The 7 hidden costs of PEO

PEOs do so much for their clients, and the best ones do it in a way that allows you to save on hiring, insurance, and perhaps most importantly time!  There’s an overused adage that as an executive, time spent in your business takes directly from time spent on your business.  Put another way, every second you are mired in the tactical and transactional aspects of being in business you are not getting to work on the strategic aspects of your business which will ultimately yield the results you’re looking to achieve.

In the ideal world, PEOs outsource that transactional and tactical work to a company specifically design to bear the administrative burden freeing you up to do the strategic.  Unfortunately, many PEOs have found there are ways to make money in the tactical… little, nuances, that they can take advantage of which no business owner who’s focused on their business would likely catch.  The purpose of this article is to illuminate some of these tricks of accounting, administration, and in some cases even slight of hand (I’m looking at you Insperity)!

1.)  Beware Percentage of Payroll Pricing!  In many cases PEOs will price their service as a percentage of total payroll.  There is nothing inherently duplicitous about this.  However, it can lead to some nasty surprises if you choose to bonus out your employees throughout the year.  All of a sudden your PEO is getting a nice hefty bonus too… and why?  It’s not like they’re making cold calls for you, hitting company KPIs, or closing big deals?  Why should they get 1-2% of the much larger bonus checks?!

2.) Examine SUTA closely.  Every PEO handles unemployment differently!  Some PEOs will build in margin in states where they are the reporting entity (called PEO Report states).  Some PEOs will even choose to report the max in every state regardless of your or their SUTA rate.  I’ve even seen some PEOs not cap their SUTA at the state limits and charge SUTA the whole year.  This last practice has been more or less sued out of existence, but it’s worth noting that this is an area that no PEO sales rep will talk about willingly and one where PEO Distillery cuts through the BS to get you a clear picture of your true costs.

3.) Benefits despite being one of the drivers for companies to explore PEO, it is also an area of profit for many PEOs.  Often times PEOs will sell rates higher than what they are quoted by the carriers and hard negotiation is required to get rates that are actually priced to risk.  Every renewal, regardless of how your group performs you will likely see an increase because PEOs know you’re used to it!  This is why having a PEO Broker help you negotiate every renewal will benefit you tremendously throughout the life of the partnership.

4.) 401K Fees – Some PEOs trot out fabulously low cost Multiple Employer Plans that are truly the least costly 401Ks in the marketplace.  Others view 401K as a moneymaker playing on the fact that you are unlikely to protest 401K fees and lump in that service for ease of use.  These fees are often sizable and uncompetitive compared to industry averages.  It is always worth shopping 401K as a carve-out to the PEO to make sure the juice is worth the squeeze, and many PEOs like TotalSource and Paychex offer standalone 401K options that really are inexpensive and well run.

5.)  Off-cycle Payrolls – often special payrolls carry special fees.  You may think you’ll never use these services but if you’re in an industry that has high turnover or corrections to payroll running pretty regularly these fees can add up!  They can also be negotiated on during the sales process.  One more thing you’d probably never know to ask.

6.)  Workers Compensation – What is yet again often a lost leader for PEOs to get you in the door is sometimes also a giant revenue generator.  Take for example a Tech company partnering with a PEO for phenomenal benefits, often times they don’t even look at the Worker’s Comp. 5 years down the road they’ve grown from 5 to 50 employees and they’ll come across our desk paying 10x what a normal tech company their size is paying in Worker’s Comp fees.  How’d it happen!?  Well, the PEO just charged you their retail rate for every new state you opened and new employee hired in those states counting on the fact that you don’t want to negotiate every hire for “market rates”.  Sorry for sounding redundant, but it’s one more reason to have a PEO broker in your corner every renewal.

7.)  I’ll end with perhaps the most duplicitous tactic of them all… One PEO in particular is absolutely diabolical when it comes to building in margin with oddly named “allowances” that aren’t tied to any logic or reasoning at all.  If you find yourself staring at an invoice that includes “Co-employment allowances, Benefits allowances, Risk allowances, etc.” don’t walk… run to call us.  You are not a child and you don’t need an allowance… It’s time to get a grown-up PEO!