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The Economics of PEOs: The 411 on what PEOs cost and how they invoice

By Shraga Jacobowitz

Okay, it’s time to address the elephant (or should we say the piggybank) in the room.  I know as you read all my (I hope, helpful) articles, you’ve been wondering about one thing…..What’s the bottom line?  While PEOs seem too good to be true, offering an array of benefits for so little cost, they really are THAT good!

So how do PEOs do this? And how much is it going to cost you?

PEOs are able to offer so much for so little because of their very structure.  Companies using PEOs are entering into a co-employment arrangement, which actually means that your employees are not only employed by your company, but also by the PEO (much LARGER) company.  This co-employment allows your company to offset some of your liabilities and receive benefits usually only offered to much larger companies.

You may already know the benefits of PEOs. If not, you can always check out our inaugural newsletter article or any of the other newsletters that covered this topic.  And once you understand how a PEO can save you money, you can get down to the crux of things. As the saying goes, “there are no free lunches.”  And we’re back to that all important question, “What’s it going to cost me?”

So, of course, a PEO will charge you for their service, but their cost outweighs the savings you receive from partnering with a PEO tenfold.  Keep in mind when partnering with a PEO that in many cases even after factoring the fees of a PEO for their service, they are delivering a much bigger net savings to their clients.  As part of a PEO, you are being offered savings on your health benefits, workers comp and creating a lower-risk environment. In addition, partnering with the majority of PEOs can eliminate the need to have a HR department and will definitely eliminate the need to use a Payroll processing company, saving you even more money across the board.  As for the PEO cost, like everything else in the PEO world, every PEO is different. But there are three basic price models offered by a PEO:

The Flat Rate

The Percentage

The Bundle

I’m sure you’ve all already picked out your favorite pricing structure, but just in case you’re not sure which is best for you, here’s a quick rundown of the three options:

  1. The Flat Rate: Here the PEO will charge you a flat rate per employee. People like this because they know what they’re paying. The downside of this is you’re paying the same amount no matter how much time each of those employees put in and how much they benefit from your PEO partnership. Rates usually vary depending on company size and/or a number of other variables and fall between $60 and $200 per employee.
  2. The Percentage: These PEOs charge a percentage of your gross payroll each month. The downside is as this will fluctuate payroll to payroll, there’s no consistency in fees and you never know what to expect. In addition, this pay structure may throw you some surprises along the way, in the form of higher service fees when you give an employee a raise or provide bounces further increasing your cost/fee for the PEO. Its simple math, the percentage on a $1000 weekly pay is going to jump up when you raise that employee’s pay rate to $1500/week. The upside is in many cases, it can actually end up cheaper than the flat rate. Again, this is simple math, i.e., dividing your percentage fee by your number of employees may show you that your percentage rate WILL often fall out cheaper than the flat rate amount. Rates are usually based within a range of 2 and 4 percent.
  3. The Bundle: While we generally like bundle deals (I mean, who doesn’t like the TV, Internet, Phone packages), you generally don’t want a bundled PEO rate. This means the PEO invoices you one percentage which includes your payroll taxes, workers comp costs, (and in some cases your employee benefits cost) and their administrative fee in one lump percentage against your gross wages per pay cycle.  Honestly, I don’t see any upside to this price structure, unless you just don’t want to be bothered with the actual cost of things and prefer to pay bills blindly (and if that’s the case, I have a bridge to sell you).   The downside to this is that you have no idea what your costs are and therefore have no way of tracking, reconciling or reporting your individual expenses. Besides that, not knowing what you pay, makes it quite difficult to shop around or negotiate lower rates for those items that are experience rates.

But be aware, not all bundles are created the same, some PEOs will bundle everything while others will bundle Workers Comp and Administrative fees.  If you’re looking for something bundle, the latter may be a better bet.

Regardless of which price structure you decide is best for you, it’s good to know that most PEO quotes will include six standard costs (whether they are bundled or not):

  1. FICA
  2. FUTA
  3. SUTA
  4. Workers Compensation
  5. Employee Benefits Premiums
  6. Administrative Fees

Not sure what these are, you can check out Unscrambling the ABC’s of the PEOs and Wrapping up the ABC’s of PEOs, but for our purposes, all you have to know is the first two, both federally mandated employee withholdings will not (or I should say SHOULD NOT) differ from PEO to PEO. When it comes to the next three, that is when you will see a difference in your quotes. Because SUTA (State Unemployment Tax), Workers Compensation and Employee Benefits Premium rates depend on a variety of factors (such as operating state, number of claims –whether unemployment or workers comp claim, and the workers comp code they are using), each PEO will offer these at different rates. This is where you can start comparing prices.  And finally, as discussed above, the administrative fees will depend on how the PEO decides to charge you.

