Things to Consider Before Cutting Ties With Your PEO

Eric Mochnacz
April 15, 2020

Now, more than ever, small businesses are relying heavily on their Human Resources partners to make critical business decisions.  It’s possible businesses are receiving guidance from their PEO. PEO stands for Professional Employer Organization. But, are they the best option for your company right now?  Can companies that offer generalized solutions actually meet your company’s specific and intricate needs in the face of the economic downturn?  We offer some sage advice on things to consider before cutting ties with your PEO – and demonstrate how engaging with an HR consulting firm is the better option.

Oftentimes, companies will enter into an agreement with a PEO to help reduce costs, especially since they are often able to offer small business employment benefits plans at a lower price.  PEOs are also likely to offer outsourced HR services, as they take on the administrative and liability burden (although the employer should still maintain EPLI benefits, for they are still ultimately responsible) of their client companies, so it makes sense for them to oversee regulatory compliance, benefits administration, worker’s compensation claims, and other people-facing functions.  By bundling these services, the PEO is often able to make the case that they are a more cost-effective solution to hiring a full-time HR Manager or working with a specialized HR consulting firm.

PEOs position themselves as an affordable option when it comes to healthcare, as they are able to leverage their multiple employment relationships into more cost-efficient group health benefit rates.  However, that severely limits the options available to an organization’s employees. The employer is only able to choose from the PEO offerings, and those health plans may not meet the specific needs of their employee population, and the employer is severely limited in their ability to negotiate on behalf of their people.  By ceding control of the benefits package to the PEO, the employer is subject to any significant rate increases or change in payment terms, with very little recourse.  What seemed like an affordable solution to a costly problem has now become more costly – and there isn’t much a business can do about it.  

Over the past weeks, you may have been one of the many business leaders who made the difficult, but critical, decision to furlough or lay off your workers.  You’ve since pivoted to navigating the next few weeks (or months?) to keep your business viable and come out of the other side of this intact.  As you begin to evaluate your financials to make even more crucial cost-cutting decisions, you may begin to critically evaluate your PEO.  

Now is the time to have an honest assessment of the services they’ve provided and if you aren’t satisfied, consider spending those financial resources on more effective and individualized HR support.  You need to have total control over your business right now, and you have the unique, inherent knowledge of how your business can be successful. If you are looking for HR support and considering a PEO or you are reconsidering your current relationship with one, read below to consider what you need to know before making your next move.

Be Wary of the Shared Employment Relationship

When you enter into an agreement with a Professional Employer Organization, you are leasing your employees to the PEO.  They become W2 employees of the PEO, which is how they are able to accept liability while managing the thorny and administrative burdensome areas of the employment relationship.  Typically, your PEO also handles many, if not all, aspects of HR Administration.

However, in that shared relationship, a company sacrifices their autonomy in managing employment issues.  For example, if you want to lay off an employee and you are engaged with a PEO, they have the right to intervene and may delay or derail the termination process. The PEO may be risk averse as a way to manage liability and maintain a steady head count.  

When you first entered into this shared employment relationship, it was probably done with the best intention to find an effective and relatively inexpensive HR solution or reduce the workload on your overtaxed HR professional.  It made sense.  

But, with all business relationships, it may stop making sense – especially in a situation where you’re stymied in your attempt to make a decisive move to keep the business moving forward.  It’s a challenge to make key personnel decisions if the two parties involved in the decision have disparate motives and misaligned intentions.  

Right now, your PEO’s ability to support your company’s employment decisions was put to the test.  The level to which they met your company’s needs in a crisis has been put under a microscope over the past month.  If you didn’t feel your PEO truly understood your business’s individual challenges, especially when faced with layoffs or furloughs, it may be time to reconsider the shared employment relationship.  

It can also be frightening to end the relationship with your HR partner, especially as new guidance, procedures and laws continue to roll out from federal and local governments – but trust the HR team you already have in place or recognize that a speciality HR consulting firm can offer the same level of support (if not more), without entering into a shared employment agreement.  With most consultancies, your employees stay your employees while the consultants work with you in the best interest of your company and your people.  

Demand Individual Attention and Individualized Services

Recently, I was at my gym and a small business owner, who owned a meal delivery service they were sampling at the location, heard I was an HR consultant and immediately had some questions.  Whenever someone wants to chat about an HR quandary, I always like to know what support they have in place.  

As was expected, they had used one PEO, were dissatisfied, and had begun the process of vetting a new PEO.  They had been promised the world, including individualized services and a committed team of people to help them.  When it came to actual practice, they received none of what they were promised.

Ultimately, the owner wanted to know his ability to provide one of his staff the ability to remain home for a week with his newborn.  After we talked for an hour, the owner was surprised I had taken the time to learn about his business, their philosophy towards PTO, and their understanding of state and federal law while working through potential solutions and what each solution meant for their business long-term.  It was evident to me that he wasn’t used to this type of HR support and guidance.

When you are navigating the issues that directly impact your business and your people, you want the individual responsible for providing solutions to have intimate knowledge of your company.  When you call a PEO customer service number, you never know who is going to be on the other side of the phone. When time is of the essence, you want a direct line to the person you know and who knows your business.

Consulting firms are traditionally better positioned to provide individualized service to their clients.  Working with a specialized firm, you’ll be assigned a skilled professional who will complete a thorough assessment of your organization, plan the engagement, and work directly with you in solution creation and implementation.  A company that is invested in your long-term success won’t provide a general template, but specific approaches and solutions to your business’s unique challenges. A Red Clover consultant is with you every step of the way.

