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!

Answers

Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

I found these two white papers:

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

You should also take a look at:
"Confessions of a Services Company CFO"
http://www.proformative.com/whitepapers/confessions-services-company-cfo

Enjoy!

Best... Sarah

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

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...

To comment, and for full access, login or register
Member's Profile

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.

To comment, and for full access, login or register
Member's Profile

When you are selecting a PEO, it's important to consider if they are local, how much individual attention they provide, customization of reporting, and personalities. Are you actually doing all the data entry yourself? Or, are you submitting documents, and the PEO processes everything (a true back-off HR department).

I have been the CFO and PEO Operations Director for a small PEO in Bellevue, WA called HRnovations, Inc. Although I am leaving the company at the end of this month, this firm does provide the hand-holding that many small businesses need (but that doesn't preclude only small businesses use our services - we range from 2 employee clients to 550 employee clients. We also provide a wide range of benefits to select from - you're not stuck with just a few options.

As mentioned above, the benefits of a PEO is to be your true off-site HR office. For clients that need it, we walk their new employees through new employee orientation (documents, benefits, etc) - both in our office as well as their office (in large groups). We are the experts in payroll and payroll taxes, and can run through scenarios as requested. And, it isn't necessarily more expensive - if you were to hire an HR staffer and process all your payroll, taxes, garnishments, etc. in house, it would likely cost more than the fee that a PEO would charge.

To comment, and for full access, login or register
Member's Profile

In my previous role, we used Adams Keegan--a local, Memphis-based PEO. They provide services mainly in the southeast, but might be expanding. It's worth a call.

We had issues with their benefits group and went with another broker. Their complete willingness to give up this revenue and serve us without reservation is a testament to their customer service attitude. They went above and beyond to make that transition smooth. They also helped us write an Employee Handbook, were willing to take a financial hit for a communications issue that wasn't completely their fault and answered our questions immediately.

I've recommended them over and over and never heard negative feedback from anyone after they started using them. No relationship now...just a fan.

To comment, and for full access, login or register
Member's Profile

I've read through the comments on the discussion, will weigh in from a different perspective.

If you have ever been in the CFO's roles with a distressed company, I believe the PEO is the way to go. Should the company fail, go into bankruptcy, etc, the employees will still have access to COBRA benefits continuation. Where/if the company had a private plan, the company's failure and not funding it's obligations falls back on the employees, there would be no COBRA continuation.

I'd agree a cost-benefit analysis is worthwhile, because the workforce size and geographical disparity should come into play.

With a PEO, you will give up the at least several days of cash flow. PEO's require all funding up front before releasing the payroll cycle for payment to EE's. If you were using on of the service providers to handle payroll tax filings, you were giving the cash flow from taxes anyway. If you were using a bank "official" check format, the net pay is fully funded and the bank takes on the escheat law obligations.

I am somewhat surprised by Ken Kaufmans' Hidden Fees comment regarding Administaff charging the client the FICA/MEDI tax on pre-tax health insurance withholding. Seems to me this is governed by Federal tax law, and unless the contract with Administaff permitted this (highly unlikely), you should have a claim back against Administaff. They potentially have violated tax law (inaccurate tax withholding), and could jeopardise the pre-tax status of the health plan. Could it be the health plan was not pre-tax?

To comment, and for full access, login or register
Member's Profile

I have had both excellent and horrible experiences with PEOs in two different companies where I was the CFO. In both circumstances it was with same PEO. That PEO ending up closing, which I believe was related to the problems in the second company.

That being said, if it fits your needs, it is a great way to go.
I know many people who are very happy with Administaff. If you need a contact there let me know.

To comment, and for full access, login or register
Member's Profile

I too, have had good and bad experiences with PEO. I definitely found the diminishing return on cost savings at around 50 emps. I also found that I simply did not use any of the ancillary services which they offer (HR consulting, legal advice, etc.) b/c I never really felt they were the best resource for that.

However, it made total sense from an overhead perspective b/c bringing on a PEO kept me from having to pay my people to do all of that work in-house - and when you are small you just don't have the people.

I have used Tri-Net before with good results (yes, I still switched out of them when my company got big enough, but they had good people and service). They are, I might add, in the B2B Marketplace here on Proformative http://www.proformative.com/node/191169/provider-resources. No, I do not work for them! But they are good and I think we should all think about how we support the companies that are supporting this platform (which I, for one, really enjoy and get value from).

To comment, and for full access, login or register
Member's Profile

If you are a 5-10 person company that plans to grow to 25-30 over the next couple of years, a PEO is a great option to handle most of your HR administrative issues. However if you are like many young Silicon Valley companies (at least before 2008) and have aspirations to grow significantly, PEOs will prove to be a costly alternative down the road. The breakeven level (depending on services) is approximately 30 employees before you are paying more per-head for PEO fees than doing it ala carte with a payroll processing firm, benefits broker and PT HR specialist.
Another point that has not been brought up in the previous discussion is that you and your colleagues are officially employees of the PEO and therefore the company is not building up its own insurance history. A relatively healthy employee population can lead to lower rates in follow on years(think about how your car insurance goes down if you have a clean record over time).
PEOs are great for small private companies but become cost prohibitive for mid-sized and above entities.

