Entrepreneur.com magazine article about PEOs is misguided

Entrepreneur Magazine Provides Misinformation about Professional Employer Organizations – PEOs

The Entrepreneur.com web site features a section on their web site (and possibly in the magazine) called “Ask Entrepreneur”. In this feature section they have “experts” that answer questions posed by readers.

In April of 2008 an Entrepreneur.com reader asked:
How do I evaluate a PEO? “We are looking to outsource our HR functions. Do you have any recommendations for PEOs? Do you know any PEOs that will work with 1099 consultants? Are there PEOs that will offer benefits to part-time employees? What criteria would you use to determine effectiveness?”

The “answer” provided was from a Entrepreneur magazine contribitor named Penny Morey.  We believe her comments were inaccurate and biased.  Jim Hamilton, president of StaffMarket Services, the nations leading PEO marketplace has responded individually to the statements made by Ms. Morey. Ms. Morey’s statements are in produced here with Mr. Hamilton’s comments in blue.

Answer by Penny Morey - Response by Jim Hamilton, Presdent StaffMarket Services, LLC.

Ms. Morey states: "This can be very challenging! Hence, this very long response: Originally, when Professional Employer Organizations (employee leasing) became fashionable, the advantages of PEOs--for smaller companies generally--were the leverage of a larger group negotiating for reduced costs for benefits (e.g., group medical, dental, etc.) most often sold by salespeople not licensed as insurance agents.
Jim Hamilton replies: Many PEO sales reps are also licensed agents although it is not required. The PEO industry has long debated requiring licensing, however the PEO services is about much more than just insurance and it has been feared that licensing would serve no real purpose other than to drive up the costs for the PEO customer.

Ms. Morey states: "Over time, these advantages diminished.Many benefits brokers can find very competitive rates for their small company clients, especially when all carriers can be accessed versus the usual only one (or at most two) carrier option offered by PEOs."
Jim Hamilton replies: Misleading.  While this may be true in some circumstances, most benefits brokers are not very interested in small companies. Since they get paid on commission, they are mostly interested in spending time developing larger accounts that generate more commissions. In addition many PEOs have negotiated better rates for their large groups than companies can obtain on their own.

Ms. Morey states: "There are a variety of retirement options from which smaller companies can choose (a much better choice because the employer can choose a plan that fits the company’s individual needs versus a plan in a box) and the advantage of the bundled workers compensation rates evaporated as well."
Jim Hamilton replies: For small and midsized businesses, the cost of establishing their own retirement and supplemental benefit plans is time and cost prohibitive. In addition benefits brokers make good money on 401K plans. Money that could be used to fund more retirement, instead goes towards commissions and plan administration costs. In addition, the advantages for workers’ compensation insurance has NOT evaporated. PEOs negotiate hard with work comp carriers and in turn, can provide very competitive work comp pricing. In addition, PEOs work with their clients to reduce workplace injuries and in turn work comp claims. This gives everyone more competitive work comp prices. PEOs eliminate workers compensation issues such as expense constants, terrorism surcharges, pre-payment deposits and annual audits. In addition they handle claims disputes and administration. PEOs remain a convenient and cost effective way to cover workers' compensation insurance.

Ms. Morey states: "While most PEOs also touted their payroll and human resources support, most often the payroll services were no better or worse than those of free-standing payroll services-only providers (typically lacking any type of customization as the software was written for PEOs) and the human resource support routinely consisted of a very generic employee manual, varying levels of employment expertise and advice most often provided by service staff, not human resource experts. "
Jim Hamilton replies: Not true. Payroll systems used by PEOs have come along way. In fact most PEO clients who have used a big service like ADP prefer the innovative payroll products in use by many PEOs. Besides simply payroll capabilities, many PEOs have integrated HR functions like benefits enrollment, applicant tracking and benefit carrier remittance into their on-line systems. These systems can offer HR and payroll functionality delivered via the internet. As for HR expertise, according to NAPEO, over 2/3 of all PEOs have staff with professional certificates like PHR and SPHR conferred by the Society of Human Resources Management.

