The Pros and Cons of PEOs: Are They a Fit for You?
Simplify HR and keep my costs low—has a nice ring to it.
Managing employees and their benefits can be expensive and tedious, and the problem only grows as your expand.
A Professional Employer Organization (PEO) is certainly an option for employers looking to offboard HR tasks and find some possible savings on health insurance.
The question—is a PEO a good fit for you?
Here are a few pros and cons to consider, as well as some topics that most PEOs like to avoid discussing in their sales presentations. Joining a PEO is a big commitment, so the following tips will help you walk into the discussion with eyes wide open.
Pros and Cons of a PEO
Outsourced HR Administration:
PROS: Since a PEO is a co-employment relationship, it handles a number of HR administrative functions for their member employers. A PEO will provide HR technology, HR support, employee onboarding, and deliver a benefit package to your employees. The PEO is also responsible for HR compliance, creating company policies, and delivering an employee handbook.
Why do PEOs do all of this? Because your employees are no longer your employees—they now belong to the PEO.
CONS: So while you have gained some efficiencies by shifting HR responsibilities to your PEO, you've given up quite a bit of control over your company culture and benefits. You company must abide by the standards set forth in the PEO's policies and handbook. Otherwise, you forgo any legal protection from the PEO for incidents that arise from a deviation from their policy.
Reduced Health Care Costs:
PROS: This is arguably the main benefit of a PEO. PEOs will typically perform some heavy underwriting of your group before determining if your employees will help or hurt their collective risk. They vet companies to make sure that they are bringing similar or better risk into their pools in order to keep annual health renewal costs low. Members get the benefit of lower renewals than they might experience on their own or in the community pool.
While you can often get a better deal for health insurance due to the PEO's negotiating power, you do give up control of picking your plans.
CONS: While this arrangement typically keeps health renewal cost low for the short-term, over time insurance pools have a way of leveling off with the status quo. PEOs make more money when they grow, and growth means more employers, more employees, and more risk entering the health pool.
Historically, many PEOs have imploded when unpredictable catastrophic claims have caused rapid rate increases. When this happens, healthy employer groups start to bail, draining the pool of the low-risk population and causing further rate increases in future years. Ultimately, whoever is left at the PEO table gets stuck paying the bill.
In some states, it's questionable whether or not insurance regulators will crack down on PEO's, who cherry pick the best risk from the community-rated pool, adversely impacting the small-group market and driving up the costs of community rated plans.
From a regulatory standpoint, these arrangements may be one phone call from the governor away from being dismantled.
HR Cost Control
PROS: On the occasion where a PEO's fees are transparent, you may find them to be more affordable than purchasing your own HR technology, hiring an office manager or part time HR consultant, or delivering your own employer-sponsored benefit plan. For the group that isn't large enough to justify a full-time HR manager, this could be a good option.
CONS: PEOs will typically charge for services in one of two ways: percentage of payroll, or a per employee per month fee. Invoices are rarely itemized and come in as a flat monthly fee. It can be tough to determine what you're paying for by each service line of the PEO, making it difficult to do an apples-to-apples price comparison of joining a PEO or remaining independent.
What to ask a PEO Before Joining
How do you vet each member's risk before bringing them into the insurance pool?
When evaluating PEOs, its good to determine if they plan on capping the number of employer members. You want to have a clear understanding of how they are mitigating risk through underwriting.
For example, if a PEO is solely assessing risk based on your employee census (by age and sex), this is a pretty insufficient way of vetting members before they enter the pool. It's like a bouncer at a club asking people how old they are instead of checking their IDs.
If I leave the PEO, will I have access to my own claims experience for health insurance and workers' compensation?
Some PEOs will keep track of your individual loss runs and claims experience. This is going to be important, especially if you are a large group (larger than 100 benefit-eligible employees). You will need this information so your group can be independently underwritten. If you don't have the individual loss runs and claims experience, you will get slammed moving from the PEO's risk to your independent evaluation.
Not every PEO will provide your individual loss and claims experience, so you will want to make sure you have this in writing before you join.
What will I see on my monthly bill?
As mentioned above, PEOs tend to mayonnaise the cost of HR, legal, health insurance, and additional overhead into one flat fee. To the greatest extent possible, push to have transparency in their fees so you have a clear understanding of that for which you are paying.