To comment, and for full access, login or register
Member's Profile

In response to a couple of points allow me a moment to clarify a couple myths. Not all PEO's require prefunding of Payroll or escrow. Some PEO's busienss model are base purely on Margin instead of administration costs and an overwelming majority do not offer a la carte options. a CBA can be misleading as mentioned by Ken and a thorough examination of the Service agreement and Q&A with the PEO's In-House counsel should put to rest any hidden cost. Most will Honor SUTA cutoffs if you start mid-year or they may charge the payroll Tax burden all year as a fee for service instead of a traditional Admin fee based on total payroll. If you've shopped 1 PEO you've shopped 1 PEO... Each is different from the ground up. Some are better at specialized circunstances. Define what you want the most and find a PEO that does that or those things well and get a price.... You will typically save money...

To comment, and for full access, login or register
Member's Profile

We are on the reverse, downsizing and increasing health care costs to the point when we now have <70 people with <50 participating in the group health and we project even less employees and group health participants. PEO seems like the only way to get affordable health insurance in the very near future. Is this right thinking?

To comment, and for full access, login or register
Member's Profile

This subject is of particular interest to me in my business as an insurance broker - we specialize in businesses under 50 and have been successful in saving a lot of benefits dollars for our clients, including a couple that had previously worked with a PEO. Does anyone have a benchmark or rule of thumb for the expected per-employee cost and/or expected savings from using a PEO? We are most interested in the health insurance component but also in the full spectrum of related services such as payroll and HR compliance. Also how much flexibility can a small employer get in designing their health and welfare plans with a PEO? Is it completely menu-driven or a consultative process? As a point of reference I was a finance executive for many years and heavily involved in the benefits strategies for several companies but always for companies that were larger and had all of the typical PEO functions internally, so I never paid as much attention as I should have to their relative advantages and disadvantages. Thanks for any input.

To comment, and for full access, login or register
Member's Profile

Richard:

In my experience with PEOs, they are more expensinve on a per-employee basis, not less. The tradeoff for small companies is the convenience of having all of your payroll and benefits managed with one provider, one web interface, and one person to call when you have issues. But not for saving money. I have always found it cheaper to go with separates when that is the goal, and clearly this is why larger companies never use PEOs: the cost savings of going with separate providers (benefits, payroll, insurance) is too compelling to ignore after a certain point.

To comment, and for full access, login or register
Member's Profile

Richard -- Are there group health insurance carriers out there still who provide HMO/PPO with gatekeeper apps (or at the most, a census with only smoker/non-smoker q)? If so, how are the rates? That is the driving reason for our looking into going into a PEO.

To comment, and for full access, login or register
Member's Profile

Hi Carolyn. The choices that are available will depend somewhat on how large the company is. If you want to send me a private message with a bit more information about your company and what you are looking at I can give you a quick idea of the price ranges you would be dealing with.

To comment, and for full access, login or register
Member's Profile

I'm a part time CEO for multiple companies, and one of mine is moving away from the PEO. We have 30 employees, and have been in business for 8 years. While the COBRA thought mentioned above is a good one, I'm not sure that will carry weight for us.

Our problem, which was not mentioned above, is that we are at a stage now where our employees need that resource to go to, to look out for them, to ensure that we are taking care of career development. Our PEO has poor customer service, and is never on site. They are a name and we are a number.

With a young workforce, we are able to bring it all in house for close to the same money - using a great insurance broker as an extension of our team, as well as a great Executive Assistant on staff. We are hiring a 30 hour a month HR Professional on a contractor basis (the HR consultants say there is 1 hour per employee of HR per month).

It's the right time for us, but there are some pretty good arguments above that go both ways. (I hate the hidden fees!)

To comment, and for full access, login or register
Member's Profile

It's too bad you had such horrible service that the overall benefit of a PEO is not to your advantage. My guess is that you are using one of the national firms, where you truly are a number. Have you considered using a local PEO? When I worked for a PEO, we regularly had HR consultants on-site, as needed (in some cases twice a week, year-round). Payroll specialists also didn't treat clients as a number - they had working and personal relationships with each and everyone of their assigned clients.

To comment, and for full access, login or register
Member's Profile

I'm a part time CEO for multiple companies, and one of mine is moving away from the PEO. We have 30 employees, and have been in business for 8 years. While the COBRA thought mentioned above is a good one, I'm not sure that will carry weight for us.

Our problem, which was not mentioned above, is that we are at a stage now where our employees need that resource to go to, to look out for them, to ensure that we are taking care of career development. Our PEO has poor customer service, and is never on site. They are a name and we are a number.

With a young workforce, we are able to bring it all in house for close to the same money - using a great insurance broker as an extension of our team, as well as a great Executive Assistant on staff. We are hiring a 30 hour a month HR Professional on a contractor basis (the HR consultants say there is 1 hour per employee of HR per month).

It's the right time for us, but there are some pretty good arguments above that go both ways. (I hate the hidden fees!)

To comment, and for full access, login or register
Member's Profile

Thanks for the input Mark; are there any specific metrics you've seen or used regarding costs for the bundled versus unbundled approach?

To comment, and for full access, login or register
User picture

Is it about saving money or making money? Do you want a glorified payroll service or do you want a true partner to help with your human capital strategy?

To comment, and for full access, login or register