Is a PEO Right for You?

Transcript

Henry Levis (0:03) Hello, everybody. (0:05) My name is Henry Levis with Relational Advisors, and I am joined here today with Chad Todora of CRC Benefits. (0:15) Chad, how are you doing today?

Chad Todora (0:17) I’m doing great, thanks for having me, Henry.

Henry Levis (0:19) Of course, it’s always a pleasure to see you. (0:21) And if you wouldn’t mind, for everybody, we’re going to be talking about PEOs and PEO consulting. (0:29) And since you are the source of truth in that industry, would you be able to give us a little bit of background on how you came to specialize in PEO consulting?

Chad Todora (0:41) Yeah, absolutely, thank you. (0:43) So I’ve been in the PEO space for a little over 10 years. (0:47) I started in the PEO industry. (0:49) I’ve worked for a couple of different PEOs over the years, and then I ended up at a general agency, is where I’m at today, with CRC Benefits. (0:57) So you learn a lot in that amount of time. (1:01) You think you know everything in the first three years, and then you realize you know nothing, and then another three to five years goes by, and you think you know everything, and you realize you know nothing. (1:10) So it’s one of those things, it’s an industry, it’s a very complex, and unless you’re in it every single day to get to the point of saying, wow, there’s a lot here, it’s ever evolving, you’re learning new stuff all the time. (1:22) And now I work predominantly in our PEO division at CRC, and it’s a consulting non-bias way of looking at PEO. (1:32) I’m happy to talk more about that.

Henry Levis (1:35) Yeah, absolutely. (1:35) And to your point, over the years you gain more experience, but it’s definitely an industry that’s always changing too, right? (1:43) So without having your finger on the pulse, you’re probably falling behind a little bit. (1:48) And in terms of being a general agency, how does that play into the PEO relationship?

Chad Todora (1:55) Absolutely, I mean, it gives us the ability to be Switzerland, right? (1:59) Like we’re independent, we’re really trying to find whatever the best solution is for the client that’s in front of us. (2:06) It gives us scale, we have partnerships with all the prominent PEOs that are in the industry. (2:13) So that helps us leverage, whether it’s we need help with a client, they leverage from us to get answers, support, implementation, evaluating the PEO, going to market, the ability to do all those things at scale and provide those services for our brokers.

Henry Levis (2:31) Beautiful. (2:32) And for those of us that don’t know exactly what a PEO actually is, would you be able to break that down a little bit and give us an idea of what an employer gets and should expect out of that relationship?

Chad Todora (2:47) Absolutely, yep. (2:48) So a PEO stands for Professional Employer Organization. (2:52) They work under a legal construct known as co-employment, right? (2:57) And that’s the main difference between PEO and anything that looks and feels like a PEO. (3:02) But they exist for a very simple reason. (3:05) It’s to give small to medium-sized companies the look and feel of having an HR infrastructure that rivals a Fortune 500 level company. (3:14) So that’s what it’s for. (3:16) They do it under three main buckets, which is attracting and retaining talent, mitigating risk, and streamlining HR functions.

Henry Levis (3:24) Got it. (3:25) And I think I saw somewhere that there are like 700 PEOs in the United States. (3:33) And counting, right? (3:34) We find new ones every day. (3:36) But I mean, if that’s the case, how do they really differ from each other?

Chad Todora (3:41) Great question. (3:42) So yes, there are 700 plus PEOs that are out there, right? (3:46) But what we find is important is the nature of a co-employed relationship, there’s a lot of shared risks. (3:54) Therefore, there’s a lot of liability that each client is sharing in with that PEO. (3:59) So that type of model, we find it’s good to have a PEO that has some sort of financial protection in place, right? (4:07) And the ESAC accreditation is one of them. (4:11) That’s kind of the gold standard in the industry. (4:13) But what a lot of people don’t know is it’s less than like 5% of PEOs that actually have that accreditation. (4:19) And again, I’m not saying that accreditation specifically is the end all be all, but you wanna have some sort of financial protection if you’re gonna go into a co-employment relationship. (4:28) So in our opinion, it slims down the percentage of those 700 plus that you potentially wanna take a look at.

