Updated as of January 2019. This article contains general information, but it’s not intended to be construed as tax or legal advice. Consult an attorney or tax professional before deciding whether a PEO is right for your specific business.
So you’re ready to hire new talent and brace your business for bigger and better challenges. The only problem is, the more you grow, the more you may find yourself getting bogged down with HR.
Don’t you love growing pains? Yeah, right. For companies that aren’t ready to bring on a full-time HR person, growth can turn into a real pickle. Luckily, there are several options you can use to get HR help, and one of them is called a PEO.
A PEO, or Professional Employer Organization, is an outsourced solution for HR, payroll, benefits, workers’ comp, and compliance. It allows you—the employer—to focus on your day-to-day work while the PEO handles your company’s back-end office stuff.
But how do you know if it’s right for you?
We spoke with health insurance broker Derek Bettencourt to get the lowdown on PEOs. Derek knows his stuff—his experience spans PEOs, insurance companies, and online brokerages. He broke down the biggest benefits and drawbacks of working with this unique type of HR service, along with the steps you need to take if you’re looking to switch things up.
What’s the difference between a PEO and simply using HR software?
“The main thing to know is that when you decide to work with a PEO, you agree to enter into something called a co-employment model,” explains Derek.
Co-employment means that the PEO becomes your employer of record, and therefore takes on the responsibility of your company’s HR—and the associated liabilities. If you like having control, this can be a big deal.
Here’s the gist:
- You run your payroll under the PEO’s tax ID numbers.
- The PEO takes on some of the risks associated with being an employer.
- With this risk sharing, you lose a little bit of control.
To protect themselves, PEOs require you to adopt their policies, procedures, and even employee handbook wording. Because if an employee issue arises, they’ll back you up only if you’ve followed their guidance.
On the flip side, other HR services do not involve a co-employment model. Yes, you are responsible for following all federal, state, and local laws. But you also have total autonomy to customize your company culture, internal processes, and management strategy within the constraints of the law.
How much does a PEO cost?
PEO pricing is an important thing to wrap your head around. There are two main ways PEOs slice up their fees:
- Percentage of payroll: This is a percentage of your total payroll for each pay period, plus local, state, and federal taxes, workers’ comp, and employer practice liability insurance (EPLI). Plus, there’s also an added administrative fee. This can make accounting confusing since the PEO’s administrative fee can vary by employee and changes throughout the year.
- Per-employee-per-month (PEPM): The PEPM fee is negotiated directly with the PEO when you sign up. This doesn’t include a separate setup fee, which can be thousands of dollars. It also doesn’t include hidden charges for additional features, or even things like running an off-cycle payroll.
Now, let’s run through the top pros and cons of going with a PEO.
- HR is entirely taken off your plate This is the main reason people use PEOs. They shoulder all your HR-related responsibilities so you can focus on going all in on your business operations.
- Up-to-date on regulations A PEO ensures that your company is always compliant. They do this by keeping tabs on fast-changing rules and regulations, and providing the action plan you need to take to follow them. However, the guidance you receive may be biased in the PEO’s favor since they are the employer of record.
- Competitive benefits and health insurance A PEO relies on purchasing power to negotiate affordable benefits and insurance coverage for their customers.
- Liability assurance A PEO gives you access to licensed HR professionals and attorneys that can help mitigate your employment-related risks. That way, you don’t have to hire HR experts and lawyers on your own. This also means you give up some control to follow the PEO’s guidance, which may not always align with your culture or style.
- Pricing PEO prices lack a level of transparency. When you’re charged a percentage of payroll, it can be hard to tell how much you’re really paying. Usually, the invoices can get murky since they bucket together payroll, taxes, workers’ comp, EPLI, and their admin fee. For PEPM, the set-up fee and per-employee rate depends solely on negotiations. “Since both are super-soft numbers, employers have no way of knowing whether that fee is reasonable,” says Derek. It’s also hard to gauge what fair pricing looks like for a company of your specific size, industry, and geography.
