Webinar: PEO Escape, Your Path to Independence

Jeff Plakans | Founder & President, CommPayHR

Jeff Plakans founded CommPayHR in 2006, for a better, holistic solution for SMB payroll and HR. He is passionate about improving employment practices and compliance to create the best business environment.

Denise Gelfand | President of PostPEO

Denise has over 25 years of entrepreneurial leadership, strategic management, and business consulting experience and is a trusted advisor for businesses seeking clarity and solutions in their PEO relationships.

Jeff Plakans:
Good afternoon, everybody. Thanks for joining us on your lunch hour, or if you’re on the West Coast or further out, during the morning. For our webinar today on the PEO Escape, Your Path to Independence. Now, as most of you know, I’m Jeff Plakans. I’m the president of Commonwealth Payroll and HR. And this is a very important topic, I think. We run into a lot of clients that are with a PEO and don’t want to be anymore and want to find a way to make it work for them to get out. We have some clients that are considering a PEO. Sometimes it’s for all the right reasons and it’s great fit. Sometimes it’s not. So what our hope today is to talk a bit about all things PEO from our perspective here on the payroll and HR side of things, but hopefully more for your perspective as a company that might be considering a PEO or might be considering the departure of a PEO.

Joining us today for our webinar is of course somebody who I believe is an expert in the field, Denise Gelfand. Denise is the president of PostPEO. Denise, thank you so much for joining us today for your lunch hour and for sharing everything that you know about PEOs.

Denise Gelfand:
Well, thank you for having me, Jeff. This is great.

Jeff Plakans:
So a little bit of housekeeping before we get going and kick everything off. We are recording this session. So if you’re here but paying half attention, or if you’re not here but wish you were, or you wanted to pass this on to somebody, if you’re registered, you will get a recording. You will get a copy of this deck and our information. So that is available to you. Also, we are going to do some questions and answers at the end of today’s session. So there is no chat box available to you, but there is a section in the top right-hand corner called Questions. Feel free to submit your questions to us there. When we get to that portion of the program, we’ll jump into those and hopefully give you some wonderful and great answers.

Now, Denise, tell us, if you don’t mind, a little bit about yourself so everybody that joins us today knows your background and understands where you’re coming from. And maybe Denise is frozen.

Denise Gelfand:
Oh, I think… Okay, I’m back. I think we had some technical difficulties there. So yeah, thank you for having me, Jeff. It’s a great opportunity to really, I think, help people understand the pros and the cons of being in a PEO. I worked for a PEO for eight years and really learned all the good, the bad, the ugly of PEO. And I started PostPEO really to help companies in PEOs evaluate if they’re still getting the value out of the PEO, the control, flexibility, and transparency in the pricing that they’re looking for. I think that people get into PEOs for different reasons and they may make sense at that particular time in their life cycle, but there’s a point where you should always be evaluating if it’s still delivering the benefits of why you got into it and if it still makes sense. So PostPEO is really a company that helps companies in PEOs do the evaluation and project manage the entire transition process from start to finish.

Jeff Plakans:
Excellent. Well, thank you for joining us again. It’s appreciated. So what we’re going to do is we’re going to jump into what do we want to accomplish today? So we’re talking a little bit about and going to cover why companies choose a PEO, and more importantly, why they leave a PEO and why those two things can exist at the same time. We’re going to talk about unbundled benefits. So what’s possible when you’re not in a PEO anymore and what capabilities are available to you. We’re going to talk a lot about fractional HR support and what it means to be reactive versus what it means to be proactive when it comes to HR. And then finally, we’re going to get some takeaways and leave you with a few things to chew on as you go off in your journey.

And as I said, who’s this intended for? Maybe you’re considering a PEO, maybe you’re in one currently, maybe you’ve been in one, but you want to know what you missed. We’re going to cover all of these things in the next 45 to 50 minutes. So Denise, why does a company choose a PEO?