Henry Levis (4:36) Yeah, absolutely. (4:37) Kind of like how banks are protected by FDIC, right? (4:41) You’ve got financial backing protection there, right?

Chad Todora (4:45) The difference is all banks are required to be FDIC insured, not all PEOs are.

Henry Levis (4:49) Not all PEOs are, right? (4:52) And so obviously you’ve got a lot of HRAS payroll players in the space that are trying to differentiate their models as well to stay competitive with PEOs. (5:04) I think there’s something called an ASO model as well, administrative services only. (5:09) How does that differ from the PEO? (5:11) I would imagine it’s really just the co-employment relationship, correct?

Chad Todora (5:16) The co-employment legal construct is the main differentiator. (5:20) You know, and again, in my opinion, anything else besides that is some sort of payroll with advanced HRAS system capabilities in between. (5:31) I’m not saying that’s a bad thing or a good thing, that’s just what I think. (5:34) You know, and it really depends on what each client’s looking for.

Henry Levis (5:39) Yep, and I definitely understand that it depends on the client what they’re looking for. (5:45) It’s totally needs-based, right? (5:47) There’s no perfect system out there, correct? (5:50) I mean, even in the payroll space, the benefit space, you know, there’s going to be a system that suits your needs more closely. (5:57) But broadly, what does an ideal PEO client look like? (6:04) Size, industry, growth stage, anything like that?

Chad Todora (6:09) Absolutely. (6:10) So I mean, I would say, just to cut to the chase, the average clients that we see, an average number of like headcount, if you will, is around 40, 50 employees. (6:19) That doesn’t mean we don’t have clients that we see that are over 2,000 lives that are in a PEO, right? (6:24) And we have plenty of startups that are there that start with two employees and they’re in a PEO. (6:28) But that’s typically the average size that we see in a PEO. (6:34) Industry, it can be nonprofit, technology, professional services, financial services. (6:40) You know, I’ll revert back to the three buckets of what a PEO solves for, attracting, retaining talent, managing risk, and streamlining HR functions. (6:49) So if you are a client and you ask yourself, do I see value in all three of these buckets somewhere, then you might be a good candidate for a PEO. (6:57) And you know, those buckets, obviously there’s hundreds of things underneath them, but if you’re attracting and retaining talent, if we were just to take that piece of it, if you’re a company that’s growing and you’re looking to attract the type of talent that is coming from large organizations that have rich benefits, PEO might be a potential solution for you, right? (7:17) That same scenario across the board.

Henry Levis (7:19) Right, okay, very good. (7:22) So I’m sure you’ve seen it. (7:24) I’m sure you’ve heard people talk about it, but there’s definitely a lot of information on PEOs out there, right? (7:29) You Google PEO, you get a plethora of different brokerage firms, PEOs themselves, you name it. (7:37) So I feel like there’s a lot of misconceptions in the market about PEOs maybe. (7:43) And I wanted to see if you could address a couple of them for us. (7:46) The first two that I was looking at is, do employers actually lose control over people or HR decisions? (7:54) And is the medical pricing really cheaper inside of a PEO?

Chad Todora (7:59) Those are two big questions. (8:00) So let’s start with one at a time. (8:03) The losing control question comes up a lot, right? (8:08) And many of my answers will start with, it depends. (8:12) And in this case, it depends on the perception of the client that you’re talking to. (8:17) Because the reality is, a PEO cannot determine who you hire and who you fire, right? (8:23) It’s a co-employed relationship and kind of the name is in that terminology, right? (8:27) But they also are the employer of legal records. (8:30) So anything that is being processed through their platform, it’s under the tax ID of the PEO. (8:36) So things like PTO requirements or overtime, regulatory laws, pay cycle, state regulatory laws, because it’s going through their platform, it has to be in compliance. (8:48) They’re not gonna allow you to be out of compliance in those specific areas. (8:52) And sometimes perception, for someone who wants to do things, whether it’s out of compliance or not, they just wanna have the autonomy to do that, that may be viewed as loss of control, right? (9:04) For someone else, that’s the whole reason they’re looking into a co-employed relationship because they wanna be in compliance, right? (9:11) And then there’s a lot of shared risk that’s in the middle, which again, it goes back to Google can only find so many things that are out there. (9:18) We always recommend- Right, exactly. (9:22) So I mean, we always recommend talking to someone such as yourself, right? (9:25) That’s someone who has the experience that can have a conversation and break it down.

