When Does it Make Sense to Use a PEO?

Welcome to the Generous Benefits Podcast, where we help employers create meaningful people-first benefits that make a real impact. I'm your host, Amanda Brummitt. Today, our guest is Bret Brummitt, founder of Generous Benefits, and he is here to cover all things PEOs with us. Hey, Brett, thanks for being here today.

I'm excited to be here. So most of our listeners probably know you, but just in case there's somebody new listening, give us the 60-second version of who you are and why we should listen to you. This is one of those areas where I hate self-promotion, but I have been around the block in benefits now in a good way for the better part of 25 years, have seen the ins and outs, worked with a plethora of different clients, seen what they've done both right and wrong, watched insurance companies come and go, and seen strategies pop up, succeed, fail, and some maintain steady.

And so I have a wide breadth of knowledge of how you can navigate the benefits space and as an employer. Okay. Very cool. So today we're talking PEOs.

Can you start by defining what a PEO is? For sure. So the acronym is Professional Employment Organization. Sometimes they have been called co-employers, but it's any arrangement or employee leasing is another way it's referred to.

It's any arrangement where there is an outside entity that is managing your employees, payroll, taxes, human resources, operations of the employer employment agreement, and sometimes benefits all under a large purchasing entity for various reasons or scale of efficiency that a small employer generally may or may not want to take on depending on their setup. And so they come in a wide variety of variances from PEO structure and scope of work. And what's the pitch for an employer that they get from a PEO?

Yeah. So I alluded to it. Purchasing power is one of the first pitches. You're able to buy, you know, benefits or technology or save on your unemployment taxes because you're coming under our large employer with better purchasing power than you have alone as a small employer.

So those are your biggest pitches. There are some states that will lean much more into the employment taxes than others just because their unemployment taxes are higher as a state. And then it becomes very important to have the lowest rate or modifier or percentage of payroll you give that goes towards unemployment taxes. So I'll pick on Florida as historically a high PEO state because it makes sense for lots of employers to go under a PEO that's able to manage turnover or unemployment rates through their structure.

And that saves a huge percentage of the unemployment payroll taxes, which offsets your admin costs more than offsets your admin costs of a PEO. And then they're also handling all that HR reporting. And so that's one of the areas. Another area comes an employer that is in multiple tax entities.

So you've got a group that's Texas, Oregon, Los Angeles, New York, Ohio. Each of those have different taxing entities for the employees and the employer has to go set up a tax ID number with each company and submit a quarterly payroll tax to those companies. Even if they're using a payroll service, they still have to manage the taxing entity part of it. And then some of those also have different retirement requirements on employees or different paid family leave requirements on employees, and it gets complicated.

And as an employer, when you sign up with a PEO, you essentially wash your hands clean of all those because your employees are paid under the PEOs tax ID numbers, both federally and in those states, and they're already operating on all those. So there's no new setup fee where you're talking about a multi-location employer. So from a startup growing, that becomes a great, easy route in a sales pitch. But in reality, in some cases, I do think there's a difference between sales pitch and reality.

But I think that is true of both an employer running on a PEO structure and a non-PEO structure. Yeah, for sure. And then I do want to get into those reality versus non-reality, but I do want to kind of back up and clarify. So you're a benefits advisor.

You don't sell PEO services for a living. But there are times that that becomes a conversation. And then I also observe it becomes a conversation that people are coming off a PEO or they're on a PEO and they use your services. So can you kind of walk us through that journey and when somebody may say, hey, Bret, what do you think about the strategy?

Correct. I can. It is complicated and nuanced. So let me give you the easy version.

There are three or four PEOs, which I have really good knowledge of what it looks like on their pricing structure, how a client goes onboarding with them. Doesn't make sense. Why do I know those? I've been along the journey with clients that have gone down that road.

So I've been privy to get to see that from a buyer's perspective, both going in and then more often coming out. I mean, that is we get approached a lot by somebody that's in a PEO that has maybe grown from 15 to 35 or five to 90 employees. And they're starting to look at that. Does it make more sense financially to bring some of these HR responsibilities in how maybe they're in a PEO that doesn't actually do benefits under their roof and the benefits are still outsourced.

So now you're into a payroll and HR only PEO arrangement because there are different PEOs that have different arrangements. Also PEOs within the large PEOs also have different levels of engagement. And so it, you know, if we're talking about, you know, maybe one of the big national ones like an ADP PEO, their product, they have a whole slew of services from payroll only to payroll plus HR to payroll plus HR plus standalone benefits through their own insurance agency or bring a broker to their structure, or then they have their full PEO where everything's under one house.

