Introduction
In recent years, an increasing number of small and mid-sized business (SMB) owners in the United States have turned to Professional Employer Organizations (PEOs) to outsource their human resources, payroll, benefits, and compliance management. This trend is driven by a range of compelling reasons, all aimed at improving efficiency, reducing risks and costs, and allowing businesses to focus on their core operations.
In this sample analysis, we will explore the key motivations for US business owners to contract with PEOs, using the example of a 20-person professional services company based in Massachusetts. The company is considering hiring additional staff to help with payroll and HR.
The Compliance Quagmire
A big reason business owners partner with PEOs is the complex landscape of compliance management at both the state and federal levels. For a 20-person company, navigating the multitude of legal requirements can be a daunting task: federal payroll taxes and filings, state payroll and income taxes, employment eligibility compliance, workplace notices, FMLA management, healthcare reform reporting, equal employment regulations, workers’ compensation, unemployment insurance, and so on.
PEOs provide expert knowledge and resources to help businesses remain compliant and avoid costly penalties or lawsuits. In states like Massachusetts with stringent employment laws, this is especially valuable.
Streamlining Payroll Administration
Payroll admin can be a real time-consuming burden for businesses. Tasks like collecting timesheets, calculating wages, handling deductions, producing paychecks, and filing payroll taxes are a significant drain on resources. At a growing 20-person company, bi-weekly payroll can eat up an excessive amount of staff time.
PEOs streamline payroll processes by utilizing advanced systems and procedures, allowing the business to control staffing growth and redirect resources toward core functions, rather than being bogged down by administrative payroll duties.
Controlling Workers’ Compensation Costs
In Massachusetts, workers’ compensation insurance is a mandatory requirement for employers, aimed at protecting employees injured on the job. However, the costs associated with this coverage can be substantial. A 20-person professional services firm in Massachusetts might face an annual expenditure of $30,000 for workers’ comp coverage. PEOs leverage economies of scale to secure lower premiums by pooling together hundreds or thousands of employees from client companies to negotiate better rates from insurance carriers.
Moreover, PEOs employ strategies that focus on safety, claims management, and modified duty programs to minimize injuries and control workers’ compensation costs. Their emphasis on prevention, light duty work, and prompt medical care ultimately leads to shorter claim durations and reduced expenses, resulting in significant savings compared to small businesses managing workers’ comp independently.
Efficient Benefits Administration
Offering competitive benefits is essential for attracting and retaining employees, but managing benefits can be a chore. Researching different health insurance plans, enrolling employees during open periods, handling COBRA regulations for former employees, and managing FSAs can be overwhelming. By partnering with a PEO, these challenging tasks are handled by dedicated pros. Plus, PEOs can negotiate better rates on benefits plans due to their larger size, giving businesses the ability to offer better benefits to their employees.
Access to Large Company Benefits
Beyond cost savings, partnering with a PEO grants small businesses access to benefits typically reserved for large corporations. This can include 401(k) retirement plans, life and disability insurance, supplemental insurance options, worksite wellness programs, adoption assistance, and educational assistance plans. These benefits are usually out of reach for small businesses due to their limited human resources capacity. With the leverage of a PEO, even a 20-person company can compete with larger corporations when it comes to offering benefits that can attract and retain key employees.
Mitigating Risks
The landscape of employment-related regulations and lawsuits poses significant risks to businesses. Collaborating with a PEO can significantly reduce exposure in key areas:
- The PEO assumes the role of the employer of record, taking on compliance risks.
- Experienced PEO staff enhance compliance, safety, and HR practices.
- The PEO is responsible for verifying employee eligibility, conducting background checks, and checking references.
- The joint employment structure provides protection in the event of lawsuits.
- PEOs are insured and experienced in defending disputes.
While no approach can entirely eliminate risks, the scale, expertise, and joint employment structure of a PEO can substantially mitigate them for small businesses. Compared to operating independently, partnering with a PEO offers superior risk management.
Financial Analysis
Based on typical PEO pricing models, which range from $70 to $150 per employee per month, a 20-person professional services firm would likely pay between $16,800 and $36,000 annually for PEO services. In return, the PEO would manage payroll, taxes, compliance, benefits, workers’ compensation, and HR, effectively eliminating 15-20 hours per week of internal administrative staff time. These hours can be redirected to client services, generating additional revenue for the firm.
Assuming a billable rate of $50 per hour for 10 hours a week, the transition of time management can generate an additional $26,000 in fees, resulting in a net PEO contract cost of $10,000 ($36,000 annual PEO contract fee minus $26,000 of additional revenue).
Moreover, there are additional cost savings areas to consider:
- Workers’ compensation: PEO-negotiated premiums could save 15-20%, approximately $4,500 to $6,000 annually.
- Unemployment insurance: PEO rates typically average 2-3% versus state rates, which are around 5%, resulting in savings of approximately $2,000.
- Employee benefits: PEO family coverage rates can save 10-15% over small group plans, reducing employees’ premiums by $2,000 to $3,000 per family.
- Employer benefits costs: PEOs can save 10-20% on employer benefits costs due to larger risk pools and negotiated rates, potentially saving $3,000 to $6,000.
Conclusion
For small and mid-sized businesses, the countless responsibilities related to regulatory compliance, payroll, benefits, risk management, and HR can be overwhelming. Contracting with a PEO offers an effective solution, outsourcing these functions to dedicated experts.
The reasons for partnering with a PEO are particularly compelling for a 20-person professional services firm. The PEO efficiently manages payroll tasks, provides assistance with complex compliance needs, achieves cost savings on benefits and workers’ compensation, enhances workforce risk management, and allows the business to concentrate on its core operations.
Despite the initial incremental expense, the company and its employees stand to gain considerable benefits, including expertise, risk management, volume discounts, and administrative efficiencies. For this 20-person professional services firm in Massachusetts, entering into a PEO partnership is a financially sound and advantageous decision.
In an ever-evolving business landscape, the decision to contract with a PEO can be a strategic move that ultimately ensures a more competitive and compliant business operation.
