We received another call today regarding two different small group prospects both of whom are looking at PEO’s (Professional Employer Organizations) as the possible answer to their HR needs.
Both prospects are small business with approximately 20 to 30 employees and both were looking to avoid hiring HR staff as they are growing and believed that a PEO solution may be their answer.
PEO’s offer the small group employer outsourcing of payroll, benefits, taxes, and HR administration. Of course, this is attractive to small employers that want to get back to focusing on their business. However, this arrangement comes at a high price.
The biggest issue with a PEO solution is that your employees are no longer your employees. All employees of your company become employees of the PEO. Paychecks, tax forms, and work documentation are issued under the name of the PEO. The second biggest issue is the PEO contract itself – once you sign the contract it is extremely difficult and costly to cancel.
The following offers a summary of the disadvantages of joining a PEO:
- Employer’s employees become employees of the PEO. This changes the workplace culture. Paychecks and other correspondence are all issued under the PEO name. How do you create a workplace culture when your employees don’t recognize you as their employer?
- Employer has no input in selecting employee benefit coverage. The PEO selects the health insurance plan and can change or cancel it anytime.
- Service fees are based on a percentage of payroll. Employers with high wages pay higher fees. Each time you give an employee a raise or a bonus, you are increasing your PEO fees.
- Liability is NOT avoided. This is the most common misperception that a PEO offers small employers protection from lawsuits. It doesn’t. If there is a claim for harassment or discrimination in the workplace, the employer is still liable.
- Hidden charges: PEO contracts are based on a percentage of payroll. However, there are many other additional fees. COBRA for example is a big issue. Contracts will typically read that if you have a COBRA enrollment greater than a certain percentage, additional fees are applied. However, employers cannot control COBRA enrollment and now due to the ARRA subsidy act which provides up to 9 months of COBRA subsidy for employees who are involuntarily terminated, COBRA participation is higher than ever.
- Terminating a PEO agreement is difficult. PEO’s often have a one year mandatory contract. If the employer terminates the contract after the mandatory contract period, the employer has just one pay period to establish new health insurance, new 401k plans, new State ID#, work comp coverage and liability coverage.
- Employer loses control of settlement of employee issues. If an employee has a complaint or problem, they have to go through the PEO. Again, this creates a big challenge in creating the workplace culture and loyalty needed in today’s business climate.
- A small employer loses the benefits due a small employer in terms of regulations. Because the employees are now employees of the large PEO, the small employer is required to follow the policies of a larger employer including overtime, PTO, holiday pay, FMLA, and COBRA administration.
Our solution: Benefaction Insurance can meet your specific HR needs without taking over your employees or a difficult contract. We offer different flat rate plans for specific HR outsourcing that enable you to retain your employees, select the benefit options that fit your business and employee needs, and focus on running your business.
Tags: HR Outsourcing, PEO
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