So you have different levels. And as a purchaser, you may choose different levels. You may also be relegated to different levels based upon your specific company's risk. Like they may not let you into their largest group purchasing PEO because maybe your health risk is bad and adverse and doesn't fit their pool.

Then you're not allowed to be in that because they still underwrite either your health and or health and financial risk to be in that product. And they'll move you down a level to where you're using HR and payroll only, but you're still having to purchase your own benefits outside of their group purchasing power. And they then can either act as broker or coordinate with a broker for those. And so there's different levels of engagement.

And so we're in those conversations a lot. Yeah. And then are there times that you people come to you specifically looking for benefits or maybe you're just one of those early trusted resources in that process that you say, you know, I think a PEO should be a strategy you consider? For sure.

I mean, we do that a lot. And sometimes it's just a conversation. Let's talk through a few things. One that's come up several times in the last year is an employer that has multiple part-time employees, like their workforce is much larger on the part-time side than the full-time side.

And from what they're doing today with payroll only and like either an HR resource or an HR consultant where they're not having to pay per employee per month fee for a PEO outsourcing or a percentage of pay. Also payrolls run either on a flat fee or a percentage of your overall payroll. And so that becomes a real hard way to figure out the actual true costs of them. So but back to the point, you start paying an increase per head over what you pay today.

And a lot of time on the part-timers that may not make sense if that fee is too high on how many part-timers you have, because you may be way more than you'd be paying what you're doing today and not getting that actual scale of economy because of your structure. So those are sometimes quick conversations or just kind of let's, I don't think it works, but let's go ahead and run the numbers with one or two partners to see what they would look like. Like it's not that hard to get some of that stuff as long as we're talking through that.

And then we can do it in a real practical way versus just a theoretical call. Yeah. And it does sound like there are some PEOs out there that you respect and very much like. Correct.

There are some that I respect, some that I like. You don't have to name names necessarily. No, I'm just saying there's pros and cons with each of them, just like there's pros and cons with each different insurance product and carrier. Everyone's got some nuance.

There's a lot of nuance that never comes through on a spreadsheet or a lot of nuance that never comes through on a pitch deck. Yeah, for sure. So what are those promises that you see not getting delivered on and or people rolling out of PEOs? Yeah, I would say one of the first ones I see often is purchasing into PEO because we do think we're getting our health benefits or our life benefits at this big group purchasing area.

But at the end of the day, that company didn't fit the risk profile and they're on a small group ACA plan that anyone could purchase. So they've paid PEO rates for the promise of a group purchasing power and that didn't work out. It was really just HR and payroll services under the PEO and benefits set to the side. Now sometimes to be fair, the medical would be carved out of what the PEO considers a master plan.

So the master plan is the plan that the PEO runs and operates under their tax ID. You're not allowed into that, maybe on the medical side, but you are in their large group dental and vision or their large group disability. So there are still perks to some of those benefits that are not purchasable to a 5, 6, 10 life group. And so those do become really good options.

Even with that, it's just a lot of times I don't know that the consumer either knows that's what's happened to them or maybe they don't remember those original conversations in the sales onboarding process. Yeah, definitely. And then what about like in control of employees and discipline and onboarding and hiring and firing? For sure.

PEO becomes a really good partner if you create a partnership with them. What I see is that a lot of employers are in the PEO and they don't actually engage with the PEO personnel and their services. And then they get frustrated when they do want to fire someone, but you haven't followed their protocol or steps. One of the first things I mentioned is the savings on unemployment taxes.

If you're a company with high turnover, you probably have more unemployment claims than the other employees, and maybe that's a pain in the rear to fight. Maybe it's not for you. But once your unemployment rate goes up, so do your taxes on all of your payroll. So your operating expenses go higher.

The PEOs, one of their primary jobs is to fight those unemployment claims on your behalf. You do still have to be there. Like you're never fully outsourced. They make you show up for most of those calls, but it's someone to guide you through those and for them to be able to guide you through those and absolve you of as much risk as possible because that is the other like how much off-boarding of risk can you do.

With one, you do have to follow their steps. So you may not want to have to go do a performance evaluation and then an employee improvement program and they're going to require you to because they're going to operate in a very conservative employment termination process. And so that can be frustrating for the consumer that wants to get things done or wants to have absolute control. Sure.

