It is very common for businesses to start off with a PEO (Professional Employment Organization) when establishing employees. Also common is for a small business to look at a PEO as an attractive alternative to bundling many employee management functions under one platform. The PEO pitch of outsourcing the employee management process and providing large employer benefits at a low cost sounds like an offer too good to pass on. However, when a company is left feeling like they have outgrown their PEO, have seen substantial rate increases, or lack the services promised, they become paralyzed with the notion of exiting and replacing their PEO.
The thought of reviewing multiple vendors, technologies, and benefits can seem daunting. Beyond the fear of where to start is the concerns around how this will affect employees and the time it will take to implement. Lastly, PEO invoices are designed to create confusion, so businesses do not know how to compare replacements for cost analysis.
This leads to the following questions centering around how to exit a PEO:
- Have we outgrown our PEO?
- How do we analyze the value of our PEO?
- What functions need to be replaced by leaving a PEO?
- Is there a universal recommended solution for a PEO replacement?
Have we outgrown our PEO?
The costs are adding up. PEO costs tend to range between 20% – 30% higher than comparable non-PEO packages. PEO’s charge using a flat PEPM (Per Employee Per Month) admin fee, a percentage of payroll fee, or a combination of the two. With a small handful of employees, these fees seem palatable given the perceived value in return. However, when employee counts start to rise or salaries rise, these reasonable admin fees start to add up compoundingly. Although palatable to start most established businesses with 10 or more employees or higher salaries, begin to feel the pain of these higher costs.
The other concern for outgrowing a PEO is when the employee service inquiries become more rapid or more complex. Small businesses tend to have less employee questions or challenges. As the organization sees growth, a once small tight-knit population becomes a larger pool of personalities and life events. Most PEO’s are not designed to be able to answer employee inquiries or challenges on demand, nor are they designed to put in proactive procedures. Many utilize general helpdesk inquiries which can take several days to receive responses from. Typically these responses are more canned and less personalized than an internal resource
Ultimately, the triggers for outgrowing a PEO center around inflating costs or not being able to scale around a canned service.
How do we analyze the value of our PEO?
Analyzing the value of your PEO can be one of the most frustrating challenges. How can any business put a value to a service in which they cannot understand or quantify? Most PEO invoices are oversimplified into a single line item cost. If a detailed breakdown is requested most PEO’s provide an excel sheet that seems like a riddle more than a breakdown.
The best way to start a PEO analysis is to get rid of any items relating to actual employee pay. Whether you go with a PEO or a Payroll company, the costs associated with paying your employees do not change. Removing items around: wages, 401(k) contributions, taxes, or withholdings, allow for you to eliminate costs that are not able to be changed. A lot of detailed PEO breakdowns also have a litany of employee information that would not be needed when analyzing value. The more columns you can eliminate, the more readable the invoice becomes.
The goal is to be left with the following columns:
- Employee Benefit Costs (Medical, Dental, Vision, etc.)
- Workers Comp Costs
- PEO Administrative Fees
With this information you will have a clearer understanding of your costs you are looking to compare and replace.
What functions need to be replaced by leaving a PEO?
Most PEO’s handle the following functions which will need to be replaced:
- Payroll
- Health Benefits Package
- 401(k) Benefits Package
- Workers Compensation
- General HR Questions / Compliance
- Employee Management Technology
While this seems like a daunting list of functions to replace, it is more simple than it may appear. The key is sourcing a solution that can easily install, consolidate and replicate these functions. Most businesses upon finding replacement see much better value and service.
Is there a universal recommended solution for a PEO replacement?
Every business has their own specific needs based on size, business type, and complexity. As such there is no universal company that can be used as a PEO replacement. The point of exiting a PEO is to get a service tailored to your business at the best available value. While there is not a universal solution, the best recommended starting point is to talk to an expert, like EVCO, in PEO replacements. These experts allow for a consultative approach to provide unbiased feedback to allow for the best options. By tapping into an expert in PEO replacements you can avoid pitfalls and be introduced to the relevant qualified replacement vendors based on your specific needs.
An expert consultant will often provide a review at no cost or contract, they also will provide only the best recommendations for your business. In the end those working with a qualified consultant find the PEO exit to be less challenging and end up with services that are significantly better and less costly than a PEO.
Conclusion
There is never a reason to settle for lesser technology or service, nor settle for higher costs. PEO’s can be a fine place to start, but the right consultant can guide your business to a better seamless process that is designed for you at a lower price point.
Should you wish to reach out to an expert consultant in exiting a PEO, you can reach out to Brian Allen of EVCO Insurance Services for a complementary analysis.
Brian Allen
(925) 478-2223
Managing Partner
EVCO Insurance Services, Inc.
