Getting Out of a PEO

Many small to mid-size employers have looked to PEOs as an affordable HR outsourcing solution for managing liability and controlling the cost of health care and worker’s compensation insurance. The events of the past year have prompted employers to re-think whether co-employment will still offer the same benefits it once had. One of the questions lingering is how new legislation around health care reform will affect PEOs and their clients. There is a case to be made that administratively the PEO will help employers track the new changes in legislation such as tax credits, new HSA limits, and employee enrollment in the new health care exchange. However, is this really a benefit to the employer or to the PEO? Who is the “employer of record” in the eyes of the IRS? Will the PEO be receiving the tax credit or the employer? Will the size of the employer even be considered since participation in a PEO pools several employers together? How will this affect the penalties and/or tax credits? The way regulatory authorities (such as the DOL, IRS, Department of Health and Human Services) treat PEOs has always been a bit uncertain and inconsistent and now, with the upcoming health care reform changes, it will only create more confusion.

In addition to the unknown future for PEOs, many employers are no longer benefiting from lower health insurance premiums like they once did. In years past, many PEOs were able to offer health plans that were less expensive than the national average and could guarantee renewals that were lower than the trend (10-13%). This past year proved that this no longer the case as many PEOs delivered renewals upwards of 35% to their clients.

If you are an employer that is wondering whether the PEO relationship is still a good solution for your business, consider these four questions carefully to determine whether the value of the PEO is worth the expense and furthermore how to craft a plan of action for leaving the PEO. Often it is very difficult to determine your true costs so seeking outside help may make sense and mitigate any confusion.

Questions to Ask When Evaluating Leaving a PEO

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. Can I obtain similar health coverage at a comparable rate outside of the PEO?  How do the last few years’ renewals with the PEO compare to the national average?
3. Can I obtain similar Workers Compensation and EPLI (Employers Practice Liability Insurance) coverage outside of the PEO at a comparable rate?
4. Will my SUI (State Unemployment Income) rate be higher or lower as compared to that of the PEO?

If you are unsure about at least one of these questions, a cost analysis is definitely worth conducting. In many cases, an employer may be getting a good deal in one area yet could be overpaying in another.

The cost to consider is a fee that many PEOs call Administrative Costs or an Admin Fee. This fee could be shown as a flat per employee per month rate or it could be shown as a percentage of the total payroll and combined with other cost components such as SUI or Worker’s Compensation. The Administrative fee is where the bulk of the profit margin lies for the PEO and when the services are bundled, it makes it easy for the PEO to shift costs so they remain profitable.

In order to get a full understanding of the financial impact of moving away, ask your PEO to break out each cost area separately: Benefits, Workers Compensation, EPLI, SUI, and Administrative fees. You then have a basis to compare costs as a stand-alone group outside of the PEO. The only sensible way to compare is to look at the total cost WITH the PEO versus the total cost OUTSIDE of the PEO. The only cost that will remain constant in or outside the PEO is employer-paid FICA and FUTA taxes.

The Five Cost Components to Shop

1. Health Insurance and other related benefit products including STD/LTD, Life Insurance, Vision, Dental, COBRA, FSA, and HSA
2. Workers Compensation/EPLI
3. SUI – this rate will be the manual rate for a new business in each state
4. Payroll/HRIS services
5. Fractional HR or the cost of hiring an HR resource

If you are utilizing the PEO’s 401(K), add this to the list items to consider.

The timing of the transition away from the PEO 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 SUI and FUTA limits. Employees will have to adjust this when they do their tax return because they will have an overpayment. The tax duplication payments need to be deducted from any savings if you are looking to make a mid-year switch.

Also, an employer’s unemployment experience rating adjusts 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. Centripetal Consulting Group can help you alleviate the guesswork and complete the financial analysis. Depending on the outcome, we can help transition you off the PEO and help select vendors from our network of over 100 top-rated HR outsourcing providers.  Contact us today for a free consultation. www.gocentripetal.com

HR Outsourcing in a Down Economy

The mid-way point of 2009 has come and gone and the economic forecasting remains positive, however the statistics still remain grim. Unemployment remains at a 20 year high, consumer spending is at the lowest levels since the early 1980s, and disposable income has sunk to levels not seen since 1947. To add to this, health care reform has the country in a tailspin, especially the large populations of employees who make their living in the healthcare industry. Concerned employers wonder how it may impact their businesses in the short and long term. As the economic downturn continues, employers across all market sizes report their top business concerns or threats to their business:

Threats to the Business

1. Diminished productivity due to deflated employee morale and leaner staff
2. Dropping revenues and unpredictable cash flow
3. Increasing layoffs and the potential for rising lawsuits
4. Increasing insurance for healthcare premiums and operating expenses

Employers, both large and small, are not prepared to watch and wait from the sidelines. They have taken matters into their own hands to offset rising operational costs and dropping profits through the use of outsourcing. “Outsourcing” is defined as, “the procuring of services or products from an outside supplier or manufacturer in order to cut costs.” Almost every employer engages in at least one form of outsourcing. In recent years, and continuing through the recession, Human Resources and Accounting top the list as key areas where businesses can immediately realize cost savings and operational efficiency. Because both of these processes are not core functions of the business itself, a return on investment or business case for outsourcing to a third party is easily made. To learn more about the key drivers behind Outsourced Accounting click here

HR Outsourcing Industry Continues to Soar

Human Resource Outsourcing is a business strategy that allows an employer the means to reduce overhead expenses, reduce employer liability, and improve employee productivity. While some employers may select to outsource only specific HR functions like payroll or recruiting, others have opted for a comprehensive, single source solution. To learn more about the differences among HR solutions and providers available to the market, click here.