Henry Levis (9:29) Okay. (9:31) And then I guess on the other question, so with the medical, I feel like, so for a small employer, right? (9:39) So you say 50 lives or under in California, it’s a hundred lives and under, you do get access to the fully underwritten large group rates, which in my eyes is a little bit of a double-edged sword, right? (9:53) Because if you are a healthy group, then you probably will get better, more advantage pricing through the PEO. (9:59) If you are a group that is on average less healthy, then you’re probably going to see some higher rates than what is in the open market. (10:09) But I guess in your experience, when people say you can get cheaper medical rates through a PEO, what pops into your head there?

Chad Todora (10:20) So first, the terminology is what I wouldn’t use. (10:23) I would never say, you can go to a PEO to get cheap benefits. (10:27) It kind of diminishes, in my opinion, the value of what a PEO is doing, because there’s nothing cheap about a PEO in my opinion. (10:34) However, what is guaranteed and with most large prominent PEOs, you’re going to get access to large group medical, fortune 500 level plans. (10:45) And depending on the region, right? (10:47) We’ll use California as an example. (10:49) I mean, you notice it off the bat with the out-of-pocket maximums in a PEO, they’re significantly less. (10:54) So you will get buying power with a PEO, large carriers, large group composite rating. (11:00) I would never call it cheap benefits though, because anyone’s looking for a cheap benefit solution, a PEO is probably not the solution for that. (11:09) Then that’s kind of how I’d categorize it.

Henry Levis (11:11) Got it, okay. (11:13) So along with the fully underwritten rates, does a PEO provide protection on the renewal side in terms of increases? (11:24) I know some people say, are single digit increases realistic long-term, that type of thing. (11:30) In my world, I mean, it’s really dictated by the underlying claims, right? (11:35) If, especially in this environment, if you’ve got the entrance of specialty medications, cancers, that type of thing on your plan, that is gonna drive up utilization, which in turn drives up cost. (11:46) But is there a protection layer for employers within a PEO?

Chad Todora (11:51) So, I mean, in the experienced rated model, right? (11:57) I mean, in my experience, in my opinion, I don’t think there’s any way to guarantee single digit increases. (12:02) I’m just gonna put that out there. (12:04) And in my experience, I haven’t been able to see consistent single digit increases because PEO with the medical is still a form of experienced rating, unless you’re carving the medical out and going to the… (12:16) Correct, right. (12:17) Now, do they have more ability to absorb risk in some areas? (12:23) Of course, because there’s different areas where they’re collecting admin fees and different things like that. (12:29) Plus every PEO is different. (12:31) Their size of their master medical plan, the renewal history, the agreements they have with their carriers, if there’s an underlying stop loss. (12:37) So, then this is also why you can’t just Google this information because there’s so many differences, so many caveats, so many things that depend on it. (12:46) But on the surface level, to your point, it’s still a form of experienced rating if the claims are good and they continue to run good. (12:53) With the prominent PEO, sure, you can expect single digit increases. (12:56) The problem is no one has a crystal ball.

Henry Levis (12:59) Right.

Chad Todora (12:59) You don’t know how risk is gonna change.

Henry Levis (13:02) Yep, okay, awesome. (13:04) And in terms of the HR department, does, I mean, I know, and most of us know that PEOs do provide HR support for their clients. (13:16) But does it actually, is it able to replace the HR department or does it just support it?