Like I said above MOST PEOs will have these six standard costs (and if they don’t, that’s an immediate red flag), but it is also important that these six costs are broken down on the invoices you receive from the PEO.  While this seems obvious, many PEOs proposal will show you this breakdown but not include it on their invoices. Before signing on with a PEO, make sure you ask about their invoicing practices or ask your handy PEO consultant (like ARC) how to navigate the billing and invoice process.

My final word of advice, ALWAYS LOOK FOR HIDDEN FEES.  These fees can be anything from additional charges for HR Services, EPLI, additional support or added technology modules, employee training. Many times, these fees will not be included in the original quote. Before signing on, ask the PEO for documentation of all fees and read everything word for word, including footnotes, endnotes, addendums (and any other way a PEO can sneak in additional charges).

Sounds like a lot of work? It can be, but it doesn’t have to be.

My ultimate word of advice that will always stand true: Contact a PEO Broker or consultant such as ARC Consultants (of course) to do the heavy lifting for you. Because these consultants have relationships with many PEOs, they know the ins-and-outs of each PEO’s price structure, whether there are hidden fees, who offers supplementary services for free, who charges for them, and just about everything you need to know about choosing the right PEO at the best rate for you.

Want to know more information about price comparing PEOs and selecting a PEO that fits all your needs? Contact ARC Consultants today.

When it’s time to fire…And how to do it: 4 steps to firing an employee without any drama.

By Shraga Jacobowitz

In our last two newsletters (see here and here), we discussed how to hire the perfect employee, but despite all our good intentions, sometimes the day comes when we have to fire an employee.  (Insert Gasp and sigh of dread here) If you speak to most business owners, they’ll most likely say firing employees is one of the hardest tasks that falls on their plate. In fact, the average employer waits way too long to fire a non-performing employee because they are dreading the task, although retaining them is costing them money, time and even customers in the long run. Which is why dreadful or not, firing is a necessary evil in business and should never be avoided.

However, keep in mind that just like hiring the perfect employee is a process, firing the not so perfect employee is a process as well. But since there are laws that govern who you may or may not fire and what you may or may not be allowed to fire for, firing someone can actually be a lot more complicated than hiring them. So what do you need to know before firing someone in your organization?

#1 Weigh your Options

Like our discussion with hiring, the first step is to consider if you really need to fire this employee. Realize that not all employees are suited for every position. Before firing someone, consider whether perhaps they would be better fit at a different job within your company.  Obviously this is only if the employee has done nothing wrong and exhibits great qualities and work ethic, but is sinking at their current position. Sometimes the difference between an amazing employee and an employee you are rearing to fire is TRAINING, TRAINING and more TRAINING (refer back to my second newsletter on hiring practices to see just how important training is). It may be that the employee you are considering firing, just needs some additional training and/or development. Offering them that training or development can gain you the perfect employee.  And not to toot the PEO horn once again, but PEOs often offer this training and courses to employees of their clients.

#2 Protect Yourself and Company

If you’re in the legal right to fire the employee (again, a PEO provider can assist in determining whether this is the case or not) you want to leave no room for a fraudulent case.

  1. Only fire someone face-to-face! Besides being courteous to your former employee, face-to-face leaves no room for miscommunication.
  2. Do not fire anyone without warning! Again, it’s a simple courtesy, but also, a warning legitimizes your claim against the employee. If you’ve told them already you’re not happy with their performance, they shouldn’t be surprised to be fired when they don’t improve. Also, no one wants to work in an environment where firings happen out of the blue. It just creates an environment of fear and distrust among your remaining employees.
  3. As a follow-up to #2 above, DOCUMENT, DOCUMENT, DOCUMENT! (I don’t need to tell you what it means when I repeat myself three times, you know already that it just indicates how important this advice is. And IT IS! So don’t ignore it.) So what to document? Everything!! Okay not clear enough, here are some examples of important things to have records of:
    • How well or un-well (isn’t that the antonym of well?) they performed their job. If someone is excelling write down….not so much so, write that down as well.
    • Any infraction they did with time, place, details and witnesses names if applicable.
    • Any disciplinary action that was taken at the time of each infraction
    • The amount of time given to rectify the situation
    • Any warnings given before disciplinary action was taken. Make sure to record each time a warning was issued and by default each time said warning was ignored.

