Why shifting away from a PEO might be best for your business
Michael Levenson November 11, 2019
For some companies a PEO can offer convenience – but it comes at a price. Leaving a PEO can save you tens or hundreds of thousands of dollars each year. While PEO contracts can be complicated, shifting away from a PEO doesn’t have to be. A licensed insurance broker can help.
Professional employer organizations (PEOs) take over your employees and lease them back to you under a “co-employment” agreement. In exchange for a per-employee fee, the PEO handles some HR tasks, such as managing payroll, administering benefits, and securing workers compensation insurance. While a PEO can work well for smaller companies who lack experience, it comes at a high premium. Many of the benefits a PEO offers can be had by working with an experienced benefits broker.
Here are the main reasons to move away from a PEO and a few considerations along the way:
Cost is often the driving force when thinking of leaving a PEO. In addition to payroll, management and insurance costs, PEOs charge an average of $100 per employee per month. The costs add up quickly. To put that in perspective:
($100 PEPM x 25 employees) x 12 months = $30,000
($100 PEPM x 50 employees) x 12 months = $60,000
($100 PEPM x 100 employees) x 12 months = $120,000
Depending on your size, this is enough to hire a full time HR manager or an HR consulting service. For a small company with only a few employees, a PEO can relieve the owner of some HR responsibilities. However even a small business with 5 employees will pay $6,000 per year – money that could be spent on advertising, operations, or dividends.
2. PEOs are not customizable
PEOs operate on a one-size-fits all model. The benefits, requirements, and technology are the same for every member of the PEO and most PEOs charge fees for any special requests, such as running a special payroll, if they allow them at all.
Many companies outgrow their PEO or become frustrated with their cooker-cutter approach. Moreover, fees charged for things like a 401k can be higher than market rates. An independent insurance broker can design a custom benefits package that meets your company’s needs at a surprisingly lower cost.
3. Technology Limitations
PEOs force its members to use its software. Things like payroll, HR requests, and benefits are managed through the PEO website. Once again, this software is out-of-the-box portal that has limitations. Today, there are many customizable HR programs that offer a better value and increase functionality for your company.
PEOs may give business owners the impression that they can avoid HR issues and act as a shield from liability. In reality, most PEO contracts shift all liability back to the business. PEO contracts typically state that you are responsible for all wage and hour compliance, correct classifications, and all civil liability.
While there is some benefit, such as access to an insurance policy, these policies are often inadequate for the average business. For example, PEO participants will often be covered by the PEO’s employment practices liability insurance. However, this insurance typically carries a high deductible (often $50,000) which is your responsibility. In addition, the maximum policy limit is sometimes very low. More cost-effective policies with lower deductibles are usually available from an independent insurance agent.
What to do next
If you’re thinking of leaving your PEO – or joining one – get in touch with a licensed insurance broker. Benefit plans and commercial insurance packages can be customized for your business at much lower rates than what a PEO charges.
In addition, a recent law – the Small Business Efficiency Act (SBEA) has removed barriers that previously kept many companies from leaving their PEO.
At a minimum, business owners owe it to themselves and their companies to explore the options available to them. Speaking with an experienced insurance broker is a commitment free way to ensure you’re making an informed decision.