Getting Out of a PEO

The idea of a co-employment relationship can be quite appealing to a small to mid-size employer. The concept of a single source vendor to manage all aspects of employment, including a shift in liability, is something that many employers find to be money well-spent.

Unfortunately, there are times when the value becomes questionable: when is it no longer worth the expense, and furthermore, what steps must you take to regain control of your employees?

Often it is very difficult to determine your true costs and what the plan of action will be if you decide to leave the PEO.

Questions to Ask When Evaluating Leaving

1. 1. Am I being serviced from an HR perspective so well that without the PEO I would have to hire someone internally to replace them?
2. If the answer is yes, then you may want to explore non-PEO service providers that offer a variation of a PEO service offering, less the co-employment relationship. A few alternatives would be to hire an ASO or a Fractional HR company. Both provide the same type of on-site support and expertise at a fraction of the cost of hiring an HR resource to your staff.
3. Can I obtain similar health coverage at a comparable rate outside of the PEO?
4. Can I obtain similar workers compensation and EPLI coverage outside of the PEO?
5. Will my SUTA rate be less or similar outside of the PEO?

If you answered “yes” to any of these questions, a cost analysis is definitely worth doing. In many cases, an employer in a co-employment arrangement is most likely overpaying in a least one area.

The other area is a fee that many PEO’s call Administrative Costs. This is where the bulk of the profit lies within these bundled service offerings. In order to get a full understanding of the financial impact of moving away, you must obtain pricing for each separate service.

Once you have this total number, you must compare this to the TOTAL SPEND with the PEO. It may seem that you are getting a great deal in one area; however, you may be overcharged in another. The only cost that will remain constant in or outside the PEO is employer-paid FICA taxes.

The Four Main Components to Shop

1. Health insurance and other related products including STD/LTD, Life Insurance, COBRA, FSA, HSA or any other services included in the PEO
2. Workers Compensation
3. EPLI (Employers Practices Liability Insurance)
4. Payroll/HRIS

If you find that each service priced separately is less than the total spend of the PEO, then it may be worth looking at further.

The timing of the transition also must be considered because of tax implications to both the employer and employees. Making a change later in the year will have a greater impact because more employees will have met their Social Security wage requirements and employers will have met their SUTA and FUTA limits. Employees will have to adjust this when they do their tax return because they will have an overpayment.

Also, an employer’s unemployment experience rating restarts as if the employer were a new business in each state that it has employees. This could have either a positive or negative impact on the employer and should be considered in the financial analysis as well.

Evaluating getting out of a PEO and actually making the transition can be very confusing and time consuming. Hiring a consultant may help you alleviate the guesswork involved with unbundling services.