Denise Gelfand:
Yeah, so if companies are really, they’re startups, they’re early stage companies, and they don’t have any HR infrastructure, a PEO is really a great way for them to get up and running very, very quickly. There’s the convenience factor. You have everything all bundled into one solution, you have one vendor, you don’t have to deal with multiple people. So flexibility really isn’t an issue for you at that point. There are companies, and I had this experience a lot where they had a high workers’ comp experience mod, and it was difficult to get into the standard market and they didn’t want to be in a state fund situation. So a PEO was a great option for them. There’s a lot more flexibility when it comes to pricing the workers’ comp when you’re in a PEO.

And if you’re a small employer group, you may be looking for access to benefits that might not be available to you in the small group market. And sometimes it’s the PEO can offer more competitive health insurance rates, and so it’s a good fit there. I think there are some companies though that will go into a PEO under the assumption that they’re able to remediate all of their HR legal risk. And that’s something I think we’ll talk about a little bit later on because that’s really a misconception.

Jeff Plakans:
Excellent. Well, all right. Well, thank you for that. So this is a great chart, the PEO life cycle chart. Tell us a little bit about this.

Denise Gelfand:
Well, this goes back to what we just talked about, like an early stage company. They’ve got one, two, five employees, maybe 10. They’re more likely to be in a PEO. It could be a good fit. As the company’s headcount continues to grow, it’s really not the place that companies… Where it really doesn’t fit any longer. I mean, I like to say PEOs are really more of a bridge. They’re not a destination. And so I think as companies get past that 50 plus headcount, for sure, they should be evaluating the cost and if it still is the right fit for them.

Jeff Plakans:
Got it. Got it. Excellent. Okay. Well, then that leads us to why companies leave PEOs.

Denise Gelfand:
Yeah, so I think as the administrative costs continue to go up and it really exceeds the value that they’re receiving, companies are spending anywhere from 1,500 to $2,500 per employee per year in administrative fees. It’s a lot of money when you think about a company with a hundred employees and it’s maybe $250,000 in admin fees. I don’t know if you’re still really getting the value from that PEO. There’s a frustration over the lack of price transparency. And sometimes the technology is a lot less efficient than a lot of the HRIS technology that’s available in the marketplace. And then you get into the customer service side. There’s a lot of turnover perhaps in the service group. You’re not able to get answers as quickly as you’d like. And so it just deteriorates over time and you don’t have that value anymore. And that’s what you were really looking for on the HR support.

On the workers’ comp, if you came into a PEO because you had a lot of losses and you had a high X mod and that is no longer existing, it might be a good reason for you to want to leave the PEO. And then when it comes to benefits and the policies, it’s like on the benefits side, all of a sudden you’re seeing like, wait, I came into the PEO because I got a better rate, and then all of a sudden I’m seeing I’m getting a 30%, a 40, 50% renewal rate. It’s like, what just happened? And probably the biggest bummer is you don’t have access to any of that data. It’s in the PEO and you can’t really see what’s causing that increase. And then some of the policies, they’re just not as flexible as maybe you want being in the PEO, and it’s not working for your demographics, your employee demographics and your culture.

Jeff Plakans:
So it’s interesting where we hear a lot about the benefits and about the benefit costs. We’re going to talk a little bit about that in just a bit. Tell me about companies as they mature.

Denise Gelfand:
As they mature, I mean they’re looking more for, or they really need more strategic HR support and generalized support. And so it’s not a best fit at that point. I mean, I see a lot of that. And when you’re spending all of that money on admin fees, it’s better served bringing in a fractional HR consultant that can support your team as you’ve grown. You’re going to have an HR team when you start getting to a hundred, even 50, you have an HR generalist. But the support that you’re going to get from a fractional HR is so much higher and the level is so much more proactive. In a PEO, these HR people are dealing with hundreds of clients. There’s no way they have the bandwidth or capacity to do anything on a proactive or strategic level.

Jeff Plakans:
Got it. Got it. Well, we talked about health insurance, and one of the major reasons that we see companies in PEOs, because when we’re talking to them and we’re pulling them out, we’re like, “Why did you go? Why did you do it?” And most of them say, “Well, my increases in my health insurance were so high, so repetitive, the loop wasn’t ending.” And so what happens with a lot of these companies, most of them are smaller group companies, companies that are 50 employees and less, and they’re protected in certain states, Massachusetts being one of them, by what we call community rating. And a lot of people don’t understand what that is and what that means. It basically means that instead of looking at the claims history of a particular group, let’s just say it’s a group of 10 employees, they’re going to look at the claims history of all of the groups that are considered small group in that particular state and look at the collective claims history of them and the actuary history.

