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Professional Employer Organizations

Question: My company is considering going to a Professional Employer Organization.  Can you provide some insight on the pros and cons of PEO’S?



I want to preface this response by saying that I am not a PEO fan.

The original concept of employee leasing was great. A third party in the form of a PEO would go to smaller companies, hire all of their employees and then lease them back to the employer for a fee.  The idea was as the PEO continues to add employees, they will be in a better position to negotiate lower rates for medical insurance, workers’ compensation and payroll processing. This lower cost would be passed on to the employer allowing smaller companies to pay less for their benefits and be able to compete with the larger corporations for employees.  However, for a number of reasons, Professional Employer Organizations no longer offer a way for employers to save money.  In fact, the cost of contracting with a PEO has risen dramatically in the last few years.  Before signing with a PEO, look at your options and know the facts.  Many PEO’s have stopped offering group benefits which is the primary reason they were formed.

In Florida, PEO’s used to make quite a bit of money on workers compensation.  In 2004, there was a major shift in the workers comp market in the state and many insurers stopped offering workers comp insurance.  During this period of time many PEO’s went out of business because they could not obtain insurance.  The Florida legislature changed the workers comp laws to the point that the advantage of using a PEO for savings in workers comp disappeared.

PEO’s then started charging administration fees and some charge in the neighborhood of $1,500 per employee per year. So a company with 40 employees will pay nearly $60,000 a year for payroll processing and human resources services. This is in addition to the workers compensation insurance and the cost of benefits.

There is also a bit of a confusing concept known as co-employment.  Your employees will be paid by the leasing company but are assigned to you as the client company.  Since the PEO pays the employees, they are the employer of record.  But since you manage the daily activities, you can still be held liable for discrimination and harassment. The PEO cannot take the liability off of the client company – nor would they want to.

One more thing – since all of your services including workers compensation, payroll, HR and sometimes benefits are all rolled under one umbrella, if you become dissatisfied with any of these services, you have to fire all four providers.

The only advantage of using a PEO is if you cannot get workers compensation through the open market.  Otherwise, my advice is to stay independent.

Let me know if you have additional questions and thanks for Asking Bob.

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