HR Outsourcing continues to gain momentum as a viable solution for challenged businesses. According to IDC, a global research firm, outsourcing Human Resources functions has become the fastest growing segment of the broader business process outsourcing (BPO) industry. It grew close to 70 percent over the past 6 years, with companies worldwide spending more than $103.3 billion.

Additionally, Centripetal Consulting Group obtained information from Everest Research Institute, an independent research and analysis organization which states that North American HR outsourcing transactions reached $25.4 billion by the end of 2007, an increase of 19 percent over the previous year. In 2008, despite the slowing economy, HRO transactions grew an additional $2.9 billion, an increase of over eleven percent over the previous year. Everest Group, the parent company of Everest Research Institute contributes to this growing number of business utilizing an outsourced HR strategy. Centripetal Consulting Group is currently working with this 70 employee firm to select the right HR outsourcing technology partner which will enable the company to streamline and automate employee related transactions and internal processes.

Why Outsource?

While large corporations feel the impact of a recession, these factors are magnified for small businesses and their recovery time is significantly longer. Public corporations may report diminished returns for their shareholders and are subject to public scrutiny. A small employer can easily go out of business overnight. This is frightening for everyone because small businesses or the SMB market are the lifeblood of the economy. These businesses are run by innovative and motivated entrepreneurs who invest their personal savings, time, and livelihood. They need protection more than a large company, yet many times either cannot afford the internal HR resources or aren’t really aware of their true exposure as an employer.

One of the reasons for the continued growth in HR outsourcing may be attributed to employers who had not considered outsourcing in the past, are now seeing the benefits of HR outsourcing as a means to reduce overhead and cut operational expenses. They’ve been forced to slash headcount. This creates a “do more with less” environment which can compromise productivity. But from a legal and compliance standpoint, employers feel vulnerable to increased regulation associated with employee terminations. The changes to COBRA are one example. This fear has motivated employers to consider the outsourcing to alleviate the burden of dealing with employment related compliance and administration.

The key for small employers to successfully navigate through a recession is to stabilize revenues and improve employee productivity. The cost associated with labor and employee benefits are reportedly the two top line items on the balance sheet, thus making HR accountable and responsible for maximizing employee productivity while minimizing costs and risk. Employers look to HR outsourcing as a means to achieve these objectives:

1. Stabilizing operating expenses increases company value and calms corporate anxiety.
2. Streamlining operations reduces unnecessary overhead and cuts wasteful spending.
3. Lowering insurance premiums reduces overhead and expenses.
4. Minimizing employment risks reduces the potential of lawsuits and complaints to the federal and state agencies, and the resultant legal fees and judgments.
5. Training and motivating staff increases employee morale and improves productivity.

Despite the recognition by many small employers as critical priorities to their success, most simply cannot afford to institute the necessary changes. Even the most efficient employers will be unable to devote the time required to make meaningful changes to corporate policies and procedures. Partnering with an HR Outsourcer helps an employer achieve relief. According to Hewitt Associations, a world-wide provider of HR consulting services and research data, the most common reason for engaging an HR Outsourcing firm is to reduce overhead. Companies clearly recognize the value of utilizing an outside resource to conduct various business-related activities, as compared to maintaining these functions internally. Other reasons to outsource include:

1. Access to outside expertise
2. Improving service quality
3. High cost of remaining up-to-date with rapidly changing environment
4 Eliminate high volume of low-value transactional activities
5. Reduce management distractions away from core business
6. Leverage existing staff to focus on key competencies

Although there are several “flavors of outsourcing”, the providers are not all created equal. However, there are two main types of HR Outsourcing providers: Traditional HR Vendors and Professional Employer Organizations (PEOs). Some employers may select to outsource specific functions, others have opted for a comprehensive solution. To learn more about the variety of the HR solution offering, click here.

Traditional Human Resource Vendors

Traditional HR vendors are firms that specialize in one particular service area, such as payroll, benefits brokerage and administration, recruiting, or training. In a traditional outsourced model, the employer selects a mix of HR vendors to perform specific function that encompass all of their outsourcing needs. To learn more about both the benefits and downside to this approach click here.

Professional Employer Organizations

The second main type of outsourcer is a PEO or co-employment vendor. In this relationship, the PEOshares many of the responsibilities of being an employer on behalf of their client. Through co-employment, small organizations access the economies of scale enjoyed by large corporations. In contrast to traditional HR vendors, the PEO provides a wide array of HR services, effectively consolidating multiple vendors under one roof.