So they’re going to look at what’s going on there. So it’s not just, you could have a company with 10 people that are all younger folks, but you’re still going to be affected by the probabilities that exist within the community rating. So if you’re in a large group, they use claims-based data, which means it looks at, okay, you have 150 employees, and your 150 employees are all going to be evaluated based on the claims that they made against your health plan over the course of the last year. But in community rating, that’s not the case. And the reason for that is it is so as not to make it prohibitive for small groups to get insurance. Now, what happens a lot of times is health insurance companies are using things like pharmacy data that they can get their hands on as a way to learn more about these small groups.

But what happens when a company joins a PEO? So if the community rating means that collectively your insurance has been increased somewhere between 10% and 20% every single year, say for the last five years, that’s compounding increasing, increase in costs, not only for the employee, but for the employer. And what ultimately happens is here comes a PEO and the PEO has this huge group and the PEO says, “Well, come join our large group.” And most rational business owners will say, “Well, yeah, supply and demand, big group, opportunity to negotiate,” so on and so forth. And so they get given a teaser rate for the first 12 months that they’re in the PEO that’s probably some kind of a loss leader. But if you’re a business owner, all of a sudden you are looking at not only not a really bad increase, but you’re looking at an actual decrease to your cost.

You’re like, “Oh, thank God it’s over. We solved the problem.” But what actually is happening in a PEO is after the teaser rate’s over in month 13, they now have 12 months of your group’s data in their large group. And what did we say large groups can be done with? They can look at claims information. So now in your group of 10, if you have one person on very expensive medication and another person that’s undergoing cancer treatment, that’s going to be available to the people that are writing your rates for your particular group. And the PEO will then take you and put you into a risk group that is priced appropriately. So I’ve heard of, and we’ve seen and talked to companies that have gone into PEOs, had a great teaser rate, and immediately on month 13 got an increase of 25, 30%.

But now they’re stuck and now they’ve been exposed, so it’s not as easy to go right back into the community rating. And this is a trick, it feels like, that’s getting used out there. Now, what we see and what we hear from clients is where all this information is coming from. What I’ve pieced together and what we pieced together with this is what it looks like a bit of a business model is. And of course, most people, once they’re in, they’ll just pay the increase and not leave again because it’s so hard to get out of a PEO, as you discussed a little bit earlier. So let’s talk a little bit about myth and reality, Denise.

Denise Gelfand:
Yeah. So PEOs are the employer of record. So they’re the employer of record really for taxes and insurance purposes. But there’s this sense from a lot of companies that they feel like the PEO is now going to absorb all of the risk, that joining the PEO, now they’ve got full protection from employment risk and the buying power on health insurance, which you just addressed. The reality is employers are still liable for payroll accuracy, tax filings, and compliance in the work site, on wage and hour, on just everything that is around the employee side. So clients are rated, to your point, Jeff, on claims on their own claims data. And so the costs and the risks can really be much higher going into the second and third year renewal.

When it comes to EPLI coverage, that is pooled with very high retention levels. And companies don’t understand that. They don’t really look at the EPLI policy carefully. And usually the retention on those is anywhere from, it can be anywhere from 50,000 to $200,000 with a maximum of a million dollar policy. And if you’re talking about the PEO has within its pool 5,000 companies or something, a million dollars isn’t going to go very far. And there’s no tail on the policy, meaning that if you leave the PEO and you have a claim that happened when you were with the PEO and you’re gone, they’re not going to cover it. They’re not going to touch it. So I used to say to my clients when I was at the PEO, “Please go get your own EPLI policy. The EPLI policies and the PEOs are really not there to protect you. It protects the PEO much more so than it does you. So if you are in a PEO and you stay in a PEO, please go get your own EPLI policy.”

