Have You Outgrown Your PEO?

For many companies, a PEO makes perfect sense.  A PEO partnership allows a one-stop shop for many of the employment related hassles: payroll processing, workers’ compensation, employment practices liability insurance, health insurance, ancillary benefits, HR services and a 401k plan.

Let’s face it, no one gets into business to be an employer, but it is necessary as a business grows. For this reason, many new companies are a great fit for a PEO. They allow new companies to offer competitive benefits to attract the talent needed to achieve their growth model; they can stop working in their business and actually work on their business. But when does a company outgrow a PEO?

First, it is important to determine which PEO services you actually use.  No two businesses or PEOs are the same. Some are high touch and some are not. Some offer insurance discounts, while some do not… or did a few renewals ago. Some businesses use all of the PEO services and some take only a few. It can be expensive paying for unused services. Likewise, if those attractive insurance rates that drew you in have steadily increased, you could really be overpaying.

Suppose you are faced with a bad medical renewal, you can’t leverage or change carriers. The PEO generally offers a one-carrier solution. Your options are to absorb the increase or leave the PEO altogether, often without adequate time for a smooth transition.  Some PEOs may let you “carve out” the benefits but then you lose some of the main advantages of the PEO -- services like benefit administration, ACA reporting and COBRA just to name a few.

Outside of a PEO, mid-sized organizations have more options than ever. Full or partial benefits self-funding, which is gaining popularity by the day due to tax savings and opportunities to manage health with actual data, is prohibited within PEOs. Further, PEOs provide little or no claim data, making getting competitive proposals from other carriers extremely difficult. Other carriers have little choice but to shadow price the increasing PEO rates. The catch 22 is, if you are performing poorly, the PEO will pass along increases well above their standard increase.  If you are performing well, you would surely benefit from being on your own.

But putting the price factor aside, a PEO is a one-stop shop that only sells a one size fits all solution. A PEO could have restaurant, technology, construction and medical clients who all have different needs. Not only do these companies face different legal challenges and have different work forces, but they are also extremely different culturally.

The HR person at a PEO, with 30 or more other clients, will never understand your business as well as a person who spends every day working exclusively for your business. At some point it’s more cost effective to employ one person, hired by you to develop your culture. By this measure, if your admin fees are higher than the cost of an HR person’s salary, you may have outgrown your PEO.

One of the benefits of a PEO is you have access to their medical, 401k and workers’ compensation plans, but what if their solution no longer suits you? Would another network serve you better for your health insurance? Could you be a fit for self-funding? Could you get better claims management for workers’ compensation from specialists? Would your company benefit from an open architecture 401k plan not offered by your PEO? Who will advise you on all this? Your PEO?

So have you outgrown your PEO? I recommend that you do the analysis today on your own terms, not when you are faced with a budget crushing renewal and a tight timeline. It is possible that you are best served on the open-market, in a PEO or maybe even a different PEO than you are in now, but you will not have the answer without an analysis.