Some Straight Talk About the Whys and Why Nots of Utilizing a PEO

First off, to be totally transparent, I work for a company that competes with PEOs (Professional Employers Organization) on a daily basis. The purpose of this blog is to reflect and attenuate some of the responses I hear from clients who have either been using a PEO or are considering using a PEO. You may […]


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PEO Considerations

First off, to be totally transparent, I work for a company that competes with PEOs (Professional Employers Organization) on a daily basis.

The purpose of this blog is to reflect and attenuate some of the responses I hear from clients who have either been using a PEO or are considering using a PEO. You may not like or agree with the information I’m providing, but it’s based on conversations I’ve had over the entire period that PEOs have existed in our country. Marketing asked me to write this honest treatise as a starting point for those groups either considering a PEO for the first time or those seeking an alternative to the PEO they currently have.
Most of the comments center on the following topics:

  • Time savings from reduced HR activities
  • Better benefits administration including reduced costs
  • Company size constraints
  • Hidden costs and changes to operations
  • Overall control of employees

Time Savings

Almost all of the people I’ve discussed PEOs with and had previous PEO experience state that the amount of paperwork did reduce but not significantly. The expectations established during the PEO sales process led most administrators to believe that things like forms completion/handling, compliance input, and day-to-day employee Q&A would be less than what it actually turned out to be after implementation of the PEO. Many regulatory requirements and routine tasks still fall upon the employer to oversee and complete.

Better Benefits Administration

This topic is somewhat of a mixed bag with many employers stating positive things about their benefits offerings and reduced premiums on the PEO. Just as many stated their expectations weren’t met, they subsequently asked to move to an outside broker to fulfill what they expected. Those groups dissatisfied by the PEO benefits administration seemed to feel disenfranchised by the carrier/plan selection or their inability to influence the renewal process.

Best Company Size Suited for a PEO

Without a doubt, this question is the easiest to reflect on. Virtually every person I’ve talked to believes that PEOs are best suited for smaller companies – the smaller the better. Fewer than 25 employees seems to be the sweet spot as administrators report costs, paperwork, and personnel issues go up exponentially as the number of employees increases. Groups with fewer than 10 employees are most pleased with the services a PEO provides and affords the business owner the opportunity to focus on growing the business rather than HR.
At Zenefits, we get quite a few groups who feel they have “outgrown” their PEO’s useful purpose and are ready to utilize a dedicated all-in-one HR/Benefits solution that both fits their budget and fulfills their desire to have a greater influence on both employee benefits and HR needs like compliance and retention.
Related: After health insurance, what’s the second most important fringe benefit to provide your employees?

Hidden Costs and Changes to Operations

I’ve received many complaints and negative inputs over the years when I’ve inquired about a la carte pricing from PEOs and about prices/rates period. Some of the complaints go back to the sales pitch used to convince them to move to the PEO initially. While many PEOs are menu driven, the quality of the “extra services” they provide are often suspect in their quality and thoroughness. Services like benefits, payroll, HR compliance, onboarding, COBRA, and many others are often not up to the industry standards that groups seek.
At Zenefits, we try to cater to the precise desires of the group and what they are seeking to accomplish and at the same time deliver a “best in show” solution to the specific application we are providing.

Overall Control of Employees

No one has invested more time in their employees than the business owners themselves. Using a PEO causes employers to abdicate their input somewhat on the level and quality of the benefits structures and HR issues – and most importantly payroll.  Payroll is probably the most sensitive issue affecting workers, with benefits running a close second. Employers report they feel somewhat helpless when trying to structure a specific benefits package for employees and do not have immediate access when payroll issues arise.

At Zenefits, we’ve initiated programs to make available to smaller employers Alternate Payment Plans (level/self funding) to allow groups to benefit from their own good claims experience. When your group is lumped into a larger group via the PEO you either benefit or suffer depending upon the claims experience of the larger group from a premium standpoint. In either circumstance, your business misses out on the opportunity to participate directly in surpluses generated based upon your good claims experience.
Another aspect of PEO utilization is the feeling of detachment employees perceive from being employed by someone other than their own company. Seem a little trite?  I’ve heard it literally dozens of times.
So, what I’ve tried to do today is point out some of the expectation fallacies employers face when utilizing a PEO and some of the viewpoints others who have PEO experience wish they had known before they opted to use a PEO. PEOs vary greatly in quality, services provided, and client service. They have differing methods of delivering benefits, payroll, and HR services. Due diligence is extremely necessary and required when selecting a business PEO partner or an All-in-One HR provider such as Zenefits.
Thanks for your interest and good luck!
Related: HRA: A forgotten tool in reducing small business healthcare costs? 


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