The recent legislative changes that impact employers including healthcare reform, tax incentives for hiring unemployed workers, and the extension of the COBRA subsidy have many employers feeling overwhelmed and more confused than ever. The function of managing human capital can be daunting as it is critical to the overall success of a business. This also includes the risk that employers bear in the form of lofty penalties for non-compliance with federal and state employment law. One strategy for mitigating this risk and shifting some of the burden associated with managing HR is outsourcing with a co-employer or PEO. This solution can provide immense value to a company for several key reasons. A PEO is a complex co-employment solution that involves many moving parts which can be confusing when trying to determine the quantifiable value or if the PEO can meet the unique needs of the business. Information is power and fully understanding the dynamics of co-employment will not only ensure a good decision on the front end but will also allow the business to take full advantage of its inherent benefits.
A Professional Employer Organization is a contractual co-employment relationship between an employer and a PEO provider that involves shared responsibility and risk for the management of employees. The employer and employee are commonly referred to as the worksite employer and worksite employee. The worksite employer maintains operational control of the day-to-day operations of the business while the PEO absorbs the employer into their client pool and assumes the responsibility of HR administration, regulatory compliance, payroll and tax filing, worker’s compensation, and employee benefits. Ask these key questions to determine whether a PEO may be a potential fit for your company.
1. Are you challenged with obtaining affordable quality medical benefits for your employees?
The size, demographic makeup, and overall health of your employee population are the main factors that impact how much an employer will pay for health insurance. If these factors are unfavorable in the eyes of insurance carriers, you might be forced to pay higher premiums to obtain coverage. If your company experienced a renewal increase which exceeded 11% in 2009, the national average renewal increase, a PEO may provide a hedge for controlling future increases in healthcare costs. A PEO allows your employees to obtain insurance at the premium rates that are dictated on the entire PEO’s client population as opposed to your company’s group as a stand-alone entity. In a sense, you are able to leverage and access a larger group of employees or risk pool that can absorb the risk with less financial impact because of the size of the group.
Consideration: It is important to note that many employers are joining the PEO for this same reason, so it is imperative that the PEO partner you are considering is doing a good job at managing their new client risk population. If a surplus of bad risk is added to the group health plan, the renewal will correspond accordingly. The premium savings you were expecting to realize may not occur and potentially be worse than what you could have obtained as a stand-alone entity. Employers who join the PEO are joining the PEO for the same reason that you may for a year or two, but consider all of the other companies that are also joining the PEO for the same exact reason. Eventually, you will become the healthier risk in the pool yet you will be paying the same rates as the unhealthy groups. In the evaluation process, you should ask for the PEO’s renewal increase for the last 2-3 years to determine how well they are managing their client risk pool. It may be helpful to understand the dynamics of the relationship that they have with the carrier who insures the group.
2. Have you experienced significant Workers Compensation claims within the last 2 years?
Similar to health insurance, a PEO allows an employer to access a larger risk pool which essentially dilutes the exposure for the smaller group. If your company has had recent worker’s compensation claims which have negatively affected your experience modifier and caused premium increases to renewal of the policy, utilizing a PEO may be a strategy to consider as a way to hedge future increases. One reason that the PEO can serve as a hedge is that claims can potentially affect an employer for up to 3 years. In addition to this benefit, the PEO offers risk resources, which may not be available to a smaller organization who has expertise in developing a risk management strategy and safety plan. This will create a safer work environment and potentially prevent future claims or injury from occurring. Implementing a risk strategy will benefit the company from a long term perspective and will protect your business regardless of how long your company stays in the PEO relationship. A PEO is also a great cash flow tool to control unexpected eorker’s comp underfunded premiums that are discovered at the time of the audit. In a PEO model, premiums are collected on actual payroll dollars instead of estimated payroll dollars thus allowing a much more predictable cost control model.
Consideration: Risk tolerance varies from PEO to PEO. So if you have had claims, the PEO is going to want to know about them in the application process. They will request loss runs and may want to do a site visit of your facility to see how the operation is being managed. Be careful to fully disclose what losses you have experienced to avoid future rate increase from the PEO if they are able to discover the losses once you become a client. It is also important to note that when your company decides to leave the PEO relationship and you seek to obtain your own worker’s comp coverage, you lose the experience that you had while in the PEO. You are rated by the carrier with a new experience modifier as if you were a new business with no prior worker’s compensation history. This fact may work in your favor or against you depending on if your experience has been favorable or not.