Ms. Morey states: "With the emergence of full-service Administrative Services Offering (ASO) vendors, PEOs have now become the expensive alternative to accessing bundled benefits, payroll, workers compensation and human resources services."
Jim Hamilton replies: PEO, ASO, its all a name game. Most PEOs also offer an ASO product and many ASO offer a PEO product. Whether a PEO or ASO makes more sense for you company depends on your current insurance, HR and administrative service needs. Companies should look at both options depending on their situation.

Ms. Morey states: "However, be aware that if the ASO vendor with which you talk offers a PEO option, the vendor may try to convince you to buy PEO services instead of the ASO model due to the higher profit margins that the PEO generates for the vendor. These higher PEO profit margins are generated by many hidden costs which can be almost impossible to decipher on the automatic fees report that the employer receives when the fees are being automatically taken out of the employers account along with the payroll and payroll taxes."
Jim Hamilton replies: What hidden costs? This statement is false and misleading. Every PEO will disclose all the costs in the the pricing for their PEO proposal. THERE ARE NO “HIDDEN COSTS”!

Ms. Morey states: "Also, PEOs use the annual contract to try to hold onto customers and they can also make it very difficult and painful to exit the PEO."
Jim Hamilton replies: FALSE. The industry standard is a 30 days cancellation notice.

Ms. Morey states: "The contract can always be broken but a PEO will try to use scare tactics to keep the client."
Jim Hamilton replies: False. What scare tactics? This statement is so biased and unsubstantiated it is not worth replying.

Ms. Morey states: "I have seen PEOs retain employee records and ignore former customers’ requests for data. Employees may have to complete a variety of new hire paperwork."
Jim Hamilton replies: No PEO will ignore a request for employee records. The warehousing and administration of required employee documentation ensures the client is compliant with all Federal and State HR regulations and is a value to the client.

Ms. Morey states: "And if the employer is in the PEO for more than a year or so, the employers workers compensation mod will be reset with no regard to the employers good safety record."
Jim Hamilton replies: Totally false. A PEO will always consider the clients claims history, mod factor and safety record when pricing any account. This is standard practice for all risk management products. Companies that work with a PEO to implement safety programs and reduce claims will enjoy lowered workers compensation insurance rates.

Ms. Morey states: "An employer will also lose a good unemployment rate once they’ve been with a PEO for 3 years."
Jim Hamilton replies: This statement is misleading. Each state handles state unemployment insurance - SUTA slightly differently and most all states require the clients SUTA rate to be maintained and reported to the state.

Ms. Morey states: "They will also charge a not for profit FUTA taxes, which not for profits are actually exempt from paying."
Jim Hamilton replies: This answer is misleading. Since not for profit entities are exempt from FUTA most PEOs will set them up with an ASO product.

Ms. Morey states: "Unless there is a truly compelling reason not to seek the better option, I recommend that before you make any decision you look for an ASO that does not require an annual contract such as Tricore (www.tricoreon line.com)."
Jim Hamilton replies:   While Tricore is a good company, there are LOTS of PEO and ASO options available. Why Ms. Morey would be advocating them in particular should cause to suspect her advice.

Ms. Morey states: "If you are determined to go the PEO route, set up a spreadsheet and see if you can extract applicable accurate information from each PEO vendor with whom you talk to fill in the columns."
Jim Hamilton replies:   First you need to identify the best PEOs for you type of company and your company’s location. The StaffMarket RFP for PEO quotes creates the short list of PEOs and ASO that are a good fit for every type of company.

Ms. Morey states: "Expect it to be almost impossible to get the same kinds of cost breakdowns from each vendor."
Jim Hamilton replies: Each PEO uses one of several standard pricing formats. Contact StaffMarket for assistance with PEO proposal evaluation.

Ms. Morey states: "They make it difficult to do in my experience."
Jim Hamilton replies:   Kind of true. That is why the experts at StaffMarket have helped over 10,000 companies.