- Health plan inflexibility PEOs offer a variety of insurance plans. However, they all come from one or two carriers that the PEO selects. Employees and companies don’t have a say in which carriers the PEO partners with and are limited to the plans the PEO has chosen. Let’s say you really wanted to get a plan from United HealthCare and your PEO only offers plans from Aetna. With a PEO, you’re stuck. If plan flexibility and carrier choice are important to you, an independent health insurance broker may be a better match.
- Customer service PEOs support a lot of employees and as a result, the customer service can feel a bit impersonal. Questions are usually passed on to various representatives, so you don’t have a dedicated person to support you and your team.
- Ease of use PEOs have been around for decades, but their technology is typically less modern. Things like customizing reports, for example, may require extra assistance and could take weeks to update. PEOs often use disparate systems to manage payroll and benefits.
Decision time: Should I get a PEO?
To Derek, it all comes down to how thorny your HR needs are.
“Generally, PEOs work best for small businesses with complexity in their hiring and employee management processes,” he advises. For example, if you’re hiring international employees, you might find a PEO’s visa application and tracking system helpful as you’re trying to navigate it for the first time.
Likewise, companies who are considered “high-risk” from an HR perspective, like those that have high employee turnover, may find that it’s useful to have on-call pros to ease their worries. However, keep in mind that some outsourced HR services can offer the same kind of HR experts that PEOs provide.
What if your HR needs are pretty straightforward? For stable, small companies planning on keeping the status quo, PEOs may not be the best option. In fact, you may find yourself ponying up a lot in admin fees for features that you don’t even use. And if your company will be scaling quickly, PEO admin fees can add up quickly, eroding any benefits cost savings.
How do I get off a PEO?
Breaking up is never easy. If you want to leave your PEO, you first need to become prepared to file your payroll taxes independently. To do that, dig up these two items:
- Federal Employer Identification Number (FEIN). This lets the IRS identify your business, much like a Social Security number is tied to a specific person.
- State Tax ID number. This unique number is assigned by the state to identify your business so you can file your state taxes.
“Getting out of a PEO is more challenging than changing brokers,” says Derek. “There’s a good chance that the PEO has been filing your company’s taxes under their FEIN, so you need to establish, or re-establish these accounts.”
Beyond your federal and state tax ID, you also have to set up the following things for your company:
When’s a good time to leave a PEO?
Generally, the best time to get off a PEO is January 1st.
If you switch in the middle of the year, your company and employees will receive multiple W-2s and tax forms, just like when you switch jobs mid-year. But if you leave on January 1st, it’s a nice, clean break.
The next best time to switch, from a tax filing standpoint, is quarterly. For 2019, the quarterly tax deadlines are:
- April 15th, 2019
- June 17th, 2019
- September 16th, 2019
- January 15th, 2020
PEOs have the choice to file your state taxes under their own FEIN (which is easier for them), or your company’s FEIN. If the PEO has been filing state taxes under your tax ID number, switching on the quarter is the best option. If your state taxes have already been filed under the PEO’s ID, you can switch at any time.
Acing your decision.
Several options exist outside of PEOs, so definitely do your research. How quickly do you plan on growing? What problems are you looking to solve or minimize with some HR help? Honing in on these basic questions will help inch you closer to a solution.
“It comes down to the comfort level of the business owner and whether they’re okay with the co-employment model,” Derek says. “Some businesses really don’t want a PEO coming in and implementing their own handbooks and HR language. It might not make sense, from both a budget and culture perspective.”
But what if you’re already on a PEO? “There’s no magical answer for when a company has outgrown it,” advises Derek. However, it may be time to rethink your PEO relationship when you’re craving more input into your policies, people processes, and culture. And of course, if you don’t want to pay for a bunch of services and features you’re not using.
The key? Take your time, and shop around. Talk to other businesses like yours, and see what HR services they recommend for a company of your size. And before you know it, you’ll find a fix to those gnarly HR growing pains.