Its no secret that smaller businesses are stretched thin. Finding the time to actually run the organization can be extremely taxing. And for those struggling with ongoing administration, such as employee benefits, payroll, workers' compensation, recruiting, risk/safety management, and training and development, a professional employer organization is a great solution. But its not a permanent for most employers. Using a PEO usually runs its course and it makes sense to unpeel from the arrangementwhen the time is right.
But that isnt necessarily easy.
A PEO enters into an agreementreferred to as co-employmentwith a business. This means the PEO handles taxes, workers compensation and usually provides a master benefits policy, which allows for the aggregation of smaller groups into a larger employee benefits risk pool. With this arrangement, the PEO underwrites smaller groups at rates lower than they would normally qualify for under community rating. However, if the group has a poor performance or experiences catastrophic claims, the PEO may impose a high rate increase, or in some cases, terminate coverage under the master benefits policy.
Despite the risk of higher rates, businesses using PEOs dont have to worry about payroll, workers comp insurance, employee benefits and benefits administration, or basic HR support. With one move, the organization has solved much of its administrative headaches. For employers with fewer than 50 employees, a PEO is a no-brainer, as long as the business selects a PEO with a workers comp risk profile that fits its needs.
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However, as great as this sounds, it does not mean that the business owner never has to worry about these functions ever again. Companies utilizing PEOs must conduct a cost/benefit analysis to take a fresh look at how theyre using each of the services offered by the PEO. There are reasons to stay with a PEO and reasons to dissolve the arrangement.
For organizations with fewer than 50 employees, a PEO relationship is almost the best deal available. The workers comp rates will be better, and they avoid community rates for employee benefits.
Multi-state employers can save themselves significant administrative headaches by participating
in a PEO. While operating in two states is not too difficult to handle, 30 states can get very complex. And for employers with a significant workers compensation risk, PEOs almost always offer the best alternative.
However, businesses are living organisms; what worked yesterday may not be true today or tomorrow. They grow, enter new industries and evolve over time. These changing circumstances can often mean that employers should reconsider whether a PEO is the best fit for them.
If a firm is growing, thats when it should consider moving on from a PEO arrangement. When an employer expands to more than 100 employees on benefits, there can be significant savings in the open benefits market, as well as in the workers compensation market.
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As employers grow, HR support often becomes more demanding. So while it might seem like a brilliant idea to outsource this function, a company must be sure its getting the proper level of support. PEOs tend to take a one-size-fits-all approach to HR support. They can come up short when it comes to customizing a solution to a specific employee population. But if your business needs a higher level of service, it may be time to move on from a PEO.
Many employers decide they need to move in a more strategic direction as opposed to the tactical level often delivered by a PEO. For instance, workplace wellness and disease management programs are typically non-existent in the PEO environment, but are a significant component of a modern employee benefits platform and design. An employer that wants to move in this direction will have a hard time doing so while tethered to a PEO.
Other common considerations for employers that are contemplating leaving a PEO include an upgrade to their payroll system, a more appropriate workers comp or Employer Practices Liability Insurance policy, a better fit for health and welfare and other offerings, including FSA funding, as well as voluntary benefits and 401(k)s.
Once an employer has concluded that its needs are no longer best served by a PEO, those charged with managing the change must understand that making a change isnt as simple as flipping a switch. This is a major change, impacting every employee and those that manage them.
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With that in mind, an organization needs to keep several goals front and center as it unpeels itself from a PEO. First and foremost, strive to minimize employee interruption. A rocky road for team members can scuttle the entire change project. Be sure to update employee handbooks and other communications.
It is imperative that the business remains in compliance throughout the transition. This means developing a strategy that always considers compliance, and layers actions in the proper sequence. The employer needs to be up-to-date on business-related forms, including tax forms.
Be sure to secure competitive employee benefit plans. After all, thats what is at the core of this decision to switch from a PEO.
Finally, manage the amount of time spent on the transition; it cant be allowed to overwhelm the business.
To accomplish all of this this, employers that are considering leaving a PEO need to give themselves plenty of time to consider all of the moving parts. Ideally, allow for at least six months of planning. This helps to make the transition go smoothly for employees and greatly reduces stress.
For many small businesses, PEOs provide a great solution to managing human resource functions. But as organizations change, they must be sure not to paint themselves into a corner. And they need to know how to get out of that corner when the time is right.
James Perry is a benefits consultant with Corporate Synergies, based in Orlando.
