Daniel Talks Insurance: PEOs

Daniel Talks Insurance: PEOs part 1

Should Agents Still Be Wary of the PEO Industry? The Answer is, "It Depends."

In this series, Insurors CMO/COO Daniel Smith will talk with industry experts about some of the behind-the-scenes information that agents may not always be aware is relevant.

From 2008 until 2010, a Nashville-based professional employer organization (PEO) named Sommet Group diverted millions in client funds to build affiliated companies, buy naming rights to Nashville's hockey arena, purchase boats and build additions to the founder's mansion. As a result of this fraud, retirement funds were not fully deposited into the accounts of employees whose paychecks were processed by Sommet, medical and prescription-drug claims by employees were not fully paid, and taxes owed by clients to federal, state and local governments went unpaid. An FBI raid exposed the fraud, and the company was dismantled almost overnight.

In 2013, a Knoxville-based PEO named Service Provider Group was raided by the FBI and IRS after a criminal investigation had been ongoing. The investigation later determined that the company had been stealing payroll taxes from its clients and diverting them to personal accounts. Just over a year later, a former employee of Service Provider Group was again under scrutiny after her company, HR Comp, LLC, was raided. HR Comp was found to have taken over $10 million in payroll tax money and over $5 million in insurance premiums that the founder used to support her lavish lifestyle.

With a fairly recent history like that, why would anyone in Tennessee trust the PEO industry? The answers may be found in how PEOs operate, are regulated and how they govern their own organizations. But there are still reasons for agents to be wary. To get some answers, we talked with PEO experts at two of our Partners Program companies – Engage PEO and Human Capital Concepts (HCC).

We'll start with some basics. Why should agents consider working with PEOs, and how can they potentially benefit an agency's clients?

Cindy Edwards, Vice President of Sales for Engage PEO:

The PEO industry has been and continues to BOOM! Working with the right one can help agent's clients by reducing administrative burden, lessening employee liability, offering cost effective & quality high benefits, improving talent retention, adding HR expertise and much more.

Jeff Hallam, Vice President of Business Development for

Human Capital Concepts (HCC): First and foremost, offering PEO services to clients is a way to help prevent non-partner PEOs or payroll companies from targeting your clients and pivoting them to their insurance offerings. The right PEO partner will allow you to keep your health and/or workers’ comp commissions intact. For your clients, working with a PEO is a way to simplify most everything involved with being an employer. They can off-load admin and regulatory duties, allowing client owners and management more time to focus on their business.

We have often cautioned our members about working with PEOs. What's changed in the last decade about the way the PEO industry is regulated?

Hallam: Probably the biggest change over the last few years has been the introduction of the IRS Certified PEO (CPEO) designation. A PEO with this designation has met the rigorous IRS standards for financial responsibility, trustworthiness and accurate reporting.

Edwards: The CPEO designation was part of the federal regulatory environment for PEOs created by the Small Business Efficiency Act. Less than 3% of the 900 PEOs have both the CPEO and ESAC certifications, therefore when partnering with a PEO, both certifications should be required for client’s protection.

Let's talk about the concerns with some of the large payroll providers and how they operate their own retail agencies. What should agents watch for there?

Edwards: All of the major payroll companies have a PEO division; therefore if the an agency's clients are payrolling with one of the big box payroll companies – you can be sure they are talking about moving them to the PEO division. In addition, there are another 4 "Mega" PEOs that also sell direct. All of them will be knocking the Agent right out of the equation. They start by selling the easiest component first – payroll. Once the client has successfully processed payroll eight times, they try to convert the client to the PEO model, if unsuccessful, they try to sell them individual lines of insurance; pay-asyou-go work comp, healthcare benefits & 401K, etc.

Hallam: These large, national payroll services often have a separate salesforce of licensed insurance agents who prospect their payroll clients for all lines of commercial insurance, creating exposure for independent agents to lose business. Partnering with the right PEO allows you to keep that business, with no disruption to you or your clients.

We'll complete this conversation with part 2 in the next issue of The Tennessee Insuror magazine. u