One of the main complaints employers using a PEO have is the feeling of a lost employer identity. The employer no longer is seen as a unique business entity...
Reason #1 Gain more internal control GAIN MORE INTERNAL CONTROL: Under a co-employment arrangement, an employer surrenders quite a bit of control to a service provider who is determined to be more competent to handle functional HR processes and compliance than what the employer could do as a standalone entity. IDENTIFY SELF AS A “UNIQUE ENTITY”: One of the main complaints employers using a PEO have is the feeling of a lost employer identity. The employer no longer is seen as a unique business entity, namely in the eyes of the IRS and insurance carriers. The time spent in a PEO impacts workers comp experience, state unemployment ratings, and potentially inhibits a company’s ability to purchase health insurance. Each of these providers sees the group as a potential risk because little or no data is known about the group as a unique entity. This doesn’t sit well with many employers knowing that the longer you take “shelter” under the umbrella of a PEO, the less is known about your unique identity.
Reason #1 Gain more internal control
CONTROL QUALITY VENDOR RELATIONSHIPS Additionally, the PEO has complete control over the vendors they choose to partner. Health and worker’s comp carriers are a big piece of this puzzle. A client of a PEO has no visibility into those vendor relationships and how they are being managed. If the PEO is not properly managing their book of clients and decides to end the relationship, this will affect all of their employer clients. Conversely, if the PEO selects an unfit provider, perhaps one that is not financially stable, the employers shares in this risk even though they had nothing to do with the provider decision. MANAGE LIABILITIES AND CULTURAL POLICIES Another example of lost control occurs when liability is at stake. The PEO provides strict guidelines for managing compliance laden processes such as hiring, firing, and dealing with employee relations. If the employer does not follow processes exactly as instructed, the PEO will not accept liability. Many PEO’s will often govern certain processes where you must comply with their policies even though culturally you are in disagreement. Mandating drug testing is one example and terminating existing employees who can’t provide legal work documentation in a timely manner is another. For certain businesses, this type of control is not worth the impact that it may have on the overall operation of the business.
Reason #1 Gain more internal control
AVOID FINANCIAL AND LITIGIOUS ABUSE PEO’s have ample avenues for abuse both financial and litigious. These forms of abuse can affect the employer and the employees. In past years, fraudulent PEO’s would fail to remit taxes, pay insurance premiums, or utilize client funds for non-business related functions. Forced regulations were imposed on PEO’s to protect the PEO’s clients from these risks. However, there are aspects that cannot be controlled by either you the client or any governing body. An example is when a PEO continues to collect tax payments on the behalf of their client beyond the mandated thresholds for SUTA, FUTA, and social security. Many times employers leave the PEO because they once needed guidance and HR infrastructure as a young or startup company, but have outgrown that need and have internal resources to support these objectives. They also see value in working with a group of vendors that can provide more customized service, as opposed to vendors selected to manage a mass of employees.
Reason #2 Expense does not justify value Often times, companies have grown to the point where the PEO expense doesn’t justify the value any longer. This is especially true with regards to the administrative fees that the employer pays. A PEO can be a great solution for a small or startup company because a company can benefit from the increased buying power for obtaining insurance coverage and leveraging a shared services model for administration and compliance. This model loses its luster as an employer grows and matures as an organization. The PEO expenses do not adjust to the organic growth of the company. In fact, the actual cost of maintaining employees decreases as defined processes are created and replicated, yet the PEO fees do not.
Reason #2 Expense does not justify value
On average, PEO fees range from $800 - $1,100 annually per employee to cover “administrative fees.” For a 25 employee company this expense is roughly $24,000, for 100 employees the number staggers to $95,000, a realistic salary for an HR Director. An employer then is challenged to determine if better results would occur if an internal staff took over the duties of the PEO. Additionally, the complexity of employee relations issues increase with volume. With increased growth an employer also is forced to deal with more strategic HR functions such as training and development, recruiting, and performance management, which are key functions to the overall success of the business. Many times PEO’s aren’t capable or willing to provide this type of high-touch support. The need for HR Strategy may become so necessary that hiring a Director or VP level HR resource seems more valuable to drive this change for a dynamic organization. The costs associated with having both a PEO and a strategic staff member is no longer feasible. A company sees more value in spending their HR budget on expenses that are more aligned with their growth plans, as opposed to the cookie cutter options offered by the PEO.
Reason #3 Cost of health care is no longer compelling Many employers see value in PEO arrangements as a hedge for managing healthcare costs. Ten years ago that statement held a lot of weight; however, today that is not the case. I site two reasons for the shift: a spike in the overall cost in healthcare and the manner in which PEOs have managed their healthcare book of business. Because so many employers, especially the ones that had employee populations with costly health conditions, sought cost relief inside the PEOs “pooled” health plan, thus over polluting the risk pool. Many PEOs failed to see the long term result because they were so focused on the growth of the business. In recent years, some PEOs showed renewal increases upwards of 25 percent, which is almost double the national average increase for fully insured groups. Employers no longer feel that they are “hedging” their bets against a spike in healthcare renewals within a PEO. Additionally, many employers fail to realize that the longer a company is in a PEO,
Reason #3 Cost of health care is no longer compelling
the stricter the underwriting process becomes for obtaining health insurance as an independent group. This rationale is based upon the premise that most employers entered into a PEO relationship for insurance arbitrage purposes. Without the experience and claims data to counter this assumption, a higher risk factor is placed upon this group thus resulting in higher premiums or even denying a quote altogether. Once this notion is explained to an employer by a trusted benefits consultant, it becomes apparent that the immediate cost savings will outweigh the potential long term savings. Another consideration is the threshold in group size; this number determines whether underwriters consider an employer a small or a large group. In a small group, underwriting requires each employee to complete an individual health questionnaire to determine the total health risk. In a large group a series of averages are compiled via demographic information. Many employers couldn’t afford coverage as a small group due to a select few health issues and chose a PEO for cost relief. Now they have grown to a large group and may no longer need this hedge to obtain affordable coverage.
Reason #5 HR system limitations are prohibitive to business operation Once a company experiences growth the HRIS/Payroll platform deployed by the PEO can become somewhat limited. The core reason behind these “customization” limitations is because the PEO chose a platform with a “one to many” service approach. Most small organizations don’t require complex PTO calculations, robust HRIS functionality, complex reporting requirements, or interface capability to third party applications. Even if some of the features would be “nice to have” most employers simply live within the technology boundaries upon which they are given. However, once an employer reaches a certain size, these limitations come into question. Many companies need a GLI (general ledger interface) that is compatible with their existing general ledger software. The accounting responsibilities of larger companies are often more complex than those of small to midsize clients.
Reason #5 HR system limitations are prohibitive to business operation
A compatible GLI file posts the payroll data directly into the client’s general ledger system. It completely eliminates the need for the client to manually input payroll data obtained from various reports into the ledger — an error-prone, inefficient, and labor-intensive process. For a CFO or an Accounting Department, this alone can influence a decision to flee a PEO in search of more efficient and flexible options. With regards to HRIS, dynamic companies desire integration and automation. They seek an HR platform with self-service capabilities that allow for easy access and operation by the end users — both management and non-management workers alike. PEO’s are challenged with integrating platforms and delivering custom capabilities that automate PTO and benefits administration because each of their clients operate just a little bit differently.
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Amy Grimmer Amy Grimmer is President and Chief Executive Officer of Centripetal Consulting Group. Amy is responsible for driving the strategy and vision of Centripetal’s future. Amy’s experience in the human resource industry in both marketing and development capacities has made her an invaluable resource. She authors many articles relating to HR.
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