You mentioned liability and that's one that I personally have seen a lot in medical practices. They think that if they use a professional employment organization that they are passing off liability, which is fascinating to me because particularly if they, you know, do something terrible like sexually harass their employees, like is the PEO taking on that liability for them? I've never seen one that takes on 100% liability. And as I mentioned, one of the things that they're called is a co-employment agreement.

And those employees are employees of both firms and every arrangement that I've seen. And even if they're, you know, fully paid under one's tax ID and essentially leased back to them through invoicing systems, you know, it is the owner operator of the entity, the prime entity that's going to ultimately be responsible for those increased taxes or increased fines. They're there to help guide you and give you all the protections, but it is sold as they set it. It's off your plate.

You don't have to do it. And then when you do have to actually follow their structure that is put in place for very good reason, it frustrates folks that thought they didn't have to actually do something or thought the liability wasn't actually back to them. So it's a co-employment for a reason and that co-employment is that you're never fully out of that risk. Yeah, for sure.

And then if people are exploring this strategy, are there certain characteristics that you see in some of the PEOs that you really like that people should look for? There's one of the ones that it's been around for a while now, but at one time was like a new feature was like called a certified PEO. So one of the problems with moving to a PEO, if you were paying someone currently today under your regular own tax ID number or state tax ID number, when you move to PEO, those capping taxes, your unemployment taxes, some of your other ones that stop at a certain threshold per year, like maybe you don't pay taxes after you've paid someone $7,500.

When you started over on a PEO, you started fresh because it was a new tax ID. So in the olden days, you had to start over and you're basically doubling up taxes on several employees if you didn't start right on January 1 with a PEO. Certified PEOs came to a structure where you didn't have to do that again. Or when you move from one PEO to another, a lot of them had a July or an October effective date on their master plan.

So it was very hard to move from one PEO to another because you'd have to again, start over on 30, 40 employees on taxes you weren't paying to have to start up again. And you're paying the tax and you're paying a little bit of an admin fee on top of the tax because there's going to be a margin spread that's even charged to you too in most of them. So it gets to be an expensive changeover outside of a certified PEO. So certified PEO is one I would look at in those categories.

Also I'd find out if they run a master plan at all when you're talking about the health plan, because the health plan is your largest insurance expense in there. And if they're not running a master plan, there's not a scale of economy for you. So it's no different than purchasing. It may still make sense on your unemployment taxes.

And like I said, some of the disability plans and ease of characteristics that works great. Also like a small employer, that's a startup area or maybe they need one benefit for eight people, but only one wants medical. That's doable in some PEOs, whereas it's not doable alone just for participation rules. So there are characteristics like that that makes this too, but like the, do you even operate a master plan?

And is it like, how hard is it to medically qualify as a company for your master plan or some initial ones? Because that again is the biggest pitch. Like how do we get on this master plan multi-state or how do we deal with employees in California and Ohio if we don't have the right insurance carrier set up for those regional geographic nuances and PEOs that have been doing it have addressed those regional multi-carrier delineate some products in some areas versus others. And those make very easy transitions.

The other thing I do caution about on PEOs, you can generally offer all of their plans and it is a huge menu of plans. And I see companies with six employees that have 12 different health plan offerings, which makes it almost near impossible to peel off of it later when you don't want that expense as you grow, but you do have such a variety of how do you move from one to the other. So kind of streamline their options if you can. In this scenario where you're a small group or even a micro group and a fairly sick group, like we've got some major claims going on.

Is there a scenario that they could even join a PEO and get better rates than they would otherwise? More than likely not. All of the high risk groups like that are going to be non-allowed into the master plan. Therefore, you're not able to repurchase and you're pushed back to some kind of community rated standalone small group health plan.

So you're not saving that super rate. Okay. And you could do that small standalone community rated on your own. It's the exact same plan.

And you're not even saving the commissions on those or the fees, the broker, because the PEOs running that through their insurance arm where they're also getting paid. I'd say they're receiving those same commissions a broker is on those products. To be clear, there are some other products that are not with these built in there. So maybe you don't qualify for their master plan, but you do qualify for a small group level funded plan.

Those have variable broker fees built into them. Some PEOs might net those down to zero because you're already paying an admin fee. Some of them will have an extra 45 to $95 per employee per month admin fee built into their plan. So they may not double dip on the commissions.

Some brokers actually do double dip on commissions in both. So it's a good discussion to know when you're having that evaluation. Okay. Transparency.

Definitely a theme of this show. Correct. Yeah. And the other like understanding the invoicing, I mentioned some simply charge a percentage of overall gross payroll and you don't know where that goes and you don't know what percentage of gross payroll that is because they bake your employee enrollment numbers in there.

