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Professional Employer Organizations Professional Employer Organization Selection Criterion

3.5 stars Average rating: 3.5 (from 66 votes)
 By Ryan Donovan

How to Plan a Successful PEO Implementation

More and more firms today are turning to Professional Employer Organizations (PEO’s) to find a unified solution that encompasses all of their major Human Capital Management (HCM) operations needs, including payroll, human resources, benefits and workers compensation. However, employers should realize that a PEO arrangement is not for every firm and the possibility of using a PEO is something that should be evaluated carefully. Here are five criterion to begin your Professional Employer Organization review and selection.

PEO Decision Point One – Employer Size

The size of employer that is best acclimated to a PEO arrangement tends to be on the smaller side. This is not to say that employers with several hundred employees or more cannot succeed with a PEO, but larger companies adopting PEO programs are the exception and not the rule. Generally, larger businesses choose to retain the command and control that Professional Employer Organizations often absorb and at the same time tend to have the resources and the preference to handle such matters themselves.

PEO Decision Point Two – Administration Costs

As one would likely assume, PEO administration costs are often higher than a traditional provider that only offers payroll and little, if anything, else beyond that. That being said, PEO’s marketing to smaller employers dictates that the overall cost structure is reasonable. Costs can be based on an a la carte arrangement where overall cost is based on how many employees use what services. Other providers base the cost on a percentage of gross wages. Both the scope of services and fee structures vary significantly from provider to provider. The details of the costs and conditions involved should be explained thoroughly for each service in advance to avoid surprises.

PEO Decision Point Three – Loss of Command and Control

One big factor that firms must consider when looking at a PEO is the company or management desire for command and control. In a PEO relationship, the Professional Employer Organization is the employer of record and is the legal entity that stands behind the payroll tax filings done unless a given agency forbids it (and some states and localities do). This is not to say that the employer gives up all rights to make daily employer decisions, just understand that some activities, such as paying W-2 employees outside of the PEO arrangement, may be restricted or forbidden by the contract with the PEO. Professional Employer Organizations use of these controls is often based on avoidance of potential legal liability so the motives behind this are certainly not impure.

PEO Decision Point Four - Compliance

One major reason that firms go with a PEO solution is compliance. Human resources can be a minefield for employers, especially in tough economic times during which agency enforcement is enhanced, and many employers lack the resources or time to be able to deal effectively with these subjects. Much of the same can be said of payroll tax filing and W-2 creation and dissemination. PEO’s provide the added benefit of rolling in workers compensation and health benefits into the mix, something that is not common with non-PEO providers. The other side of the compliance coin as it relates to whether employers heed the advice of their PEO’s staff is that PEO’s will generally not have a firm’s back if they go against the advice given. As an example, if a firm wants to fire someone for insubordination and the PEO advises against it for whatever reason (e.g. lack of a progressive discipline structure) and the employer chooses to fire the person anyway (which is technically their right), the employer is not usually going to be protected under the PEO’s employment practice liability insurance (EPLI) policy.

PEO Decision Point Five – Benefit Concerns

One overarching topic that has been present in the 24-hour news cycle over the last couple of decades, and the last few years in particular with the signing of the Affordable Care Act, are concerns about benefits. Employers should be particularly careful and diligent when making decisions regarding benefits. PEO’s are an attractive option because they allow smaller employers to pool together with other small employers within that same PEO relationship thus allowing them to get a group rate they would normally not get. However, employers should use extreme caution. A low-ball offer on benefit pricing is quite likely not a panacea and the concept of getting what you pay for does often hold true. As such, going with national and larger regional providers will often avail employers seeking a PEO relationship to product options that smaller PEO’s simply cannot offer.

Professional Employer Organizations and Final Thoughts

Employers making any sort of choice regarding their payroll provider, whether it be a PEO or not, should act with diligence and care because the implications of doing otherwise can be substantial. Avoid changing payroll providers to or from a PEO in the middle of a calendar year as your employees will get at least two (if not more) W-2’s even if they were at the same worksite the entire year. The reason for this is that the FEIN that payroll tax information is filed under will change since a PEO will use their own FEIN irrespective of what FEIN(s) you were filing under the rest of the year. Also be careful to not change payroll providers in a way that cause lapses or overlapping of health benefit coverage. End

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PEOs are an attractive option for benefits plans as they allow smaller employers to pool together with other small employers within that same PEO relationship.

 

 

 

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