Chad Todora (13:23) In short, no, I would tell everyone that I don’t, a PEO is not a replacement for a person. (13:29) It is really there to give the HR person the support and kind of power that they need behind their role. (13:37) You know, a PEO, when you think in general terms, it is more so on the compliance side of HR because everything, again, everything’s processing through the employer of legal record. (13:50) Now, I will put the caveat, every PEO is very different with how they service HR and the extent to which they do it, right? (13:56) So that can vary widely. (13:59) But I tell, you know, when I have conversations with the HR generalist in that role, what I normally find is they went into that role because they wanted to have an impact on culture and working with the employees and developing, you know, things that are unique to the company. (14:16) And the end result for most is that they typically end up just doing paperwork all day long. (14:20) So a PEO, and again, in my experience, gives the HR role the ability to do the things they wanna do and supporting them on the backend with the compliance and streamlining a lot of the vendors. (14:33) Got it.

Henry Levis (14:33) Okay, very good. (14:36) And then I feel like we hear this one a lot, but does an employer have to move their payroll if they’re gonna go into a PEO?

Chad Todora (14:43) Under the legal construct of co-employment, which defines PEO, yes, they will have to move their payroll.

Henry Levis (14:50) Got it. (14:52) And so in terms of like pros and cons of going into a PEO environment, what really makes it plug and play? (15:01) So, because that is very valuable for some employers, especially if it is an employer with, say, 50 lives, they’ve got one person in their HR department and they could be overloaded. (15:14) And what they’re really there to do, like you said, is engage with the employees, create a culture, that type of thing. (15:22) So, how is it valuable and for whom?

Chad Todora (15:27) Absolutely. (15:28) It goes back to what I said initially, attracting, retaining talent, mitigating risk, streamlining HR functions, right? (15:35) You asked the question, do you see value in any of those areas or you have pain points in any of those areas? (15:40) To answer your question about plug and play, right? (15:42) Think about a group that’s 50 employees. (15:45) If they have multiple employees in different states, right? (15:49) Someone is handling the different systems that are in place today. (15:54) Everything from the payroll, if the medical is on the open market, someone has to capture the medical deductions, pay the carriers. (16:02) If workers’ comp is not pay-as-you-go, someone is giving estimates to what the wages are, but at the end of the year, they have to go back and look and audit and make sure that they’re either getting a refund or they owe more money for the workers’ comp. (16:14) And again, to the multi-state, they’re getting letters from the state to open these tax accounts, file the taxes, and whoever’s handling that role, whether it’s operations or HR, they’re juggling all these different things. (16:27) So a turnkey solution at a PEO, yes. (16:30) I mean, the way that it works under that model, if you’re using the master medical and the master workers’ comp, is the PEOs have direct EDI feeds to all these different carriers. (16:39) So everything’s happening in real time. (16:40) Whether you bring on a new employee or an employee has a life status change, there’s no paperwork that’s involved on the admin side, because it’s all happening within that system. (16:49) And that is what provides, in one aspect, a turnkey solution.

Henry Levis (16:53) Yeah, that makes sense. (16:54) And especially, I mean, with all the different leave laws coming out in different states as well, that’s something the PEO handles too, correct? (17:00) Correct, yep. (17:02) Got it. (17:03) So I wanna pivot a little bit and talk about the sales process. (17:09) So what does the typical PEO sales process look like? (17:13) I mean, from my perspective, when I end up chatting with folks who are interested in taking a look at PEOs, their experience in the past has been, one representative makes a phone call to the company from the PEO. (17:27) They get involved in their sales process. (17:30) And this is like any sales rep for any tech company, any HRAS company, any benefits company. (17:36) It’s an urgency-based close, right? (17:41) But what’s your typical experience with the PEO sales process and cycle?

Chad Todora (17:47) So when I talk to clients that have gone through that process, you typically hear that there was initial discovery, exploratory stage, I guess I should say, where they’re talking with the PEO and the sales rep. (17:58) Then they go into the data collection, different pieces of paperwork they need to do the underwriting. (18:05) And there’s more calls in between that to look at the technology. (18:09) The biggest thing that I hear is, when it comes time to look at the numbers, they can’t always make sense of what’s being provided. (18:18) And typically there’s a lot of different pages that are involved in that type of proposal, depending on how the PEO is charging. (18:24) And especially if you don’t understand medical, and medical alone can be confusing to understand what that looks like. (18:29) And are they determining an employer contribution or is this just the full rate, right? (18:33) And then you get into things like taxes and workers’ comp, and all these different things can be very confusing. (18:39) And they’re probably, I’ve yet to meet someone that’s not looking at more than just one solution, right? (18:45) And sometimes the answers they get seem like they’re conflicting, or they feel like there’s questions they should be asking, and they don’t know what those questions are. (18:55) And on the surface, everything seems like it’s going to work. (18:59) But if you go to Google, you’ll find all kinds of reviews, good, bad, how do you know what’s true, what’s not true? (19:06) So it can be a very time consuming process, and it can be a little bit overwhelming is what I hear.