Jeff Plakans:
All right. Well, so let’s say we’ve decided to leave our PEO.

Denise Gelfand:
Yeah.

Jeff Plakans:
What do we have to think about, Denise?

Denise Gelfand:
Well, you really have to be ahead of your renewal. You have to be four to five months in front of when your PEO renewal is. And you need to be careful with that too, because sometimes some PEOs will renew benefits at a different time than they will renew the whole PEO policy. So really you need to really understand your agreement. But really when we start to unbundle someone from a PEO, we will do a current state analysis. We’ll do a cost-benefit evaluation. We’ll review the contract, and then we put this whole roadmap together for them so that we can start bringing in all the different solution providers that they need. If they have a broker that they work with on the P&C side or the benefit side, it’s not a problem. We stay very agnostic across all areas.

And we will then start to obtain the payroll HCM quotes and help with that whole decision-making process to make sure that whoever they decide on, and we will help bring in multiple vendors for them to look at, once they make that decision, we will sit on every discovery call, the demos, and then every implementation call. And then you’ve got your benefits going out and the plans being designed, open enrollment dates being put forth, and then you have the workers’ comp, the EPLI policy, and then transitioning now your 401k. If you have remote employees in different states, we’ll help get those state tax IDs set up for you. And then we will make sure you cancel your policy in time on the PEO side so that you’re not going to get hit with any penalties. One of the things we do look at, if it’s a mid-year, is helping you understand if you’re going to have any restarts on your taxes. And so I’ll let you get into all of that and we’ll go from there.

Jeff Plakans:
Yeah. Well, I mean, you make a great point, which is there’s a lot of different factors to consider about when thinking about when to do this. And in fact, the actual PEO industry, which used to be like we would only do this at the calendar year and that was it. And you can imagine if the door for new business was only open at one time of the year, how tough that is on an organization. They lobbied to make some changes to the law to be able to do that. That allowed a lot of opportunity for them to bring new clients on, not at the calendar year term. But for those of us who do the opposite, who bring companies out of PEOs, it also opened the door for the things that we do. So when you’re moving your company and your company’s employees from the PEO’s EIN back to your own, what do you want to think about?

Do you want to do it mid-year? Well, why would you do it mid-year? One reason for that, and you mentioned this already, Denise, is the anniversary date of the benefits. Some PEOs use very random dates like 05/01 as the benefit anniversary date. And I think part of the thought process is that if you do it on 05/01, that’s difficult because it works against some other numbers that you have to deal with. So you do that at the start of the calendar year, well, you can avoid problems like employees getting halfway to, for example, their FICA limits and then jumping into another tax ID number and having to start over again. No business owner loves that. But on the flip side, if you go mid-year in the middle of the actual plan and benefit years, then what about employees’ progress against their deductibles on their individual plans?
The employees, let’s say they have a $2,000 deductible. They get $1,500 into it and then they jump to a new plan and then they start back from zero again. That’s not good for the employees. So you have to be very intentional about thinking about when you’re going to do this. Now, the good news is because of those changes in the laws that I mentioned, it allows us on the side of companies taking out or going out of PEOs, we can use things called predecessor wages to make sure that employees who’ve paid X amount towards a limit like a social security limit can get credit for that so they don’t have to do it twice or more than once in that process. So all things that you want to think about as we’re getting into it, these are conversations that we’re having with clients that we’re talking to bring them out of PEOs. And Denise, I know that’s a big consideration as you’re counseling companies as well.

