by Joe Moran, Senior Partner & Business Development Manager
Professional employer organizations (PEOs) can be a great option for smaller employers who typically outsource the bulk of their HR or employee management-related tasks like payroll, health benefits, workers compensation, training, compliance, and other areas. And oftentimes, small businesses may be able to leverage the scale of the PEO to obtain more competitive rates on benefits.
However, as your company grows, PEOs can get expensive and will most likely lack flexibility to accommodate the range or depth of employee benefits your organization wants to offer. Having control over your benefits as you scale is a big deal. Plus, you may have internal resources to advocate for lower rates on your own.
Based on what we’ve seen in the market and what companies have confided in us, these four trigger points have historically encouraged companies to explore exiting a PEO relationship:
- 50+ employee headcount and growing rapidly
- Addition of HR staff to accommodate more robust employee needs
- Hyper-growth mode (ex. recently received funding)
- Interest in creativity and flexibility within and around employee benefit programs
Leaving a PEO is a big decision, but it’s one that’s a natural part of business growth. Every year here at EBS, we see companies successfully making the switch. However, hitting a home run on your own isn’t as easy or straightforward as meets the eye. If you’re considering coming out of a PEO model in the next year, here are five things to consider as part of your PEO transition checklist.
1. Look at the relationship between headcount and rates.
Understand when a PEO may be able to provide better rates and when it can’t.
PEOs tend to be favorable among smaller employers who benefit from being bundled with other companies. But, there’s a possibility that, after going through a benefit analysis exercise (which we strongly recommend you do), your rates will be more favorable outside of a PEO.
In 2015, one of our clients, a premier, Boston-based online gaming company, had received Series funding and was growing employee headcount from 35 to 300 employees. In hyper-growth mode, their decision to come out of a PEO was rooted in 1) cost and 2) control/flexibility. EBS helped guide them through a PEO exit so they could access more cost saving opportunities by dealing directly with the insurance carrier that they wanted – Blue Cross Blue Shield – which wasn’t a carrier option under the PEO.
Why? Senior Vice President here at EBS, Kevin Ryan, explains. Typically as a company grows over 50+ employees, insurance carriers consider industry, employee demographics and location(s) when determining health insurance rates. Depending on the industry and where your employees live, rates could be just as, if not more competitive, outside a PEO.
A PEO bundles the benefit costs (health insurance, life insurance, disability, etc.) and the administrative costs (payroll and technology, for example) together. So, when you and your broker are performing a cost analysis, it’s important to look at cost from a holistic perspective and factor in those increasing admin costs, not just the rates you’re paying for employee benefit insurance. In reality, you’re not comparing apples to apples when it comes to premium dollar of a plan inside a PEO vs. a quote direct from the insurance carrier.
2. Do you need creativity and flexibility within your plan design?
One of the most common mistakes businesses make when transitioning from PEO is they underestimate just how much it manages. This model is relevant for lean companies who outsource their HR infrastructure and rely heavily on external resources to manage payroll, benefits admin, and compliance so they can focus on other business areas like recruiting talent.
When a company starts to bring more of that HR infrastructure in-house, they’ve grown to a point where the benefit of a PEO might be diluted, especially as the HR team grows, they’ve received Series funding, are in hyper-growth mode or want more flexibility with their benefits programs.
Plus, canned benefit solutions don’t allow for creativity within plan design.
A PEO model tends to frustrate growing companies who feel handcuffed to certain insurance carriers or want to provide options and flexibility within their benefits plan. After a PEO exit, you and your benefits advisor have full access to the marketplace and can develop a benefits program based on cost and culture criteria most important to your organization, like a high-deductible plan with an HSA, for example.
3. Account for everything your PEO provides
If you aren’t sure if you’re ready to manage employee benefits on your own, go through the cost analysis exercise with a resource that represents each aspect of the PEO.
I can go into a meeting with a client considering coming out of a PEO, but the conversation is so much more than just about benefits. It’s about payroll, technology, online enrollment, compliance, and more. Be clear about all that you would be unbundling, and then make sure you come into the conversation with a united front – with all the pieces of the PEO represented in the same meeting – so everything is on the table, and that there are no surprises. For example, bring in a broker in conjunction with an HR technology expert you trust who knows how to deliver the entire functionality of what you currently have within the PEO.
In other words, before you say goodbye, make sure you have all of the resources to support the transition.
Or, consider a Business Process Outsourcing (BPO) solution as a permanent, transitional or supplemental answer to moving away from a PEO. A BPO model typically provides technology and resources to give you the guidance you need and can be the best parts of a PEO without the co-employment.
It’s daunting to leave behind a PEO in search of greener pastures, which is why it’s a good idea to find expert consultants who have been through the process many times before who can help you weigh the pros and cons. Consultants at a brokerage firm like us can help you manage the transition so that you can upgrade the quality of the benefits you’re offering to employees.
Ultimately, leaving a PEO may have many benefits. You’ll gain more flexibility, have more control, and be able to offer more to your employees. You’re also likely to save costs on your benefits packages overall. But leaving a PEO isn’t a simple matter, and neither is transitioning to a new solution. When it comes time to leave, be sure to be deliberate in your planning by meeting with key stakeholders and/or your broker who can advocate on your behalf, to ensure a smoother transition while remaining compliant.