Henry Levis (19:14) Yeah, I would definitely echo that on my end, especially with the time commitment. (19:20) I would say that for the individuals that we’re working with, the biggest time commitment for them is on the front end just gathering all the documents, right? (19:29) Especially if you’re with another PEO, some PEOs make it a little bit harder to get certain information out of them so that the marketing can take a little bit longer. (19:42) But I mean, at the end of the day, how do you really separate what’s a fit for the employer and their people and what’s being sold well, right? (19:52) How does it become a needs-based approach rather than just pricing?

Chad Todora (19:58) Great question. (20:00) I mean, it really comes back to asking the question, what ultimately are they trying to achieve, right? (20:06) What are the pain points? (20:07) What is the ultimate solution? (20:09) And then the follow-up question that I always have to that is how much is it worth, right? (20:13) How much is a solution like this costing you today? (20:17) Like how much is the pain costing you today? (20:19) What are the results if you don’t make a change, right? (20:23) Is it something you can continue living on with? (20:26) And if not, then you know you have to make a change. (20:28) So how much is it worth to do so? (20:30) And then we have to understand exactly what are the areas that we’re trying to improve and does that even match a PEO, right? (20:41) And that’s really ultimately what we’re trying to determine first is, does the pain match the solution of what a PEO is going to provide or is it some other completely different type of solution?

Henry Levis (20:51) Yep. (20:52) So, I mean, to me, it sounds like you’re not afraid to tell somebody that a PEO isn’t the right fit for them.

Chad Todora (20:58) No, absolutely not. (20:59) Yeah, I mean, the best experiences I’ve seen in a PEO are when we’re trying to take all the guesswork out of it prior to. (21:08) We wanna know about things that are not gonna work early on. (21:11) And the end result for clients by doing it that way is the ones that truly end up in a PEO, they stay there a long time because the expectations were set properly.

Henry Levis (21:19) Yep, absolutely. (21:20) I’m with you on that. (21:22) So then I guess what really belongs in a well-run PEO RFP that most employers wouldn’t think to include?

Chad Todora (21:34) Well, you know, PEOs are doing full underwriting for each group, right? (21:40) And medical is on average is typically the biggest number that we’re looking at, right? (21:46) Outside of admin fee, outside of everything except for the employee wages, almost every single case, it is the benefits that are gonna be the most cost, right? (21:55) And being that the PEOs are doing full underwriting for the medical, accuracy is important, right? (22:01) You want to give the PEOs and their underwriters everything that you possibly can that they will need to do accurate underwriting. (22:09) In today’s technology driven world, accuracy of census is important. (22:13) There’s a lot of critical information that’s on there that’s needed, matching the invoices to the census to make sure that accuracy is there. (22:22) Because the reality is in a PEO or any experience rated model for medical, you want it to be accurate. (22:29) You don’t want the rates to be underpriced and you don’t want them to be overpriced. (22:34) And a lot of people are like, well, why would you want them to be underpriced? (22:36) Well, it’s an experience rated model. (22:38) It’s gonna come back at some point. (22:39) You want them to be right where they’re supposed to be for the risk tolerance of each PEO that you’re quoting at the time.

Henry Levis (22:46) Absolutely, I mean, we always say that rates are like rubber bands. (22:48) You stretch them in one direction too far, they snap back the other way.

Chad Todora (22:52) Yeah, that’s a good one.

