Small business owners juggle a surprising number of job functions every day. As their business grows, it soon becomes impossible for the owners to handle every administrative function. If your business has grown to that stage, you are at a crossroad. Do you hire staff to handle the additional workflows associated with key functions such as payroll and employee benefits, or do you outsource those functions?
Thinking about this decision may lead you to explore the concept of PEOs and PEO alternatives such as EnrollMe.
PEO stands for “professional employer organization.” A PEO outsources, among other things, payroll, human resources, workers compensation, and employee benefits. According to SHRM, PEOs typically serve as a professional employer of their clients' employees, which allows the PEO to share and manage many employee-related responsibilities and liabilities.
Although PEOs work well for some businesses, they do not meet the needs of every business. For that reason, many organizations look for PEO alternatives. Here are a few to consider:
You can turn to HROs for specific HR needs. An HRO offers a more affordable, less restrictive option than a PEO.
There are also administrative service offerings (ASOs), which manage third-party providers such as health insurers. You choose your third-party provider, and the ASO handles the relationship. The drawback to this arrangement is that the ASO can’t guarantee compliance.
As of January 2020, a new type of PEO alternative became available in the form of ICHRAs. WIth an ICHRA, employers provide reimbursement funds to help cover the cost of employee individual health insurance. Employees pick their individual insurance plans, and employers determine the reimbursement amount that will be paid to the employees. EnrollMe is a great example of this type of PEO alternative.
If you are torn between choosing a PEO or one of the above-mentioned alternatives, here’s what you should know about PEOs.
PEOs first became popular in the 1980s and were mainly used to process payroll for clients. That involved:
To increase efficiency, PEOs started putting their clients’ employees on their own payroll. They would carry out all payroll tasks (for their employees and for those of their clients) at the same time.
However, that led to confusion; for whom did the clients’ employees really work? Some client employees took advantage of this confusion and tried to reduce their legal responsibilities. To clarify the situation, regulators and insurance companies created new policies. The PEO became a joint employer (also known as a co-employer) with its client firms, responsible for HR functions; essentially, it became an outsourced HR department.
Over the years, regulations changed, making HR functions more complex. As a result, PEOs offered more and more services, including hiring and employee benefits.
Every time a PEO enters into a relationship with a client company, it becomes a co-employer of the people who work there.
What exactly does “co-employment” mean? Co-employment refers to a situation in which the business manages its employees on a day-to-day basis, while the PEO provides requisite HR services (be they insurance, payroll, or other benefits administration).
Here are some common services that PEOs may offer:
- Benefits administration
- Recruiting and hiring
- Payroll administration
- Unemployment administration
- Workers’ compensation administration
- Regulatory compliance assistance
- Drug testing programs
- Family and Medical Leave Act administration
One of the primary reasons small businesses investigate PEOs as an option is that PEOs administer employee benefits.
PEOs have purchasing power. They can purchase better insurance plans than a small business could on its own, which makes PEOs an option for small businesses. The reason that some PEOs have so much purchasing power is that they offer the same group health benefits to multiple businesses through a large master policy. That means that the PEO may have little incentive to find a health plan package that is specifically tailored to the needs of your small business.
PEOs shoulder the burden of administering the health insurance plan, meaning that small businesses do not have to worry about plan administration. Instead of needing a dedicated HR person on-site to answer employees’ questions or walk them through the insurance enrollment process, the PEO handles that. That means, of course, that you must choose your PEO wisely, since your employees will be directly impacted by the level of service offered by the PEO.
PEO insurance means the PEO is responsible for the entire relationship with the carrier, from policy selection to renewals to pricing changes. Clients don’t have to worry about those issues, so they can focus on their core business instead.
That said, if any issues arise that make you wish to terminate the agreement between your business and the PEO, it may not be as simple as you think to do so.
Guidelines for PEOs vary from state to state. Below is a rough breakdown of regulations:
Hawaii requires PEOs to register. The registration requirements include registration fees, confirmation that the PEO used for payroll operates and maintains branches in Hawaii, the most recent IRS W-3 form, and a surety bond or an irrevocable letter of credit equivalent to the bond amount based on a sliding scale as written in Hawaii state law. Registrations expire on June 30th of even-numbered years.
Illinois requires a license. PEOs must register with the Department of Insurance before obtaining workers’ compensation insurance or self-insurance in the state.
Rhode Island requires PEOs to submit a tax certificate.
The term “HRO” stands for “human resources outsourcing.” There are some similarities between PEOs and HROs, but there are also some significant differences.
In contrast to a PEO, an HRO coordinates and manages selected HR functions. Think of it as an a la carte PEO; you can pick and choose which services you like. An HRO can assume as few or as many of your HR services as you choose.
HROs are an appealing option for small businesses, although occasionally, larger firms will use them as well to fill knowledge and skill gaps (for example, writing HR policies).
PEOs always offer a co-employment relationship. An HRO does not. When you sign a contract with a PEO, you’re bundling HR services with benefits or payroll administration; that isn’t the case with an HRO. An HRO can offer a more affordable, less restrictive option than a PEO.
The cost of PEO options varies from organization to organization. A PEO typically charges based on the client’s headcount, and costs can run from about $100 per employee to thousands of dollars a year based on a percentage of each employee’s salary or a flat rate per employee.
Other factors that affect the cost of PEO options are:
In addition, some PEOs charge their clients based on the client’s situation. These can include:
When a company signs with a PEO, they enter a legal relationship in which the company and the PEO must fulfill certain obligations. That’s why it’s crucial to choose a PEO for your small business carefully.
You want a PEO that offers the right services to meet your needs. If you’re in the market for PEO group health insurance, evaluate the company’s offerings. The insurance options might not be the best fit for your employees.
Furthermore, read the fine print very carefully. Answer these questions before signing the dotted line:
If you choose to work with a PEO, be aware that there are some benefits and some drawbacks.
You might be considering other options for a number of reasons. First, you might not need all the services a PEO offers. If you can handle most HR functions with no problem, you may just be looking for an affordable way to provide employee health insurance plans.
Second, you might be concerned about what the future holds. What happens when you want to scale your business? A PEO lacks scalability, so if you are anticipating going into growth mode in the future, a PEO may not be your best option.
Unlike PEOs, EnrollMe takes a new approach to corporate health insurance with an innovative hybrid model that leverages ICHRA for the benefit of employers and employees alike. Here’s what EnrollMe’s innovative digital health insurance marketplace provides:
Looking for an alternative to PEO insurance for small businesses? EnrollMe’s innovative digital healthcare marketplace offers self-service options to employees to find the right insurance for them. Choose a flexible, affordable option for insurance that meets employee needs. Sign up for a demo of EnrollMe today.