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PEO Background
PEOs, also know as Professional Employer Organizations, Employee
Leasing, and Human Resource Outsoaring, were first conceived by
a group of professionals from the legal, accounting, insurance,
and HR fields. The strategy was to create a mechanism for
increasing employer efficiencies and reducing costs by pooling
larger numbers to create economies of scale. PEOs initially
gained popularity in the 1980's due to escalating insurance
rates in the workers compensation market. Additionally,
PEO master health plans also help improve the popularity of PEO
in the 90's as small group health rates increased.
Like most industries, PEOs have continuously changed over the
past 30 years and there are tremendous differences in PEO
operating models today. State and federal regulatory laws
and market forces continue to create change within the PEO
industry.
PEO Concept
The PEO concept is relatively simple and makes good practical
sense in theory. The basic premise centers around an
agreement between the PEO and an employer group or client.
The client company enters into a co-employment contract
(employee leasing agreement) with the PEO and designates them
the "employer of record" for IRS purposes. The client
(managers/owners) basically act as the onsite supervisors for
the PEO, controlling and directing the PEO worksite employees on
the jobsite which basically means they retain control of the
leased workforce.
Once executed, the co-employment agreement allows the PEO to
assume certain liabilities for employer taxes, insurance,
benefits, and human resources. This transfer of employment
status is designed to pool multiple employers into one larger
employer group. As a larger employer, the PEO should now
be able to most of the following: 1) Hire expert staff in
the areas of payroll, HR, benefits, risk management, etc. and
spread that cost out over all the employer group creating
economy of scale. 2) Negotiate better insurance rates such
as workers compensation and health insurance. 3) Increase
efficiencies and reduce costs for things like unemployment tax
(SUTA), HR, and insurance by utilizing best practices
implemented by the experts within the PEO.
PEO Advantages
When done properly, PEOs can be a great alternative for all
types of employers. But it is difficult, if not
impossible, for a PEO to be all things to all employers.
In other words, a PEO needs to specialize their services for
certain types of employer groups who have specific needs in
order to create real value for the clients.
Many PEOs have the ability to:
- Simplify the process of employing people
- Reduce the employer startup costs and deposits for
insurance
- Lower the overall costs associated with workers
compensation insurance
- Reduce the costs associated with health insurance for
some employer groups
- Provide better HR services and risk management practices
for employers
- Improve employee benefit options available for employees
- Reduce the cost of unemployment taxes in some states due
to state experience rating
Unfortunately it is unlikely a PEO will be able to do all of
these things at the same time for all types of employers.
Take health insurance for example: Fewer and fewer PEOs
operate master health plans due to carrier resistance and claims
history. The PEOs who do offer master health plans operate
them under greater scrutiny than ever before in order to
maintain acceptable claims ratios. This means that PEOs
today must individually underwrite each employer group and then
properly price the group under certain rate tiers to protect the
overall policy. Some employer groups will not even
qualify. Furthermore, PEOs often must require certain
participation requirements for each group.
Now consider workers compensation: While the majority
of PEO still operate master policies, many now "carve out" this
service and provide client owned policies that are administered
by the PEO. Carved out policies are good for clients with
good
experience modifiers, but provide less value to clients who
have had some claims. PEOs who excel in workers
compensation are unlikely to excel in health insurance for most
industries.
PEO Disadvantages
While there are some great PEOs around the county, there are
some less than desirable PEOs as well. Some PEOs have been
associated with various types of fraud with regard to workers
compensation, tax reporting, and
SUTA dumping. According to
Wikipedia on PEOs, at least 15 PEO Companies were the
subject of criminal prosecution during 2006.
Here is a list of the potential general disadvantages:
- Dependence on PEO to negotiate insurance rates and
control claims history
- High administration fees and/or hidden fees on SUTA or
work comp
- Legal ambiguity associated with state and federal
co-employment laws affecting PEOs
- Potential for fraudulent tax reporting or workers
compensation premium reporting
PEO Shopping and Alternatives
The best method for measuring the viability of outsourcing to
a PEO is to compare your current employer program and needs to
multiple PEO options as well as other solutions such as payroll
and administrative outsourcing or direct insurance products and
programs to address any problems or needs identified.
PEOshop was created to help employers take a much broader
approach in identifying current problems and implementing
solutions. We work with employers and create multiple
opportunities and advise them on costs and benefits of each
opportunity including PEOs.
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