Professional Employer Organizations or “PEO’s” represent the deepest level of client/provider service partnership available and can solve some fundamental problems that plague many small businesses.
Professional Employer Organization (PEO) technology and service providers can provide high ROI for companies in need of:
PEO’s can solve a variety of challenges due to their unique ‘co-employment’ partnership model, as compared to payroll or HCM providers which do not utilize co-employment. Co-employment is, in a nutshell, a service relationship where both parties (the PEO and the client ) act as an employer of the employees. The PEO acts as the Administrative Employer (overseeing the HR administrative details) and the client acts as the Worksite Employer (overseeing the supervisory / worksite details). Per IRS guidelines, the PEO can assume the role of a co-employer of the client’s employees via issuing payroll to the client’s employees under the PEO’s Federal Employer Identification Number or FEIN. The employer liability is now shared, and the PEO service provider now has more ‘skin in the game’. Instead of offering client advice from a distance, where a service provider is insulated from the results of this advice (save for losing the client), the PEO is in a unique position to realize the effects of their client advice and the resulting client performance.
Some common reasons an employer would consider partnering with a PEO:
1. Health benefits purchasing power: The PEO has many employers (& employees) on their ‘master plan’ & get the best rates.
2. Work comp cost containment: The PEO has many clients, so a client worksite accident has less of an effect on the entire pool.
3. Reducing HR “spend”: HR staff can be expensive hires (visit the Bureau of Labor & Statistics website for proof)! PEO’s provide many HR duties at a fraction of this cost.
4. Affordable Expertise: PEO’s offer other in-house expertise to clients such as risk management & recruiting, usually included.
As any PEO industry veterans will tell you, a prospective PEO client needs to appreciate that shopping for a PEO is actually a two-way interview. The prospective client is of course trying to assess the PEO’s performance and capabilities. But the PEO is also trying to assess the level of risk that the prospective client represents if they were to come onboard. As discussed above, this increased ‘skin in the game’ for the PEO via the shared liability of co-employment means the PEO will want to learn a lot more about who they might be partnering with. The PEO also has an existing client pool to protect, in terms of keeping their existing client insurance premiums and renewals as low as possible. If a PEO is successful in this client cost containment and/or risk mitigation, this will create client success stories and case studies that allow the PEO to attract new clients and grow their book of business.
If a PEO does not exercise industry accepted due diligence and brings on clients that introduce greater than anticipated levels of risk (i.e. the risk levels have not been properly assessed by the PEO) this can increase the administrative and insurance costs for all clients with that PEO. If this practice continues, it can lead to an ugly situation known as the ‘death spiral’. This is where PEO clients see their administrative and insurance costs rise to unacceptable levels and no longer see the value in partnering with the PEO. The clients who can exit the PEO do so, leaving behind clients who may not have other options. These remaining clients may have employees with significant health challenges and thus the employer cannot obtain affordable health insurance under their own FEIN. Or these clients may not be able to afford exposure to their own ‘true’ work comp claim history (aka “experience modifier” or “ex-mod”) and prefer to stay on the PEO’s work comp master policy. Increasingly, this leaves the PEO with no way to offset their costs and remain profitable. If this PEO cannot right this ship, they could go out of business – or if they’re lucky – get acquired by another PEO that is in better shape and can absorb the other PEO’s group. This new PEO may be able to offset this death spiral due to the size and health of their own client pool. But there is no guarantee that the new PEO won’t eventually reassess the cost/benefit equation of continuing to partner with these acquired clients, and inevitably let some of these clients go. This is why it’s so important to thoroughly assess a PEO you would partner with, and to get independent advice – or to have a resource in your back pocket if conditions with your current PEO take a turn for the worse.
Typical PEO services and plans will most likely include solutions for:
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