As with any other types of documentation, have concrete proof of everything. And if something was relayed verbally, follow it up with an email so you have written proof of all interactions.

  1. Don’t fire an employee without a witness! The reason for this one should be obvious. If you have someone who is there to attest to your reason and method of firing, it is harder for someone to make a claim of employment discrimination.
  2. Protect your property and data. Terminate the employee’s access to all your systems immediately and change any passwords you may have, and don’t allow them to access their work area. Ask the employee to hand over their key, door pass, badge and any electronic equipment that is company owned, i.e., smartphone, laptop, tablet etc.
  3. Keep it short and simple! The more information you give, the more fuel they have to fight you. If you’ve given them the proper warnings (see #2), then they know why they are getting fired and there’s no need to rehash it. Honestly, it might just be cruel to do so.
  4. Don’t end the meeting on a low note! Sounds like odd advice for a termination meeting, but the reality of the situation is no one wants a disgruntled former employee (especially in the world of social media). If the firing is done respectfully, you are accommodating and acknowledge the employee’s positive attributes, you are more likely to have an employee who won’t bash you on social media or TP your house. Unless they’ve truly been awful, don’t deny them unemployment benefits and encourage them in their next steps towards employment. If applicable, you can even offer to be a reference for their next job.  If you are able to and if the situation warrants it, offer a compensation package. Basically, be nice and you’ll make a very hard situation a bit easier (although, I’m not promising that there still won’t be tears, because unfortunately, most likely there will be tears!)

#3 Be Prepared

Like we mentioned above, some classes of workers are protected based on race, color, religion, national origin, gender, disability….you get the point. Therefore, when you are firing anyone, especially someone who falls in these protected classes, make sure you have a clear reason why you are firing them and have documentation. Don’t wait until an employee becomes a problem to begin documenting. Have a clearly defined method of tracking and documenting employee performance, establish uniform policies on what is expected and what is a fire-worthy offense, and if possible, discuss and correct problems as soon as they occur. If you’re really not sure if you have a leg to stand on, reach out to a professional (just saying, your PEO can most likely help you with this).

#4 Interview, Interview & Interview

And, no I’m not talking about hiring the replacement for your fired employee just yet (that we covered in our last newsletters), but I’m actually referring to Exit Interviews.  All too often, this important step is skipped, but they are a valuable tool for any business owner. They can help bring to light issues within your company. After all, a fired employee has nothing left to lose, so they’ll be as blunt as possible and everyone needs to hear the blunt truth every once in a while.  Now obviously, if your employee is leaving on bad terms and has a “burn the company down to the ground” mentality, you may want to take what they have to say with a heaping tablespoon of salt. But otherwise, be open to the criticism and see how you can improve both the work environment for your current employees, and implement ideas to attract better new hires.  This step holds true whether you are firing someone or they are quitting.

#5 Be Transparent

There’s nothing that strikes fear more in employees’ hearts than hearing that a colleague was fired!  Unless you want to run a company on fear (trust me, you don’t – it’s not really the motivator you think it is), be open with your remaining employees about the circumstances of the firing. You don’t have to share the intimate details, but recognize that a change has been made to the staff and assure them that their jobs are still safe (unless they’re not, and if that’s case, go back to #1 and repeat).

Obviously, the best option is to not have to fire at all, but when you do, keeping these points in mind can definitely make the process a lot easier, smoother and minimize your stress, dread and fear.

Want to find out how a PEO can help you attract and retain quality employees or how they can help you with your HR administrative tasks so that both hiring and firing can be easier? Contact ARC Consultants today.

The IRS has given their stamp of approval to PEOs; What does that mean for your business?

By Shraga Jacobowitz

Earlier this month, the IRS released a new standard for PEOs — the ability to become a CPEO, or a Certified PEO. With the conferring of this new, coveted title on a handful of existing PEOs, the IRS has given their stamp of approval, acknowledging that these PEOs have met specific standards set forth by the US government. Ok, this is so HUGE, it’s worthy of being repeated – the IRS is giving their STAMP OF APPROVAL to PEOs!