So now what happens when you work with me? What happens when you work with Denise? Well, working with our companies together is going to mean you’re going to get a project manager for the entire PEO transition. So all of those things, all of that counsel that Denise talked about and offers along with a full hire to fire human capital management solution, that’s on our side, with payroll, with onboarding, with employee offboarding, with full benefits enrollment, the HR and onboarding support to the employee, the employer HR support. We talked about that fractional support already that is actually isolated and not like a call center HR support as Denise described it that exists on a lot of these others. Obviously you get workers’ comp providers and a full integration on that. You get the benefit plan advocacy and brokerage.
Now we’re not brokers ourselves, but we work with a short list of individual brokers who we match up to the company. Not every broker is a good fit for every client and not every client is a good fit for every broker. We’ve got a lot of experience with making that and making sure that match works together. And then obviously most of all, and most important here, you don’t jump out of a PEO every day. In fact, we have a rare client that’s done it more than one time, which means if you’ve never done it before and you’re hoping you’re never going to do it again, you want to make sure that there is somebody holding your hand and guiding you the entire way through. And that’s what working with PostPEO and working with Commonwealth Payroll and HR together are going to be able to deliver to folks that are interested and want to go through this process and want to make sure that it’s done exactly the right way. Have I missed anything, Denise?

Denise Gelfand:
No, no, you haven’t. I think having a team and someone there to guide you and hold your hand through the entire process really, it makes it so much less complex and daunting really. I mean, it’s not like you feel you’re thrown into the deep end and it just becomes very streamlined. There’s one point of accountability for everything and one point person. So I think that can you do it on your own? Sure. Is it going to be a good experience? Probably not.

Jeff Plakans:
Well, we promised takeaways. So here are some takeaways. Denise?

Denise Gelfand:
Yeah, so I alluded to this in the beginning. PEOs can really be a great starting point, but they’re not really a long-term solution. They can provide the structure, compliance for smaller growing companies, but many outgrow the one-size-fits-all model of the PEO. Exiting when you exit a PEO, it really can unlock a lot of new opportunities. It gives you a lot more control, cost transparency, flexibility. And I always say the savings that we create for these companies coming out of PEO can really be utilized for other strategic initiatives. But the key to a successful transition is planning. You’ve got to plan ahead. You can’t just rush a transition. I turned somebody down last year because there was four weeks for them to do an entire transition out of a PEO. And I just said, “You’re too late. It’s not going to be a good experience, and you can’t even get all of the payroll and everything, all the benefits, onboarding working.”

And when it comes to the HR, some people worry, “Oh my gosh, I’m not going to have any HR support if I leave the PEO.” I really look at it as, you are not losing any HR support. You are really gaining a much higher level of service and support. It’s a different experience. It’s much more white glove. You can pick up the phone, you can talk to somebody, you can really have them be proactive with you and strategic. And that’s important for companies as they continue to grow and evolve. And you’re really creating a people strategy that fits your culture, that fits your company. You’re not under any controls of the PEO as to how you need to terminate somebody, what steps you need to take. If you don’t take these certain steps then you’re not going to be covered for EPLI that they have. And like I said, the timing is really critical. You need to understand what your contract says and so you don’t get hit with penalties and this timing everything.

Jeff Plakans:
All right. Well, thank you for that. Okay, so we’re going to jump into our questions, but I got to put in a plug for something that is a new thing that we’re doing here at Commonwealth. It’s called our Employer’s Handbook Community. So we have lots of clients that by career definition were not originally HR people. They were tasked at some point in time with a number of things administrative that turned into leadership of employees or administrative responsibility of employees. Either way, a lot of times that’s not where everybody’s the best prepared. So what we did was we created this employer’s handbook community to create value and a place for information and a place for coaching specifically for those individuals.

So if you want to learn more about the Employer’s Handbook Community or you want to go ahead and join it because it is free to join, go ahead and just hit that QR code that’s there and you can go ahead and that’ll take you right to our spot. Now, we’ve had a few questions that have come in as we were talking, Denise. The first one, let me just get into it over here, is what makes a PEO a bad choice if that when I joined it, it was a good choice at first?

Denise Gelfand:
Do you want me to take that one?

Jeff Plakans:
Go ahead.

Denise Gelfand:
Okay. I never say it’s a bad choice. You joined it for a specific reason. And that’s why I say it’s so important to just, on an annual basis, really evaluate, am I still getting the value out of it? Did I join it because I had a high experience mod for workers’ comp? I don’t have that problem anymore. So if that’s the reason I joined it, do I still want to be in that co-employment model? It just depends. Did I join it when I was really small? You had 10 employees and now all of a sudden I have a hundred employees. Am I really getting the value out of it at this point? So I don’t say it’s a bad decision. I just say it’s a decision that you need to evaluate moving forward. And does it still make sense for you? Is it still the right fit?