3. Do you have high turnover or have you experienced a recent layoff?
In a PEO arrangement, your employees are absorbed within the PEO’s customer base or pool from a tax and that PEO assumes tax filing liability as the “employer of record” in the eyes of the IRS. The SUTA, (employer paid state tax used for unemployment) rate that your organization pays to each state where you file may be a higher rate that the rate of the PEO. These rates vary by state and change from year to year. If you are able to gain a favorable and hedge SUTA liability under the PEO by employing your company with a larger group with a lower SUTA rate, the savings could be significant. The PEO also assumes responsibility for changes to the rates on a state by state basis. If you employ people in multiple states keeping up with this can be administratively cumbersome and expose you to liability and the penalties associated with late or inaccurate tax payments.
Consideration: If your SUTA rate is better than the PEO’s, you are helping them lower their rate for the rest of their clients and paying more than needed if you were not on a PEO. Usually the SUI limits are met fairly early in the year; in fact, the average wage amount where SUTA is capped is $9K, however this amount varies as does the tax rate. If you decide to join a PEO, make sure that the PEO honors the SUTA caps and will track when each employee meets the limit. You should verify this in the service agreement; otherwise you could end up paying a much higher amount of SUTA without realizing it. Additionally, it is important to note than when you leave the PEO and begin to file SUTA under your own tax ID, the state will look at your organization as it would a brand new business that has no prior unemployment history. Unless the PEO’s SUTA was higher than this or you were overpaying without realizing it, your SUTA expense will more than likely increase. This also applies to FUTA and Social Security taxation.
4. Are your internal HR resources or staff bogged down with time-consuming HR administrative processes?
If you are in a rapid growth mode, the amount of paperwork needed to recruit, hire, compensate, manage job changes, and terminate employees can be overwhelming. It may be the job of a full-time employee or perhaps it has BECOME the job of a full time employee! These tasks are non-revenue producing and can be outsourced to a PEO who deploys HR technology that can automate many of these processes. This HRIS technology is otherwise not accessible or affordable for purchase or deployment internally. Not only do you gain access to the technology, but also the accredited HR resources and staff that the PEO employs. These HR professionals BECOME your HR staff or augment an existing staff. The HR expertise now readily available to you comes at the fraction of the cost of hiring a Director level HR person. In addition to the technology, the access to HR expertise, the PEO also acts as shelter for HR compliance via the co-employment arrangement. As a new client, the PEO provides a compliant employee handbook that each employee acknowledges understanding and acceptance of company policies and procedures surrounding employment. All “new hire” paperwork must be completed when the employer joins a PEO. This includes I-9 verification which is a potential exposure area that the worksite employer no longer assumes. From an ongoing perspective, the PEO maintains management over employment related requirements such as new hire reporting, FLSA, FLSA, EEO, ERISA, COBRA, etc. In addition, they provide documented processes to avoid lawsuits around discrimination, wrongful termination, and sexual harassment to name a few. Administratively, the PEO’s HR representatives also do much of the heavy lifting as it relates to benefits enrollment and administration. With the right PEO partner, HR staff is truly an extension of the employer’s staff in which the employees view no differently than if the employee were an internal HR manager.
Consideration: Read the PEO’s service agreement very carefully or have it reviewed by outside counsel. There are gray areas as it relates to stipulations around whether the PEO or worksite employer controls certain processes and responsibilities and moreover, where the liability falls. Common examples of this surround terminations, drug screening, lawsuits for non-compliance, job classification, and workplace safety. Also, determine how much and what kind of access you have to the HR resources of the PEO. Will they be onsite or just available via phone? Is there a limit to the time spent with the employer or is their time only allocated for certain functions?Are you billed an additional fee for special projects that may be out of the normal scope of the relationship?
If you answered yes to one of these questions, evaluating a PEO is worthy of further analysis. With the increasing complexity of business decisions in the economy today, it is important to understand all the facts and to choose the RIGHT PEO. For assistance with this determination and potential vendor selection process, rely on Centripetal Consulting Group. We recognize that this business choice is a strategic decision that may promote the growth of your business. Our goal is to keep our clients focused on running their business and maximizing the value of their human capital which in turn increases your business value to your customers. If you would like to inquire about our services, just provide some basic information below and we will be glad to help you.