Why am I so excited about this news? Well for one, having the IRS certify select PEOs lends the entire PEO industry credibility. By certifying PEOs the IRS is acknowledging that there is legitimacy to the PEO business model, and that this not some “back alley” concept that is skirting around the law to manage your business’ employee related tasks, obtaining competitive employee benefits, WC insurance and administer payroll taxes and compliance.  Instead, the IRS is essentially saying PEOs are a valid and reasonable method to obtain these items and services for your business. Something I’ve been saying all along, but it’s always nice to be backed up by one of the biggest government agencies in the USA.

In addition, having the IRS’s stamp of approval also ensures that these CPEO’s are secure and trustworthy. In fact, to ensure this security for PEO clients, PEOs that wish to become certified, must go through the following processes:

  • Annual Financial Audits
  • Quarterly assertions and CPA confirmation regarding payment of all employment taxes.
  • A third party surety bond of a minimum $50,000 or for an amount equal to 5% of the federal employment tax liabilities for the prior year.
  • Background checks of PEO and controlling persons at the PEO
  • Present a client service agreement that meets certain IRS standards.

But that’s not all! Besides the newfound security CPEOs will bring to this industry, this news carries with it tax implications for those looking to join or switch PEOs midyear. In the past, a midyear transition often resulted in a restart on your payroll tax calculation. That’s because in the past the IRS didn’t recognize the PEO as a continuation of your current employment status, but rather that all your employees were now employed by another entity; the PEO.

CPEOs now have clear authority to collect and remit federal employment taxes (Social Security, Medicare, Federal Unemployment Taxes, etc.) for the worksite employees and to do so under the EIN of the CPEO. In addition, because the IRS now recognizes the CPEO as a successor employer, a business joining or switching to a PEO midyear will not have their FICA and FUTA wage bases reset. But before you run out to switch midyear, be aware that while this will affect your Federal taxes positively, it will have zero impact on how your state taxes are calculated, and therefore, the state tax implications of signing up for or switching your PEO must still be taken into account.

In added good news, being part of CPEO ensures that special tax credit programs designed for small business clients will still be awarded to clients of the CPEO.  This means that your small business will still be viewed as a small business, and will not be denied these tax credits just because you are part of a larger PEO organization.

However, the final cherry on this CPEO cake is that having PEOs certified by the IRS, can help to take some of the guesswork out of choosing a qualified PEO. I repeat can, not will, because while having certified PEOs may be helpful, it is important to realize that not necessarily  are they the end all in determining what is the best PEO for you.

Firstly, there are many factors in determining the best PEO, and not necessarily will a CPEO meet your specific business’ needs. Secondly, the PEO industry has had in place already for many years means of keeping tabs on PEOs, ensuring that PEO customers are completely protected and that PEOs are meeting the needs of clients. So even before this news was announced, businesses joining a PEO had other assurances that they were working with either an accredited or at least privately audited PEO.

In fact, the Employer Services Assurance Corporation (ESAC) has been doing exactly that since 1995! ESAC provides accreditation and financial assurance programs for the PEO industry. Their process verifies the PEOs’ ongoing financial solvency and compliance with government regulations and important industry standards. Even more so, ESAC gives more security through underlying surety bonds held on behalf of each ESAC accredited PEO, plus a $15 million excess bond covering all program participants.

But even those PEOs that are neither certified by the IRS nor accredited by ESAC, are often vetted or audited by third parties or privately owned by investment firms, and therefore can be just as reliable, if not more so than a CPEO or ESAC.

After all, becoming a CPEO is a voluntary choice made by the individual PEOs, not a mandatory obligation. Which means while being a CPEO says a lot about that PEO, i.e., there is a standard you must uphold to be certified, (according to the IRS website, “To become and remain certified under the CPEO program, CPEOs must meet tax status, background, experience, business location, financial reporting, bonding and other requirements described in the statute and regulations”), it does not say anything about those organizations that are “just plain old simple” PEOs.

Which begs the question…

What really is the most important letter in this industry? The “C” or the “P”?  What is really more important to your business, the certification, i.e., the “C” or the professionalism, i.e., the “P”?

And even more so, what does the presence of CPEOs on the market mean to you? To your business? To the industry? To us as a PEO consulting firm?

But finally and most importantly, which option is really the best choice for you? A CPEO, PEO, ESAC, or some other combination of letters that we haven’t even heard of yet?

Well, I can’t give away all my secrets in one breath. Sorry, but for that answer you’ll just have to give us a call….after all having someone to help you navigate through the alphabet sea of PEOs, CPEOs, ESACs is exactly why using a PEO consultant is so important.

To find out if your PEO is the right fit for your business, or if you should sign up for a PEO, click here or contact one of the ARC Consultants today.