You've found what seemed to be a straightforward way to save your company some money on health insurance, state unemployment taxes, or workers' compensation: You joined a Professional Employer Organization, or PEO.
But is it actually saving you money in the long run?
As a payroll company, we get this question all the time.
So, we wrote this article to break down what a PEO is and its pros and cons.
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What is a PEO?
Small businesses typically join PEOs to save money on insurance, access better benefits, reduce headaches, and delegate tasks owners don't always enjoy doing.
But now, a few years later, after annual renewals, those insurance savings have been erased, and your premiums increased, especially if you had an employee use the insurance more than average.
And you realized some other financial drawbacks, like the fact that your company must now comply with rules meant for larger employers. And New York companies have been hit the hardest.
For example, as a member of a PEO in New York State, with the new sick time regulations enacted this year, you must give every employee an additional 16 hours of paid sick time every year over and above your competitor who does not use a PEO. That extra paid sick time cost adds up.
Also, you must comply with all federal regulations for large employers, such as the Family Medical Leave Act and the Affordable Care Act.
The PEO plan that seemed too good to be true when you signed up may be just that. The bottom line is most business owners realize that PEOs cost much more than when you initially did your cost-benefit analysis. Plus, the PEO takes control away from you.
A full-service payroll company like Baron can provide many of the same services without all the hidden costs and an overpowering contract while allowing you to maintain complete control of your business.
Maybe it's time to leave your PEO. And Baron can help you do it.
What Are the Hidden Fees?
As a small business owner, you outsourced many of your functions to the PEO, including employee benefits, human resources, payroll, and regulatory compliance.
The PEO became the employer of record for your employees, and they became your federal tax ID number. You entered into a co-employment arrangement, where you still handle most of the day-to-day operations, and the PEO controls the administrative side.
The PEO charges an administrative fee ranging from hundreds to thousands of dollars per employee per year. Sometimes, the PEO charges their fee as a percentage of your total payroll expense – a huge cost to your business.
Many times, the PEO collects much more payroll tax money than it should. For example, the employer tax for unemployment insurance is on the first $11,800 of wages in New York. Most PEOs collect this tax on every dollar your employers earn and don't cap it at $11,800. So, if you have an employee that makes $60,000 at a tax rate of 8%, you just overpaid $3,856 in tax for that one employee. How about all your other employees? Do they earn more than $11,800 per year? This is a large expense you may not have realized you're paying.
There are many hidden fees like this when working with PEOs. You may have no idea what the PEO really costs you because they don't make it easy for you to identify their fees on their invoices. Baron knows the PEOs' tactics well and will help untangle their web of hidden fees so you can decide if a PEO is still best for you or not.
Is Your PEO Over-Charging and Under-Delivering?
But it's not just the fees themselves that can have financial consequences for your business.
For some who join PEOs, the cost savings last only one year. If the insurance gets used heavily, or just if the PEO decides, the insurance costs can rise dramatically in all subsequent years, potentially negating any cost savings from pooling.
And when you factor in the administrative fees charged, the cost savings you anticipated, are erased.
After a year or so into your time with a PEO, you may have noticed some other drawbacks as well.
Joining a PEO means losing some of your control as an employer. And if you're like most entrepreneurs, you started your business to do things your own way.
You have to sign a contract that tends to tilt in favor of the larger PEO. On paper, the PEO is the employer. That means you have to be beholden to labor laws and regulations that apply to larger employers.
What are the Pros and Cons of a PEO?
The services you're receiving from the PEO may be subpar compared to what a full-service company like Baron can offer your business.
The PEO may not offer HR and timekeeping solutions that protect your business. Unfortunately, this leaves your business exposed if the Department of Labor comes knocking on your door.
The bottom line is the PEO only cares about getting your payroll and insurance up and running because that's how they make money. PEOs put you at risk when it comes to protecting you, your family, and your business from all the other HR and timekeeping liabilities.
Additionally, joining a PEO means you lose your good history or "experience ratings" with your insurance carriers. If you've had good records with workers' comp and unemployment usage, becoming part of a PEO will not take these good histories into account and may no longer translate into cost savings for your company.
At the end of the day, PEOs can cost a fortune, and the drawbacks may outweigh the benefits.
One-size-fits-all doesn't mean you're getting the best possible services that your business needs to thrive.
Can You Leave Your PEO?
But you aren't stuck in your PEO forever. You can leave, and we can find other solutions to your business needs that are financially sustainable and provide you the flexibility you need to chart your own path as a business owner.
To save money on insurance without the unintended consequences, small businesses can find a smart insurance broker who will find them the best available rates and customize insurance that makes sense for their business.
And instead of relinquishing control of your business to a PEO, you can work with us at Baron and maintain your power to make all the important decisions for your business.
Baron doesn't require onerous contracts, and we won't force you to do things you don't want to do. We will never tell you to fire your best employee because their workers' comp rate is off the charts.
A PEO may seem like an exciting solution initially, but as time goes by and the consequences are exposed, most business owners feel PEOs are just a shiny object.
Not sure if it makes sense financially to stay with your PEO?
Want to explore your options?
