regulations. This includes withholding rates, reporting requirements, and tax deposit schedules. 

They need to make sure they have transparency into those agencies so they can verify that the payments are being made correctly and that the payments are being made on time. 

If the PEO is using its own state tax ID, there’s a risk that the client might be paying a higher rate, and the PEO may not adhere to annual wage caps. 

Another thing to consider is obtaining a registered agent, which is critical. Yes, it can be very confusing.

Using a tool like AbstractOps can really be a huge help, because I think it takes the weight off the company’s shoulders and provides peace of mind knowing that everything is being handled properly and efficiently, but still gives them more control than with a PEO.

How long in advance before they leave the PEO should they set up their own state registrations?

Well, when we transition a company off a PEO, we typically look at 12 to 18 weeks to make a move.

So specifically from a state compliance perspective, once they make that decision, that’s when I would start with “Okay, let’s look at your state tax IDs. Are they your state tax IDs or are they the PEO’s?”

If they are the PEOs, I would recommend setting up their state registrations once they’ve made the decision to leave.

What would you say are the top 3 misconceptions about PEOs?

So I think the biggest misconception is the compliance liability issue. 

People really are under this misnomer that they’re going to be protected because of the co-employment relationship, that they will be protected against any HR liability issues.

But if there is litigation, the PEO’s client service agreement completely unwinds their responsibility, and will not take any responsibility for that type of litigation.

So that’s a huge misnomer. And even though a PEO says “oh, we provide EPLI (employment practices liability insurance),” that insurance is usually pretty subpar.

For example, most PEO EPLI policies are limited to employee claims only.  This means any third-party claims and  FLSA claims aren’t covered.  To further protect itself, the PEO may require the company to clear all termination decisions with its HR team and if they don’t, they will deny coverage in the event of a claim.  

Second, PEOs have a lot of hidden fees that companies are not aware of.

There are hidden fees that come under the cafeteria section 125 plans where the employer doesn’t get the tax benefits because the PEO keeps those benefits.

The PEO is paying federal taxes based on the net-wages after qualified medical deductions and not passing that savings to the client..

And last, I think there’s a misconception that PEO’s are kind of “set it and forget it.”

A company really has to do their due diligence before they engage with the PEO, just to assess their track record, their financial stability, and their business practices.

There was a case, I think it was October of last year, where a small PEO collected payroll taxes that they withheld from their clients employees over a five year period to the tune of 24 million dollars, and they did not pay the IRS.

They kept that money to pay their personal  bills and their staff. It’s crazy because those companies may be liable for the money that the PEO didn’t pay to the IRS.

So that’s why I say it’s important to really monitor and make sure that payroll tax payments are going where they’re supposed to.

Additional notes from the AbstractOps team

A PEO reporting state refers to a state where PEOs are required to report certain information or meet specific regulatory requirements, rather than the clients they represent.

Conversely, a “client reporting” state is one where certain the company using the PEO is obligated to report specific information to state authorities directly.

However, in any state where a company has a remote employee and foreign qualification is required – regardless of whether that state is PEO reporting or client reporting – it is the company’s responsibility to register with the secretary of state.

So to summarize:

  • If your company uses a PEO

  • And has remote employees in a state where remote employees triggers a need for foreign qualification

  • Your company is responsible for registering with the secretary of state.

This use case is a big reason we see folks leverage AbstractOps.

They’re offloading most of their HR / ops capacity to the PEO, so rather than waste the little bit of internal bandwidth remaining trying to figure out stage web pages and processes, they use AbstractOps to automate the process.

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