So if you and I are on the plan and it's just two single employees, the percentage of payroll would not be up as much that they need to draw out of your bank account to be able to do all your payroll and pay the insurance. But if you and I are enrolled with both, you know, five family members, the number they need to collect for insurance is going to be much higher. Therefore the percentage of payroll is going to be up. And those are hard to decipher what the, what you're actually paying for because you'll see an invoice as a percentage of payroll, however, the employees paying that portion out of their withholdings, but that doesn't come through on the invoice.

So it can be very complicated to actually figure out what your invoice is for. So I do have a preference for the PEOs that do a much better simplistic accounting on their invoicing. And then I assume you've heard some horror stories for especially people that go on bounce off because it didn't work out. So from those, are there anything you would say for listeners to watch out for questions to ask things to avoid?

It's really the scope of services. How many services are you going to utilize of your PEO? How often are you going to utilize them? And a lot of times is the age old stories like, man, we're paying a ton of money.

We don't utilize any of their services and we do it all on our own. And these generally come from employers that don't have either a lot of turnover, way more professional based groups that actually know how to operate in the first place, or just don't have as much risk in there as you get into that. So that that's a difference of PEOs and those are generally the horror stories. And then you get into the really weird one off horror stories about they didn't do our taxes right.

And then we owed something and we're still fighting this over several years because a state entity didn't know we were under there for, you know, worker X, but they were under that for worker X for certain days of the year. And then we owe part of the claim. And it's a big dispute. And those are one-offs, not, not over and over again, stories.

Anything else you would want employers to know about the strategy? There are direct PEO sales. So you can go to a rep that does, you know, just sells for that PEO. There are PEO brokers who, you know, will just go out to multiple PEOs at a time on your behalf.

And they generally know who has pretty good pricing deals or specials, if that's intriguing. And they'll also know the lay of the land. They will still have preferred partners. For sure.

There are insurance agents that are willing to do both. There are insurance agents that like myself, that will do both. Regardless, there are some that want to push all of their small groups to a PEO to be hands-off. And so they'll say you're below 50.

You should just go to a PEO. That's not always necessarily the best advice. Probably not always the best advice, but it's worth considering. And then there are insurance agents that, you know, coordinate with a PEO broker or a PEO general agency or upline to basically dual quote at the same time.

The hard part for a benefits broker, when doing the dual quoting, is there's going to be questions that are going to be asked on the liability and the property casualty side that is out of their general scope. Or if you're working with a property casualty agency, there's going to be ones that are, benefits wise, that are generally out of their scope. And even when you're working with a large house that has both inside, those don't always coordinate well. And so it gets muddy.

So advice, I would work with someone that has a good working knowledge of them, knows a few partners, start that exploratory program. And if that looks like a good pathway, then it may be time to pull in some outside help from who you normally work with. Yeah. And then how do all those people get paid?

There's, I mean, they're paid either a bonus or a commission or a placement fee. I mean, it's some kind of per employee. And several of those PEOs offer a referral program to the agents. There are ones that will pay you if you send your client over on a per employee per month basis or a percentage of what they sell.

So there's some kind of a commission. There's come some kind of referral fee. They run different areas depending on different structure. But someone's always getting paid.

So don't ever think you're not just getting that friendly handoff for free. Yeah. And is that appropriate to ask? Absolutely.

Okay. I think it's appropriate to ask your people every single time so you understand what their vested interest is on their advice. Okay. Anything else that you want employers to know?

It's worth exploring. I think it's going to become more and more prevalent. I think we're going to be on a swing back to more employers purchasing through some kind of purchasing organization, be it a PEO, an association plan, a medical captive with what we're seeing on the traditional solo employer, especially solo employer under a hundred employees purchasing on their own and their experience and the volatility we're seeing in all plans, both fully insured and self-funded with rising costs.

The dream of scale and purchasing is going to be on the rise. Scale does not fix risk and strategy. So that generally wins if you have a good strategy for those risks versus just hoping the scale gets there because scale again is a hope and not a strategy in itself. And so that is going to sound like a lovely sales pitch.

However, you know, sparts beats scale. And so just invest the time in the sports. Okay. Well, Brett, thank you as always for your time.

Thank you for breaking down a really complicated topic and sharing the nuance with us. And we appreciate you. Look forward next time. Thank you for listening to the Generous Benefits podcast.

That was Brett Brummett of Generous Benefits on all things professional employment organizations. If you've got questions, if this is a strategy you're considering, don't hesitate reaching out.