You have finally incorporated and started selling your product. It feels great. You suddenly realize you need to start hiring soon and have no clue what to do beyond the interview. How are you going to pay your workers? Do you need to offer insurance? The startup dream isn’t about cutting payroll checks and negotiating medical insurance plan pricing. Perhaps it's time to use a PEO, so you can get back to building and selling your product.
What exactly is a PEO?
PEOs (or Professional Employer Organizations) are corporations that act as middlemen in handling crucial parts of small and medium sized business - things like payroll processing, health benefits, workers' compensation insurance, employers' practice and liability insurance (EPLI). Using a PEO takes the stress off of having to handle the day-to-day micromanagement of the business backend, leaving you more time to focus on growth and expansion.
A Quick History
In the 1960’s, employee leasing became common practice. It allowed companies to augment staff without the overhead of providing benefits or handling additional payroll. Marvin R. Sellers pioneered the employee leasing business when he got his start leasing administrative staff to local doctor's offices in Southern California.
Leased employees were compelled to participate in the process by ancillary benefits and tax incentives beyond what was typically available for temporary positions. By 1986 more stringent taxation guidelines eliminated most of the employee leasing benefits. The concept was here to stay, it just had to undergo a remodel or two before reaching its final form in the PEO.
Today’s PEO firms provide small and medium businesses bargaining power to negotiate insurance, retirement plans and other ancillary benefits. With the cambrian explosion of startups over the last two decades, combined with the expansion of API-driven business automations, the PEO industry is booming - with revenues approaching upwards of $174 Billion annually in 2017.
Do I need a PEO?
Short answer, yes.
If you find yourself struggling to properly understand and put together things like employee benefit packages, payroll processing, and workers' compensation insurance, a PEO can be your best friend. Mismanagement of employee related compensation and benefits can not only financially impact your business, but it also carries significant legal risk. Having professionals handle some of the most sensitive parts of your operations, coupled with massive cost savings from collective bargaining power make choosing to use a PEO a no brainer.
PEOs in a Remote Working World
PEOs are actually a great friend for business in current times with everyone focused on remote learning and working-from-home. PEOs play a huge benefit for your business with their expertise, allowing them to help you better select employees to hire to help you grow and expand your business. Your hires won't have to make any sacrifices to get the benefits they feel they deserve, with you receiving the best rates and services with your clout in the PEO umbrella.PEOs handle everything that's needed to keep your employees feeling safe, happy, and comfortable - they take care of benefits, health insurance, compliance requirements, virtual onboarding and accessibility/tools for remote teams, and anything else necessary for your business to thrive and survive.
How does this all work in practice?
PEOs offer a system of co-employment; the PEO becomes the employer of record and handles tax purposes, filing tax paperwork under its own tax identification numbers. (If you currently use a PEO, go take a look at the EIN your employee W-2’s are issued under. It should be the PEO who handles payroll for your company). The client company continues to run as it did before and direct the activities of its day to day employees. PEO's usually charge an administration fee for handling all of this for the business .
When you use a PEO, you're entrusting them to handle some of the most crucial parts that are integral to your business success. PEOs serve dozens, if not hundreds, of companies, which in turn allows them to offer discounted rates when it comes to medical, dental, and vision insurance for your employees. They use their clout to get you easier and better systems to manage your retirement vehicles (e.g. 401k), and using them takes all of the stress and micro-management out of having payroll set up.
It’s Not All Roses
When delegating sensitive ops processes to another entity, be wary of the pitfalls. Specifically with PEOs, know your company is still partly liable for any EPL or worker’s compensation claims. In other words, if an employee brings a workers’ comp claim, both entities can be named liable. Additionally, PEO liability insurance usually has relatively low caps on coverage. Check that your company maintains additional liability coverage beyond what the PEO provides.
Because a PEO will handle tons of sensitive processes for your company, periodically review the administration of things like payroll taxes and employee benefits to ensure everything is going smoothly. Keith Levinson, a PEO expert who works at Coadvantage tells startup operations professionals to “[e]nsure that quarterly and year end taxes are filed appropriately and accurately,” even if your PEO might handle parts of it.
How to Choose a PEO
If you’ve been around the startup ecosystem for more than a minute you’ve probably already dealt with some of the contemporary PEO’s out there such as Justworks, Gusto and Rippling. There are dozens of PEOs to choose from -- it’s worth taking a glance through the major players for the startup ecosystem:
To get started, below is a quick list of the major players in the PEO space commonly used by startups:
PEOs these days are essentially commodity businesses. The more tech-focused platforms generally offer similar digital experiences and features. At a minimum, your team should be looking for payroll administration, insurance plans (medical, dental, vision), workers’ comp insurance, ELPI (Employee Practices Liability Insurance) and HR consulting services. Pricing varies only slightly between each platform -- usually ranging from base prices starting at $50 per month, with each new employee adding $6-10 in monthly costs.
Levinson advises startups that one of the biggest differentiators is that “a PEO with a strong service model [they] should provide proactive rather than reactive HR.” Cutting a few extra dollars in cost could potentially lead to headaches down the line.
“There are few (if any) drawbacks for companies to partner with a PEO assuming the company has 10-100 employees,” Levinson says,“assuming the company has less than 100 employees, PEO is a no brainer as it saves time/money/hassle.”
Let a PEO take care of your employees so you can handle your business.
If you are an early stage company looking for help, reach out to Keith Levinson. He is a great resource for PEO knowledge and can answer any technical questions about getting your company set up.