The four key service areas include:

• Human Resources compliance and administration
• Employee Benefits and administration
• Workers’ Compensation insurance and safety consulting
• Payroll and tax filing services

This type of employment arrangement can offer several benefits to an employer, especially in a down economy. Many times a PEO can be a savior to a business owner who cannot afford expensive health premiums, is overwhelmed with paperwork, or is concerned with maintaining HR compliance. Click here to explore if a PEO is a good fit for your business.

On the flip side, an employer may only benefit from a co-employment arrangement for a short period of time as it no longer seems financially compelling to fully outsource the HR function. This trend may occur once the economy strengthens or changes in healthcare occur. Because the PEO performs all HR transactions, it is sometimes confusing or difficult for a company to determine their true costs for each of the services delivered by the PEO. Even if you do determine that it makes sense financially to leave thePEO, it can become even harder to piece the right vendors together to unbundle from the PEO. For help in this area click here.

The Flavors of HR Outsourcing – PEO, HRO, ASO

Human Resources is one of the most critical functions for a small/mid-size business. HR Compliance alone presents so much risk and liability as an owner builds and grows an organization. One violation could cost an employer thousands, sometimes enough to put them out of business. The legalities involved with having employees are so cumbersome that they can legitimately occupy a full-time job, in addition to the administrative burden that occurs as a result.

The question then becomes, “Does a company hire someone to handle this function or do they outsource?” Or a combination both? HR administration does nothing for a company’s bottom line – but it is necessary. In fact, many companies view HR as simply a cost center that adds no value to an organization, thus making an argument that HR is the poster child for outsourcing. Why hire someone or add additional headcount when you can outsource for a fraction of the cost? This may be true in some scenarios.

There are 3 main forms of outsourcing in the HR space. One form of total outsourcing could include a co-employment arrangement with a Professional Employer Organization or PEO. Many small to mid-size employers have found value in this type of arrangement. The four main benefits of co-employment include:

1. Shared Risk – the PEO shares in the compliance aspect of the HR function. It reduces the exposure and risk an employer bears by incorporating the business under their tax ID. The PEO sets strict guidelines for hiring and termination practices and ensures that you operate within the guidelines of governing bodies including the IRS, DOL, EEOC, OSHA, ERISA, COBRA/HIPPA.
2. Administrative Relief – the PEO brings robust technology for managing payroll processing, HR, and benefits administration to the small market. These HRIS systems are not affordable for a small business on a standalone basis. The automation that these systems create add value by elimination of redundant processes and improve consistent employee communication through employee and manager self-service. Benefits administration is a key component in the deliverables of a PEO’s technology offering because it is such a compliance driven and error prone process.
3. Improved Insurance Offerings – the PEO provides access to quality insurance options not readily available to the small market at an affordable rate. Employers enjoy the buying power of the larger organization to obtain health and worker compensation insurance. Many times the rates through the PEO are far less than what an employer could obtain on their own. Through economies of scale a PEO also protects an employer from hefty increases related to workers’ compensation claims.
4. Access to HR professionals – the PEO provides employers resources for managing day-to-day employment issues and best practices for keeping your employees happy and productive. The PEO provides an outlet once an employment issue arises. They deal with lawsuits involving wrongful termination, discrimination, harassment, unemployment, etc.

Many PEO’s are becoming more flexible with their clients to allow certain components of the PEO to be “carved out” of the co-employment arrangement. These include health insurance, 401(k), and workers compensation. The employer may be able to obtain better arrangements as their own entity and don’t need the economies of scale that the PEO can offer.

Another form of outsourcing is an Administrative Services Outsourcing or ASO arrangement. Similar to a PEO, an ASO incorporates best of breed HRIS technology alongside a menu of additional HR services including COBRA, FSA administration, Unemployment Management, 401(k), Time and Attendance, and Recruiting. The ASO model seeks to eliminate or automate the transactional components of HR Administration. Many ASO’s will also do fractional HR or project work for an additional fee. The main difference is that the employer remains under their own tax identification number. This scenario allows the employer access to high touch HR expertise, thus potentially eliminating the need for added head count in the HR department while still allowing internal control.

The final form of outsourcing is Human Resource Outsourcing or HRO. This may also be referred to as BPO, Business Process Outsourcing. This has traditionally only been available to larger organizations; however, many outsourcers are bringing this model to the mid-market. Like an ASO, an employer remains the “employer of record” in this type of arrangement. In an HRO model, the solution focuses on managing the entire HR business process. The provider manages the HR function by utilizing their own tools on behalf of the client. This includes payroll processing, new hires/terms administration, and benefits administration. In a sense the HRO becomes the HR department, and employees communicate directly with the HRO provider as if they were internal HR. An Employee Call Center is inherent to the solution within an HRO offering.

Each form of outsourcing is very different and has the potential to bring unique value to a company whose goal is to improve the overall efficiency of the HR function. The entire premise behind outsourcing any or all of HR is to allow an organization to spend more time on meaningful tasks that are core to the business. It is paramount to partner with the right HR services provider. This relationship is critical to experience success in the entire business today and to be better positioned for growth in the future.