Professional Employer Organizations (PEO’s): Separating Fact from Fiction

by David Schek | Nov 4, 2013 | Professional Employer Organization (PEO), Tips

Every day I speak to many staffing company owners who discuss their workers compensation and back office challenges with me.  I explain to them that they have three basic options for workers compensation.
a)  Using the State Fund
b)  using a direct policy with a carrier like Travelers, Hartford or AIG
c) or partnering with a PEO.

Since I have used all three while I operated my staffing business for over 16 years, I explain the  advantages  and disadvantages of each.

The option that I get the most questions about though, which is often the least expensive and most flexible for the staffing company,  is partnering with a PEO.  It seems that either many staffing company owners are not aware of what a PEO is, or if they are, they have misperceptions of the pro’s and cons’ of using a PEO.

In this short article, I would like to highlight the most common misunderstandings about PEO’s and shed light on this workers compensation/ back office solution so staffing owners can use this information to select the right workers compensation option for them.

Fiction 1: PEO’s require long term Contracts of at least a year.

Fact: Most PEO’s  operate on month to month contracts  with their client, though most PEO clients stay for years with their PEO.

Fiction 2: I will never be able to move to a direct carrier or State Fund because I will not have my own work comp Loss Reports if I partner with a PEO.

Fact:  PEO’s keep separate records of losses for each client.  Should you wish to review your current work comp lost record at any time, a PEO is required to/will  give you that report usually within 24 hour notice.

Fiction 3: All PEO’s are created equal

Fact: Just like staffing companies should not be “painted with a broad brush” PEO’s should not either.   There are over 700 PEO’s in the US.  Only a few specialize in the staffing industry. Most PEO’s work with white collar codes only.   Some are known for their high level of service, while others are known for their very low rates. Still others offer coverage in all the States while some PEO’s just operate in one State.  Because of these differences working with a knowledgeable PEO broker is always a very good idea.

Fiction 4: A staffing company is very similar to a PEO.

Fact:  Staffing companies are very different.  For example, staffing companies focus on recruiting employees for their clients. PEO’s focus on administrating all back office functions and providing and managing the staffing companies workers compensation coverage.  A good analogy  is thinking of a PEO like a payroll service i.e. ADP that provides workers compensation coverage to the employees.

Fiction 5: PEO’s always have lower rates than a direct carrier or State Fund.

Fact: PEO’s use insurance carriers for their workers compensation insurance just like staffing companies. But because they buy their workers compensation (wholesale in such huge volume) they are usually able to offer workers compensation coverage at a discount to the staffing company. Having said this, sometimes staffing client’s losses are so severe that the PEO deems the risk too high to offer any discount.

Fiction 6: I lose control of my most important asset—my employees.

Fact: Under a PEO relationship the employees are “co employed” with the staffing company for statutory purposes only. (I.e. filing payroll taxes and managing workers compensation  and unemployment claims.)  This does not mean that the PEO will be managing your employees or recruiting your employees for you or your clients.  Should you decide to sell your business or decide to not do business with the PEO at some point , your employees are simply transferred to your payroll.  Again the way to think of the PEO arrangement is like using an outside payroll service that also offers workers compensation for your employees.

Fiction 7: Insurance agents know a lot about PEO’s because they know a lot about workers compensation insurance.

Fact: While in some cases Insurance Agents do know about how PEO’s operate, but they are rarely specialists in PEO’s and usually offer the State Funds as  the best option if they cannot find a direct carrier to underwrite your workers compensation. It usually best to work though a specialized PEO broker with staffing industry experience before you sign up for the state Fund.

Fiction 8: All PEO’s require a large deposit and large deductible like direct carriers and state funds.

Fact: One of the advantages to a staffing company that most PEO’s offer is  that no deposit is required to do business together.  Usually the state funds or a direct insurance policy will require 25% of the Premium upfront.   Also many (though not all) PEO’s will either not require any deductible or will have a small deductible of a few hundred dollars per claim.  If a PEO requires a larger deductible, they should be balancing that with very low rates to the staffing  company

Fiction 9: PEO’s are not involved in assisting their staffing clients comply with the Affordable Care Act and other employer related regulatory laws.

Fact:  Some PEO’s actually include the ACA costs in their administrative pricing to you, while other PEO’s will help you select the best way to manage the new costs in your business model. As a human resource business partner that wants you to succeed, they are experts in sharing this type of advice with you.

Fiction 10: If you use a PEO, you can not use a payroll funder

Fact: PEO’s work with all the major staffing funding companies. In fact some funding companies want staffing clients to use a PEO because they know the payroll taxes and workers compensation expenses will be paid on a timely manner.

I hope these 10 Facts about PEO’s help you better understand how PEO’s can be a very efficient business partner for many staffing companies.  While not all staffing companies are the right fit for a PEO model, the PEO that specializes in the staffing industry should be part of every staffing company’s worker compensation and back office review.

Please feel free to contact feel free to contact me at davidstaffing@gmail.com with any questions about PEO’s. Also visit our web site at www.StaffingCompSolutions.com

All the best
David Schek
President
StaffingCompSolutions.com
American Staffing Association Member
California Staffing Association Member
Exclusive PEO Broker for the United States Staffing  Association

StaffingCompSolutions.com—-Workers Compensation Specialists and Staffing Business Consultants For Over 20 Years.