Assess Culture Fit

As companies shift to focus on building a company culture and identifying, living and working by company core values, entering into an employee lease agreement with a PEO could present a number of challenges in maintaining a culture-driven organization.  If you’ve outsourced your recruitment process to your PEO, they have a vested interest in raising the headcount, but they may not be as invested in hiring for culture fit. Their need or desire to hire just to hire could have a direct impact on the investments you’ve made into employer branding and company culture-building.  Your priorities may be misaligned, and a company will see it most if they find themselves with new hires who don’t understand or haven’t committed to living and working by the company core values.  

This discordance can create a separation among your workforce.  When working with a PEO, you’ve ultimately sacrificed control of your organization, and it can create confusion among your employees.  If some members of the team are highly invested in the core values and hold themselves accountable to them and the other members don’t – it can be disastrous.  People want equitable and fair treatment – and is that possible if two different groups of people were hired under different banners?  

Even if you’ve done your due diligence, researched, and are confident you’ve selected a PEO that aligns with your company values, it’s not possible to guarantee that every employee from the PEO with whom you interact will have the same level of investment.  Although your employees are held to your standards and the standards of the PEO through the shared agreement, the PEO employees aren’t leased to you. It’s an uneven relationship that may manifest itself in the way your team works together and in the disparate performance perceptions and expectations.  

No one can serve two masters – and this is a perfect example of that situation.  In the shared employment relationship, it comes down to issues that arise from competing priorities.  Serious clashes can arise and prove detrimental to the growth of your company and its identity. Most successful companies are able to build and maintain trust among their with clear and consistent communication.  With two entities responsible for people management, key communications may get muddled or even be radically different, especially if the employer and PEO aren’t maintaining appropriate levels of communication. When communication breaks down, so does productivity.  When communication plans are disparate and confusing, employees quickly lose trust in the organization.

It’s logical for business owners to look for external support, especially if human resources and people operations are their blind spot.  It’s also appealing if it means saving money. But, in turn, you are sacrificing control of the entire employee experience to a company that doesn’t have as much vested interest as you do.  Oftentimes, the employee is unable to distinguish between the company and the PEO. So, if the employee has a negative experience as a result of something the PEO did or didn’t do, they may not attribute it to the PEO, but to the company as a whole.  There is a negative impact on your company’s internal and external reputation. If owning every aspect of the employee experience is something you value as a business leader, outsourcing that responsibility makes it near impossible to do so. 

One of Red Clover’s values is “Honest Counsel.”  As a culture-driven organization, we are mindful of working with like-minded companies.  But, one of the tenets of Honest Counsel is if we aren’t the right fit for your company, we will tell you – even if it means we don’t get the gig.  

It’s important that all of your suppliers recognize your values and are able to work with you within that context.

Ensure Business Continuity

When a business engages with a PEO, they are handing over a certain level of control of the business to the PEO.  The line gets blurry over who owns what. It’s important that when entering into any business relationship, all parties understand what they are permitted to do with any of the processes or procedures, especially if and when you sever the agreement. 

If you’ve sourced your PEO to handle recruiting and onboarding, and you’ve made a major investment in that process, is it worth it if you have no control or can’t continue the process if the relationship ends?  This also assumes you, as the business owner, are satisfied with the results from the PEO. If you’re dissatisfied, and they are operating from their template, you may not have any flexibility in providing feedback to improve the process.  This can prove incredibly disruptive to the day to day operations of your business and its growth.

Also, as you decide your business needs to scale, you may determine  a PEO no longer meets your needs and you will begin the search for a full-time HR Manager.  Will the PEO engage in a knowledge transfer with the newly hired HR team member? Do you lose rights to the PEO’s HR solutions if you end the relationship?  If so, what’s the ROI? Because if your new HR hire needs to develop their own policies, processes, procedures, and educate the workforce, it’s a lot of wasted time and money, especially if your employees are just getting comfortable with the old PEO-implemented processes.  To avoid this situation, read and review the agreement before you sign on with a PEO and understand what you’re entitled to if the business relationship ends.  

An independent consulting firm, in providing specific and individualized results, has more control of their product and is in a position to be more flexible with their products and usage rights.  For example, Red Clover engages in a through knowledge transfer with the new HR resource after an interim engagement concludes.  

Additionally, although we own the intellectual property rights to the solutions we provide clients, we do provide for their use in perpetuity within the organization, even after the engagement ends.  We believe we provide value, and if you engage with us for that added value, it’s only appropriate that you be able to use what we’ve provided in your efforts to have long-term, consistent and sustainable change.

Right now, owners are making tough decisions for their business.  Although a PEO may seem like the easiest, most effective and most affordable way to support your people and run your HR function – there are other options available.  As you begin to cut or reduce contracted services, if your PEO is in the back of your mind as a non-essential, it may be worth exploring that gut feeling a little further.  As they themselves determine how they will remain viable through the economic downturn, they may be forced to reduce their own services or raise their prices as a sustainability measure, and these changes may force you to reconsider the relationship because they can no longer serve your business in the way you need.  

However, if you’ve relied on the PEO to support your HR function, heading into the tumult of the next few weeks without any human resources help could be incredibly daunting.  Red Clover is a small, committed team of skilled, certified HR professionals prepared to deliver individualized, sustainable and affordable solutions to meet your company’s highly specialized needs.  Whether it be as an interim HR Manager, an on-call resource, or as a rapid responder to pressing and urgent HR issues, we are ready to deliver satisfactory and impactful results. If you’d like to get in touch with the team at Red Clover, fill out our contact form today!

Written by Eric Mochnacz

Learn more about Eric on LinkedIn!

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