PEO Pros And Cons - To PEO or not to PEO

Steve Siino's Profile

PEO pros and cons

I am seeking the opinions of the group regarding experience with specific PEO providers, the general model, and recommendations specific to a company's size (0-49, 50-99, 100-999, 1000 and above) and status (public, private and pre-IPO).  Thank you!

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I was the Controller for a small manufacturer/distributor(25 employees) and could not justify a salary for an HR person. This was 4 years ago, and there are probably more choices available now, but it was the 2 big payroll companies ADP and Paychex we had to choose from. We ended up choosing ADP's Total Source program. We were able to get much better health insurance and benefits choices than we would have on our own. We were also finally able to offer a 401k plan to the employees.Our biggest concern was with employment law- we had no one with any HR or similar knowledge and a surprising number of employees with issues for such a small company. ADP set us up with guidelines to produce an employee handbook and easy access to forms/information for most common situations. My one complaint would be that sometimes it seemed like there was still alot of busywork/paperwork that had to be handled by the company(ie myself). I guess the bottom line would be that the PEO fees were reasonable considering the potential liability that was removed from our shoulders, but there is still a fair amount of paperwork that is the responsibility of the business.Ultimately it would be a case of weighing the costs/benefits, but I would certainly think that by the time you reach the 1000 employee mark it would be beneficial to considering hiring an HR professional and bringing things in house.

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I found these two white papers:

"2014 Finance Priorities Survey:"
http://www.proformative.com/whitepapers/2014-finance-priorities-survey

Enjoy!

Best... Sarah

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Kathleen, I would definitely agree with you that depending on the PEO, the employer can still end up doing a lot of manual busywork/paperwork which would be the same if you went directly through a benefits broker. So the benefit of less time in the processing of this paperwork is not always a benefit with a PEO. It should also be noted that a company has to be approved to the join the PEO and this does not always happen. ADP Total Source, for example, has a significant underwriting process a company must go through and the majority of companies do not get selected. That being said, in my experience, given the size of the company and I think people have been accurate in their over/under 50 employee count, companies who are approved at PEO's see a very favorable reduction in their benefits costs that far outweigh the per employee PEO fees which makes joining a PEO a less cost alternative overall.

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As CFO at a number of small and mid-sized companies what I have seen is that after about 50 employees the company has enough hands on deck that paying the extra fees and overhead associated with a PEO stop making sense. Below 50, they can make great sense. You pay for their overhead to do the things that you would otherwise have to staff yourself with a fraction of a person here, and another fraction there, etc.. But at ~50 employees you now have an accounting person or two, maybe some part-time HR, etc., and at that point you can DIY and take advantage of splitting out your HR service providers for the great cost advantages you reap.

You will see, if you quote them side-by-side, that cobbling together your own payroll, benefits, and other HR services saves you a lot of money once you go past this threshold.

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Jeff, I agree with your assessment completely- couldn't have said it better. When I was with a small, fast-growing startup, I evaluated a PEO option at about the 50 employee count level, and I determined we had JUST passed the mark where it stopped making sense. Because we had a fraction of one employee's time spent on payroll, and a fraction of another's time spent on overall HR/benefits administration.

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As the CFO of several firms I have experience both with and with out a PEO, and there are pros and cons for each. I have only worked with one PEO - Administaff and therefore can only speak to the experience. I think size of company is a factor however the quality of the PEO is as well. PEO can make sense at differing employee sizes, however in my opinion, I think they are most appropriate in early stage and companies that have limited resources for accounting and HR. In my current role we have about 120 employees and have been using Administaff for the past two years and it has been trying at best. It is getting better, however it has been a painful process. I will admit I was not for the decision, however it was not my decision so I have to work with it. My reason for being against it was that 1. It is more costly when considering an all in cost. 2. The company gives up payroll control and in a business where the employees are one of our most valued resources and their pay is one of there most significant concern that can be an issue. 3. Some PEO are not willing to provide a breakdown of the "overhead" costs between taxes, insurance, administrative fees, etc. 4. the benefit package is not flexible, you have to accept what they offer and there is no customization. On the positive side, we do have one benefit that we did not have before and employees like that. I will say that from an employee experience, the process has not been as bad as from the administrative perspective.

On the non-PEO side again there are pros and cons as well. From a pros perspective, you have control and can negotiate with benefit vendors and customize packages. This can also be a negative. Annual increases are only based on your group and again this can be good or bad based on the overall health of your group. Generally the PEO should be better since it is a larger group, however when we converted our costs did increase and heath care is one of the largest expenses. As mentioned above you need adequate resources in HR and accounting to deal with this, however you can mitigate some of this by using the ADPs and benefit providers who are willing to give extra services.

Overall I would say that it really depends on how important the function is to firm and what is the cost.

I am happy to talk about specifics of line if you would like.

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TriNet offers a cost breakdown and an al-a-carte menu from which you can pick the services you want, and ignore those you don’t want. They also manage their insurance pools such that it can yield advantages for low risk companies. This is one of their major selling points vs. Administaff. Administaff will answer that when you use most of the services, their buffet pricing can result in lower costs.

I can give you a TriNet contact if you are interested.

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I have worked with ADP TotalSource, similar to the first post and saved my Company over a million per year in G&A costs. TotalSource bases the fee off of Gross Payroll, similar to many of the PEO's in the market place. You can model out the costing based on your quotes, however based on the size of your entity, your savings will vary. I picked up my savings in the areas of Benefits, HR compliance and Worker's compensation insurance which may not be applicable to your situation. My model indicated that once a level of 350 FTE were obtained, the PEO added expense, thus cost out your options. Hope that helps and if I can provide further insight, please let me know.

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I know the PEO industry well. They hide and often do not disclose the total cost for using them. For example, if employees are deducting health insurance from their check on a pre-tax basis, they usually still charge the employer the FICA/Medicare even though that would be tax free if the company was running its own payroll. They usually have arbitrage on workers comp and state unemployment, as well. I am a fan of the services they offer, but I think anyone considering it should understand what the TOTAL cost is, not just what the service fee is...

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Ken et al.,

I typically work with clients who have evolved past a PEO being a strong financial option. However, one of my clients is spinning off a division that could be a great candidate for a PEO. There is a high degree of volatility in this venture and I want to help prepare this venture structure their arrangement with the PEO if it is extremely successful. Can you recommend any particular ways to structure a PEO contract to provide the most flexibility when a company is prepared to move away from the PEO? Are there contractual pitfalls or products/services that should be avoided?

Any advice or guidance would be greatly appreciated.

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