Jeff Plakans:
All right. Let’s see. The next one here says, “In my PEO, they’ll represent me when I get sued by an employee.” So I don’t know necessarily if that’s actually what will happen.

Denise Gelfand:
Well, I’m curious when they say, “When I get sued by an employee,” what are you being sued for? What does that lawsuit look like? Is it a wage and hour lawsuit? Because if it’s a wage and hour lawsuit, they’re not going to cover you. They won’t cover you at all for a wage and hour. That’s on you. And that’s not covered under their EPLI policy. If you read it carefully, it won’t specifically say that.

Jeff Plakans:
I think it goes a little further than that in that the key here is to examine the definition of the co-employment relationship and what exactly that means. They’re not directing these employees on a daily basis. So to your point, if an employee was directed to work 70 hours in a week and nobody paid any overtime, the PEO’s not going to be really responsible for that because that was effectively a management decision that got made. But most importantly, they’re certainly not going to represent you. If you’re getting sued, you are going to need to find representation for yourself. And that is not going to be on the dime of the PEO. The PEOs don’t make money doing things that way. What they do make money, and you have to think about this, is where the money is getting made is frankly on what I’ll call benefit arbitrage and the administration fees that are out there.

So let’s not lose sight of the business model. This is not an altruistic thing. This is not socialized medicine. This is a for-profit business. Every one of these is a for-profit business. So something that needs to be taken into account.
Now, this is actually, I love this question when we get it. We get it all the time. Denise, if I leave the PEO, who’s going to talk to my employees?

Denise Gelfand:
I don’t know many PEOs that talk to the employees now. Maybe there’s some, I don’t know. I mean, there’s what, over 800 PEOs. They don’t typically talk to the employees. They will guide the HR person or the owner. They’ll guide them in how to have a conversation. They won’t do the talking. Now, if you do hire a fractional HR consultant, there are some of those consultants that really act as the HR arm of the company, and they will have those conversations with employees. So very different level, but you’re not going to have a PEO be talking to your employees. That’s not what they do.

Jeff Plakans:
One of the things that I think exists out there, we’ve seen it out there already though, is effectively an employee, we’ll call it resource center, employee support center. Basically, it’s a phone number or a chat box or an email address directly for employees. And frankly, you’re right, there’s lots of PEOs that don’t want to talk to employees. There are some that offer it up as a benefit, and it’s rudimentary. It’s just supporting employees. And frankly, I haven’t heard of it lately, so I don’t know that this particular group is still doing it. What I will say though, just to put in a plug, one of the things that we offer at Commonwealth is something that we refer to as employee aid, which is directly that. It is set up as a time usage solution for companies that want to have a place for their employees to go to talk about certain things, to learn about certain things related to HR-related items, related to benefits, so on and so forth.

There are still a little bit out there. Now, the difference being we’re not a PEO, so there’s not a lot of back and forth that we’re going to have with the employer about what’s being discussed with the employee because we’re helping employees get self-service going. We’re helping employees go through onboarding. We’re helping employees go through that benefit enrollment process. And that’s important because that usually sidetracks the employers in a big way. So that’s why we do it that way. But in most cases, the employers or the PEOs don’t really want to be talking to the employees and will avoid it to every degree that they can. They’ll say that they rep management, and hopefully that’s all of you guys.

So that covers all of the questions that we had, Denise. Certainly, if you want to learn more, both about PostPEO and about Denise, her information is here on the screen. Of course, most of you know how to get ahold of me, and if you don’t, my contact information is there as well. Like I said, we really appreciate you giving us the time during the middle of the day to learn more about this. And again, if you aren’t actually on here, but are watching us at some other time on this recording, we’re happy to be a part of this time of day as well. So thank you everybody. Denise?

Denise Gelfand:
Thank you. Thanks, Jeff, for having me. This was great. Appreciate it.

Jeff Plakans:
Appreciate it. Have a great rest of your day, everybody.

Denise Gelfand:
Thanks everybody.