Background – PEO Industry Consolidation
Beginning in 2010 and continuing throughout 2012, the Professional Employer Organization (PEO) industry (Also known as Employee Leasing) experienced a wave of buyouts and consolidations. At one time there were estimated to be over 2500 PEOs operating in the USA. Today the estimate is around 700. The number of small businesses in the USA has dropped significantly during the recession of 2008-2010. Since small businesses are the customers of a PEO the PEO industry has shrunk as well and has been under marketplace pressure to consolidate. However, for businesses who have survived the recession and who also use a PEO, the numbers are much more positive. Nearly all the shrinkage in the PEO industry is the result of their clients reducing their workforce size or going out of business. In general, existing PEO clients who have survived the recession have stayed with a PEO.
What Happens when your PEO is sold?
As in most things, there is not one simple answer. You are the customer and you will decide if the new PEO arrangement meets your needs… or not. This article can help you decide on your best course of action.
The PEO Spin Zone
As a consultant to thousands of businesses and advocate of the PEO industry we believe strongly in the benefit a PEO can bring to most small businesses. However, when your company’s PEO has been sold it is a great time to assess the “fit” of the new PEO and make sure that new PEO is really the best for your company. Rest assured that the new PEO (the one who bought your old PEO) wants your account to smoothly transition to the new PEO. The new PEO owner paid good money for your account and the last thing they want is for you to leave the new PEO. Shortly after the sale you should expect a call or visit from the new Account Executive who’s job it is to convince you that “Everything is going to be fine… in fact it is going to be a whole lot better!” Well…Maybe it is, and maybe it’s not.
The first thing to ask is: What kind of transaction was made between the former PEO and the new PEO? The answer to this question holds the key to understanding impacts for your transition to the new PEO. There are 2 kinds of sales in the PEO industry: An Asset Sale and a Company Sale.
In an asset sale, the new PEO did not buy your current PEO company. They paid the PEO owner money and purchased the relationship with you, the client (the assets). In technical terms this mean that the old PEOs corporate entity is being abandoned and will no longer have an FEIN (Federal Employer Identification Number) in use for reporting employee wages and taxes to the state and federal government. In addition, your workers compensation policy and employee benefits plans will be held with be a PEO that is no longer an ongoing entity.
In a PEO company sale, only the equity interest in the PEO has changed hands. The PEO, as a company, is still a legal entity with its own FEIN for tax reporting and all of its assets and liabilities. From an accounting and legal standpoint nothing has changed, just the ownership of the equity in the PEO. In the short term (within one year) most of the services and employee benefits you get from your PEO will stay the same. Afterwards, the new PEO will most likely gradually transition your services to the new PEO product platform in a way that minimizes the impact for your company.
Why it Matters!
If your PEO has been purchased in an Asset Sale, then you could experience a significant impact in the transition to a new PEO. In fact, it is just like joining a PEO for the very first time.
Changes to PEO Pricing
Will the cost go up with the new PEO? This can be hard to assess sometimes. The new PEO may use a totally different pricing model than your old PEO. For example, you may be told that the pricing will be the same, but later find out that certain reports or services are not considered part of the standard package and now are subject to an additional fee. Research is required to define exactly what you are getting from your current PEO and make sure the new PEO offers the same at a comparable price.
Changes to Payroll Service Personnel and Relationships
Will the great payroll tech you have had forever that always made sure your checks were correct be making the transition as well? If not, then will you have a dedicated service tech, and who is it?
Change to Paperwork
Will the transition require all new documents for W4s, I9s, employment applications and benefits enrollment? This can be an inconvenience for your company.
Changes to Payroll Systems
This can be one of the biggest headaches involved with the transition. If your current PEO is using a different software platform than the new PEO, your company staff will mostly likely face the challenge of learning a new system for payroll data entry. In addition, all existing data in the current PEO’s system for employee records, pay rates, year to date tax balances, vacation accrual rules, vacation balances, sick leave balances, w4 withholding deductions, IRS levees, garnishments, court orders, etc, will all need to be transitioned to the new HR/payroll system. Your new PEOs may have automated methods of moving this data over from the current PEO’s system, but they may not. If they don’t, ask them who has the responsibility to transition this data to the new system.
Changes to Workers' Compensation Insurance Carriers and Carrier Ratings
Ask who the Workers’ Compensation insurance carrier will be in the new PEO and ask for the AM Best rating of the carrier. Some PEO client companies (especially in construction) must have a certain rating level to work for other companies. Make sure your new PEO has an acceptable rating for the new carrier. In addition, ask for the new PEO's method for obtaining a work comp certification or “cert”. Of course you also need to compare the old PEO’s work comp pricing with the new PEO’s work comp pricing. In addition ensure that they accurately know the Work Comp classifications of your employees and can cover those codes under their policy.
Changes to Unemployment Taxes
Ask the new PEO what rate they will be charging you for State Unemployment Taxes (SUTA) and compare that to the SUTA rate from the current PEO. Also ask if the new PEO will be honoring SUTA and FUTA cutoffs. If they are, make sure that the new PEO will crediting your SUTA balances for wages already paid in the calendar year to the old PEO.
Changes to Health Insurance Plans
If you are purchasing health insurance through your current PEO’s group plan, then this is the area that you will need to evaluate closely with the new PEO. Do they use the same insurance carriers? Will the rates stay the same? Does your company have to complete new paperwork to ensure you do not have any gap in coverage? If the new PEO uses a different health insurance carrier, then the evaluation gets more complex. Ask the new PEO to evaluate your existing group plan and recommend a similar plan and provide the pricing. Does the new PEO require a higher level of employee participation than your current PEO? Does the new PEO require a higher company contribution rate than your current PEO? If your company has its own policy that is being administered by the PEO, ensure that the new PEO can provide the same services for your plans. Also ensure that the new PEO will provide the same tax treatment for your section 125 deductions for you and your employees. If you have any employees on COBRA, ask the new PEO how this will be handled.
Changes to Other Employee Benefits
Review your use of the old PEOs supplemental insurance plans like long term disability insurance, 401K plans, Flexible spending accounts, etc. Ask your new PEO what similar plans they offer and what needs to be done to make any necessary transition for your employees.
The sale of your current PEO to another PEO does not automatically mean that the new PEO will be the best fit, at the best price, for your company. If your current PEO has been involved in an asset sale, your company will have the same amount of work to transition to ANY new PEO, why not look at some other options? Contact StaffMarket to let us help you review all the options and find the best PEO for your company.