Henry Levis (22:53) Yep, and in terms of making sure everything’s priced fairly, I like what you said there in terms of like the comparison, right? (23:02) Some PEOs will show just the employer cost, that type of thing. (23:09) It is in our view, it’s best to benchmark it against the open market as well if you have ACA rates available to you. (23:16) And if you don’t, then getting some level funded options as well, just to keep the underwriting honest because I think if you have some competitive quotes from additional carriers, that can also play into the overall negotiations as well, correct?

Chad Todora (23:32) Absolutely, I mean, it plays into a lot of different areas. (23:34) One, it gives you a barometer of what options are out there in and outside of a PEO. (23:39) Number two, it gives you an idea of trend. (23:42) It shows you what the market is showing, what it should be priced at. (23:45) And it helps you identify if there’s anything that’s overpriced, number one. (23:49) But also you wanna have some consideration if something looks underpriced, right? (23:53) So we wanna see what the market is telling us it should be priced at. (23:57) Now in terms of employer contribution or employee contribution, there’s several different ways you can do it. (24:02) What’s most important though, is when you’re doing a spread or a comparison of multiple vendors and options.

Henry Levis (24:08) Just making sure they’re all the same.

Chad Todora (24:10) Bulls is whatever you’re comparing on one side, you wanna do the same for the other. (24:14) It’s the only way to make sure that it’s accurate.

Henry Levis (24:16) Got it. (24:17) And so when Relational works with you and your team, what’s the biggest differentiator that you’ve seen in terms of providing proposals, that type of thing?

Chad Todora (24:30) Well, I mean, I think we do it in a way that’s efficient. (24:33) We have relationships and communication with underwriters to make sure the process is smooth and efficient. (24:39) Just like what I was talking about with apples to apples, we make sure that all the comparisons are done apples to apples. (24:46) Discovery process, it’s our knowledge of the space. (24:49) Yeah. (24:50) I had to say there’s a key differentiator. (24:52) It’s the knowledge of understanding what a PEO is, what a PEO does, the differences in the PEOs and understanding that this goes down to a very granular level, down to employee practices, liability insurance. (25:05) One will cover it this way, another covers it that way, and then there’s a third, right? (25:09) So there’s a lot of different questions that need to be proposed to a client just to get them thinking about all the different possibilities. (25:17) And it’s our experience in this industry that is the differentiator. (25:21) You can have the peace of mind knowing that you have someone you trust in and have confidence in that knows what they’re talking about.

Henry Levis (25:28) Yeah. (25:28) I mean, I think the biggest thing for us, right, is a lot of the time we’re talking about risk pool analysis. (25:34) And when I say risk pool analysis, it’s the way that you actually fund your benefits. (25:38) So the spectrum from fully insured all the way up to self-funded, what’s going to make the most sense for the employer over a long-term time horizon? (25:48) Because you want to mitigate making those changes as much as possible for your employees, for the employee experience. (25:56) And, you know, like you said earlier, you know, the biggest thing that gives me pause is seeing something that’s super underfunded compared to what they’re doing currently. (26:05) You know, what’s going on on the backend that’s allowing them to give you a 30% discount on the medical when the market is showing something else? (26:15) And, you know, the fact that we’re able to take a look at the entire market in terms of PEOs that we think are good fits for our groups, and then also different solutions out there, we’re really trying to take into account, like I said, the best solution for the group. (26:34) Absolutely. (26:37) So if someone’s on the fence about a PEO, what would be the one question that you would ask them or tell themselves to ask themselves first?

Chad Todora (26:52) It’s going to depend on what they’re on the fence about, right? (26:55) Assuming they have clear understanding, clear direction, you know, it’s a simple question of, you know, what is it we’re trying to solve for and how much is it worth, right? (27:04) Outside of that, if they’re on the fence because they’re unsure about something, I would seek out someone like you and get someone you trust, get an advisor or a consultant, someone that understands the industry. (27:14) If you’re on the fence about something because you feel like there’s missing information or questions to be answered. (27:22) Yeah, got it.

Henry Levis (27:24) All right. (27:25) Well, Chad, thank you for the time. (27:28) Always appreciate you and your expertise. (27:31) And, you know, hopefully we can find some more projects to work on together. (27:36) Awesome.

Chad Todora (27:37) Thanks for having me, Henry. (27:38) Appreciate it.