BY MIKE MARROCCOLI
For small businesses that have experienced growth beyond what their back offices can handle, a professional employer organization (PEO) can assist you in some of the administrative burdens you may be struggling with on a day-to-day basis. PEOs have become more popular over the past few years as businesses of all sizes are frequently challenged by increased compliance with government regulations, rising workers' compensation claims, and health insurance costs.
By working with a PEO, you are entering into an agreement with an outside company as a shared employment or co-employment relationship, which means the PEO you select to work with becomes the "Employer of Record," and you become the "workplace employer." Essentially the PEO is responsible for payroll and payroll tax, compliance issues, benefits purchasing and administration, processing of any unemployment claims, and other HR-related tasks. Your company remains the workplace employer and continues to retain the day-to-day control and direction of your workplace employees, leaving you with the authority over all decisions regarding payroll and hiring and firing.
PEOs offer a number of benefits, including the following bundled services:
• Payroll processing, including state and federal tax deposits
• HR services, including government compliance
• Workers’ compensation insurance
• Employee benefits
• Retirement plans
• Employment practices liability coverage
When you engage a PEO company, you now have the buying power of a much larger company. The PEO is the employer of thousands of employees, and they have the buying power to offer employees benefits at a lower price than you might be able secure as a smaller business. As such, the company's employees now fall under the Federal tax ID # of the PEO, and they are able transfer the liability on the workers' compensation and state unemployment insurance. This can be a distinct advantage to you if you have had frequent claims or high severity rate with your workers' compensation and your experience modifier has increased over 1.00.
Furthermore, the administration of all compliance issues also is transferred to the PEO, including insurance matters like the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Affordable Care Act (ACA). As ACA compliance issues are becoming increasingly more difficult to understand and fines are rising for those not in compliance or for those who do not offer health insurance to employees in accordance with the ACA regulations, you and your staff may not have the time or technical skills to stay informed on changes in these compliance issues. As a result, you may find yourself facing heavy fines.
Let's look at some advantages and disadvantages to consider when looking into a PEO.
Advantages
Outsourcing the HR functions that keep you up at night. Many small businesses have gravitated to the PEO option so that they no longer have to deal with the confusion and time-consuming functions of HR and compliance. The PEO provides trained HR professionals to handle these complex tasks, freeing you up to focus on your business.
Accessing better benefits for you and your employees. The ACA has given businesses a greater range of health insurance options, but the limited networks and benefits provided—along with complexity of the issues facing small businesses when deciding on which plans to offer employees—can make your head spin under new regulations.
In addition, it takes time and money to administer these plans, and unless you have a dedicated HR or benefits department, the responsibility will fall on you or your management team. The PEO option helps to eliminate this issue by providing you with plan and pricing options that are typically only available to much larger organizations. In addition, a PEO may make it simple for your employees to take advantage of 401K plans, long-term and short-term disability, and other benefits that may have not been available, or financially feasible, to a company of your size.
Workers’ compensation and unemployment insurance. As previously mentioned, if you have a high workers’ compensation modifier, the PEO option may be advantageous to you because the workers’ compensation rates set by the PEO will usually provide you with a savings. As an experienced property and casualty insurance broker, I have seen clients who have been able to reduce their workers’ compensation cost substantially through a PEO. If your experience modifier is high, and the claims history is such that you can explain to the PEO underwriter that there is good reason to believe that claims results will improve, you likely will receive a lower rate.
Additionally, with a PEO, workers’ compensation is charged on a pay-as-you-go basis, preventing you from being hit with any audits or unanticipated increases in premiums at the end of the policy year. PEOs also work very closely with any injured employees to partner with you in handling claims. Their expertise in claims management and back-to-work programs, along with case management and new hire screening to prevent fraud, can result in an improved workers’ compensation experience.
By working with a PEO, you are entering into an agreement with an outside company as a shared employment or co-employment relationship, which means the PEO you select to work with becomes the Employer of Record."
Another advantage of being under the PEO’s federal employer identification number is that you may be able to obtain a lower state unemployment insurance rate, particularly if your unemployment rates are high. This varies by state.
Disadvantages
Expenses. The PEO is in business to earn a profit. In addition to carefully calculating the costs of payroll, benefits, and other value added services offered to employees, they charge you an administration fee. When shopping for a PEO, make sure that you have a clear understanding of all applicable fees. This is usually set as a per-employee charge and/or a percentage of payroll. You must look at the entire cost before signing on the dotted line. Remember: While there may be savings on benefits or workers’ compensation, you are paying for a service in order to relieve your company of the day to day issues of HR and administration.
Change. Many of us don’t deal well with this word. While this may or may not be a disadvantage for everyone, it is something to consider. Some small business owners may find dealing with the change in operations more difficult than others. Though the following may seem very insignificant, they may bring about some stress from owners or employees. How is payroll reported to the PEO? When and how is time and attendance tracked by the PEO? Can we set up separate line items for drivers’ gratuities, commissions etc.? How quickly can a PEO make an adjustment or correction to an employee’s paycheck? When is the gross payroll, including taxes, deducted from my bank account? Some business owners depend on keeping money in their account right up until the employees payday, and some PEOs will debit the money up to a week prior to a check date.
Leaving the PEO. This may not be easy to do, particularly after employees have grown accustomed to the benefits and procedures of the PEO. If the PEO increases pricing for you as the business owner, it may not be as seamless and easy to move back to your former way of running your operation. Especially since you may find that you have limited options on what benefits you can provide to employees. Depending on the amount of time you have contracted with the PEO, you must make certain that you have the following in place before terminating the relationship:
• An active federal employer identification number with the IRS
• Re-established state required unemployment accounts and workers’ compensation insurance
• Preparation in place to manage and retain all employee paperwork such as I-9s and tax forms
• The ability to assume all necessary HR functions
If the PEO option sounds like something you would like to consider, I would recommend that you speak to several of the leading PEOs and obtain detailed proposals from those that you are seriously considering. Make certain that the PEO is financially solid and has a track record of client satisfaction. Moreover, they should also be a member of the National Association of Professional Employer Organizations (NAPEO).
Keep in mind that PEOs are not a solution for everyone. As a professional transportation company, you must consider all aspects of the PEO before making a decision. Most importantly, it is imperative to consult with your insurance broker, your CPA, and your attorney before moving forward with a relationship with a PEO. [CD1116]
Mike Marroccoli, CIC, MBA, is a Regional Vice President with The Capacity Group. He can be reached at mmarroccoli@capcoverage.com.