Employee Benefits - A New Approach

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PEOs - "Professional Employer Organizations" - offer a fresh alternative to traditional employment relationships.  One big advantage for smaller businesses - affordable access to employee benefits.

Although PEOs have been around since at least the 1990s, we find that many smaller businesses are still unaware of this potentially powerful option.

What is a PEO?

PEOs co-employ their client's staff.  In a nutshell, you continue to hire, fire, and direct the day-to-day work of your employees. 

However, your employees are actually paid on your behalf by the PEO.  As a result, you can offload many of the administrative headaches of payroll and payroll taxes to the PEO.

While specifics vary for each client, PEOs typically handle the payroll function and all related state and federal payroll tax reporting and compliance.  They also handle claim management for workers compensation and state unemployment insurance. 

 The typical PEO client has fewer than 20 employees.  However, larger businesses find value in PEOs as well, particularly when they want to outsource recruiting or need to staff a large number of positions quickly.

Are employee benefits available through PEOs?

Yes.  In many cases a PEO can offer attractive employee benefits like medical and life insurance, dental and vision coverage, and retirement savings plans.  They're able to do this because they combine small numbers of employees across many clients to achieve the advantage of scale.

As you know, many wellness businesses find these benefits out of reach because they're simply too expensive for smaller employers.

For example, fewer than 20% of small businesses offer a 401(k) retirement savings plan.  However, 85% of NAPEO-member PEOs offer 401(k) programs.  And NAPEO estimates that 40% of businesses upgrade their employee benefits as a result of their relationship with a PEO.

As Ray Grossman points out, benefits are key in attracting and retaining great people.  PEOs offer a fresh approach to the benefits challenge for small businesses.

How does a PEO differ from a temporary staffing agency or staff leasing arrangement?

When you hire a temp, they're usually just that - temporary.  They work in your business for a few days or weeks and then move on to the next assignment for another employer.

The employees covered by a PEO arrangement are typically long-term employees of your business.

How do we select a PEO?

Eight tips to get you started:

• Decide which human resources and people management functions you want to outsource.   Different PEOs have different strengths, including web-based recruiting tools, industry expertise, different benefits programs, and more.

• Assess the benefits needs of your employees.  Make sure that the benefits offered by the PEO you're considering are a good match.

• Check current and former client references.  Ask for the names of several former clients and interview them about their experiences.

• Check references with their key professional relationships - typically a third-party benefits administrator and insurance carriers.

• Make sure that the PEO has the necessary approvals to operate in your state.  If not, make sure that they're willing and able to get them in an acceptable timeframe.

• Understand how the PEO funds its employee benefits.  Many PEOs "self-fund" certain insurance risks.  This means that they pay certain claims out of their own pocket, rather than passing the claim to an insurance carrier for payment.  If it's self-funded, check their financial health by asking for bank and credit references.  And confirm that their insurance carrier and any third-party benefits administrators are licensed in your state.

• Get written proof that they've remitted payroll taxes and insurance premiums for their current clients. 

• Check their bank and credit references.  Since they'll be responsible for paying your employees, you want to make sure that they have a good track record.

And what should we watch out for?

First, double-check the PEO's financial health before you sign any agreements. 

Second, make sure that the contract is clear on your responsibilities and the PEO's responsibilities.  Make sure you can terminate the agreement if you encounter chronic service or quality issues.  And you certainly want to be able to terminate for even one late payment of payroll taxes or insurance premiums.

Third, as your business grows, periodically compare the cost of standalone benefits programs with those offered by the PEO.  It may become more cost-effective to switch to a traditional program as you grow.  A benefits broker can help you make this comparison.

For more information:  e-mail us and we'll be happy to suggest some providers in your area.  We don't accept referral fees, so our suggestions will be objective. Check out the NAPEO site for additional information.