Ms. Morey states: "Also, ask for at least six references (happy users with similar size and types of companies to yours) and call each one with a standard list of questions about costs and services."
Jim Hamilton replies: True. That is the best advice in this article. At StaffMarket we have helped hundreds of companies find their best PEO or ASO arrangement and will assist with independent reference for any PEO your company is considering.

Ms. Morey states: "Hope this is helpful. Penny is a seasoned human resources executive and consultant with over 25 years of diverse business experience in advising enterprise leaders on employment-related matters."
Jim Hamilton replies: Okie Dokie.

Who the Heck is Penny Morey?
The Entrepreneur website lists her bio as:

Penny is a seasoned human resources executive and consultant with over 25 years of diverse business experience in advising enterprise leaders on employment-related matters. Most recently, she established RemarkAbleHR, Inc., a consulting/services company focused on helping business owners/managers to find and keep the best talent available in their markets. In addition to recruiting, RemarkAbleHR identifies how clients can be competitive in the challenging employment arenas of 2007 and beyond. Morey has also served as the director of administration and human resources for Mazda Motor Manufacturing throughout its first 5 years in the U.S and as vice president of administration and human resources for TelePlace, an international telecommunications collocation and managed services company.

In Our Opinion
While Penny may have some big company HR experience she does not appear to have any background in the HR needs of small and medium sized businesses (less than 500 employees). Since PEOs traditionally serve that marketplace, her advice is of little value to small business owners and managers who can benefit from a PEO. PEOs continue to be a viable, valuable and cost effective solution for all types and sizes of companies.

NAPEO Response to this Article
This communication was sent from the NAPEO president Milan Yeger to the editors at Entrepreneur.com

Penny,

Your column is promoted as having answers but your recent response on how to evaluate a PEO enlightens me on your opinions but left readers without the facts or research they expect from Entrepreneur.com. You stated the advantages of group benefit negotiations and administration have diminished but provided no facts. You provided similar depth in stating small businesses have a variety of retirement options. With so many options and advantages readily available, why have participation rates for health and retirement benefits of workers at small businesses continue to decline while the growth in the average PEO continues to climb at double digit rates.

It is overly simplistic to discuss the evaporation of the workers’ comp advantage as if safety for America’s businesses is merely an issue of premium rates. What has evaporated are the loss prevention or claims management services businesses need to keep their environments safe and their workers productive. You also missed the mark when you opinioned PEO expertise and advice come from service staff not HR experts. You should have checked the statistics to learn over 2/3 of the HR staff have obtained HR related professional certificates such as PHR and SPHR offered by the Society of Human Resource Management.

Your reader asked for advice on how to evaluate a PEO not your bias toward the provider of choice for American’s Fortune 200 corporations. ASOs have been around for decades and are a wonderful resource. ASOs love corporations with more than 5,000 workers but many entrepreneurs are not corporate giants and regrettably there are few options for these employers of fewer than 100 employees. Only PEO can provide comprehensive services from payroll, workers’ comp, benefits, human resources, and employment compliance functions. More importantly, your readers deserve to know that PEOs share and allocate the risk and liabilities from these business functions while ASOs deliver these services as agents leaving their corporate clients on the hook for any liability.

Instead of suggesting PEO contracts are hard to break when the industry standard or custom provides a 30 day cancellation clause, it would have been more helpful to suggest business clients should seek clear separation details when negotiating a PEO arrangement. You should have also explained that PEOs don’t work with 1099 consultants because by law they are not employees. Your suggestion for getting references was a helpful but that also is simplistic as businesses should do even more. In many states PEOs must be licensed. Check to see if they have audits or are certified for risk management by the Certification Institute or accredited by ESAC. More information on how PEOs operate and how to select a PEO is available at www.napeo.org. Like you, we too have a bias and are happy to disclose that we represent the PEO industry.

Milan P. Yager
Executive Vice President
myager@napeo.org
Milan P. Yager
Executive Vice President NAPEO -- The Voice of the PEO Industry

StaffMarket Services, LLC
431 12th Street West, Suite 202
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Phone: 941-750-9450 - Fax: 877-471-5608
Office hours are 9:00am to 5:00pm EST
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