Jeff Cangialosi

Introduction

To PEO or not to PEO? That is the question. Whether ‘tis nobler in the mind to suffer the pain of managing HR internally or join up with a PEO to unlock efficiency and reduce complexity. 😏

This article is for my startup operations friends who are deep in the weeds of managing their team’s human resources. PEO stands for “Professional Employer Organization.” In short, joining a PEO is a way of outsourcing your HR operations by combining your employees with a large pool of other employees under one central entity. This allows small startups that might only have a handful of people to join forces and act like a company with thousands of employees. This unlocks benefits and economies of scale on a number of fronts.

If you are a founder or work in operations at a startup, you have likely weighed the pros and cons of using a PEO at some point. It is not a simple question. It’s one that requires considerable research, and there is no one right answer. Company-specific features often drive whether or not a PEO will make sense for your startup.

As you are doing your research, there are already a number of great articles that will outline the pros and cons of using a PEO. I won’t rehash these articles, but at the end of this post, I have included a list of posts that I would consult if you’re researching PEOs. Instead what I wanted to do was point out key questions that I wished I knew to ask upfront when evaluating PEO options. My goal here is to equip you with the hard-hitting questions to ask that may not be immediately top of mind. Unfortunately, I’ve learned which questions to ask the hard way in a lot of cases, so I hope I can save you some pain 😁. Let’s dive in.

1) Do you have minimum employee count requirements?

Some PEOs require you to have a certain number of employees to join. The number I have come across most often is 5. Often times, this will not be disclosed upfront, so make sure to ask. Even if you are well above that number today, ensure you know what the minimum is. The worst case scenario is reducing headcount and then realizing you are also going to get bumped from the PEO. Some PEOs also lock you into a seat count for the year, so even if you let 5 employees go in June, you may still need to pay for those 5 seats through the end of year.

An ancillary point here is that you need to ask if the PEO program only handles payroll for W2 employees or if it will allow you to pay 1099 contractors as well. Only the W2 employees will factor in towards the minimum employee count. Sometimes paying 1099 contractors is a separate charge, or you might even need to use another platform to pay them.

2) How exactly does your support model work? Will we have a dedicated point of contact (POC)?

This seems like an easy one, but make sure you spend time here to really dig in and understand the provider’s support model. Is there going to be one person with a global view of your account who can triage any issue that comes up? Does this person have a direct phone line that you can call? Will they set up a dedicated Slack channel with you?

I’m old-school on this one, but having someone who I can pick up the phone and call is extremely valuable. When it comes to HR, you are dealing with your employees’ salaries, benefits, and a range of other sensitive topics. If there is ever a problem or an ambiguity, you want to be able to receive an immediate response. Chatbots and support emails are fine, but I’ve found them to be lacking during critical moments when I need a response asap. I also don’t want to be ping-ponged between 5 different support reps who each need to come up to speed on my account.

3) How big is your PEO pool of members?

This one is important to ask when it comes to health benefits. The more members, the more the risk can be spread out. From what I can tell, there is no magic number here, but bigger is likely better. I would look for the PEO to have at least 5k to 10k employees in it. PEO providers tend to be selective in terms of who they let into their program, so keep in mind that they will be screening you on this front. They are incentivized to have as healthy and low-risk a pool as possible to keep their rates down. If you have a team that is a heavy utilizer of health benefits, this could be a factor in the renewal rates you see year after year.

4) How flexible are your contribution schemes for health plans?

As you’re designing health coverage for your employees, you likely want has much flexibility as possible. You may want to cover employees 100% and their dependents 50%. You may want to offer 3 different tiers of coverage and only provide 100% employee coverage for the first tier. Some PEOs will also allow you to create custom coverage for founders. Another area of flexibility is thinking about whether you want to set up contributions on a percentage or flat rate basis. You will find that PEOs will have minimum contribution ratios to ensure that their health benefits are competitive and generally in line with the typical coverage you would see at a Big Tech or Finance firm.

5) How transparent is your pricing? What happens when I need to add another feature or service?

What happens when you add commuter benefits? Device management? Accident insurance? Is there one flat rate for all the services or is it a la carte? I generally favor the one flat rate, but there can be benefits from breaking the services in pieces. Be careful though. It becomes painful to manage and keep track of your monthly bill when you need to track multiple line items. There may also be “access fees” to turn on the extra service and then per employee costs, which can add up.

6) Do you handle tax filings electronically?

While you may assume all things are done electronically these days, that may not be the case when it comes to tax filings. Ask your provider if they are doing electronic filings or are still on paper. Paper filings slow down the process and can lead to longer wait times when you inevitably need a refund at some point. Some of the problem here is that each state in the US is different and has different filing requirements, but your PEO should be trying to file electronically where possible.

7) Do you take care of claiming our R&D tax credits?

If you’re in the startup world, you are likely already familiar with research and development (R&D) tax credits. This is a perk that the US government offers in reduced tax expenses for contributing to innovation here in the US. For startups, this can be hundreds of thousands or millions of dollars in savings. There is some administrative work to go through a study for these tax credits and to then claim the credits each quarter. Make sure you understand if your PEO provider is set up to do that for you. If not, you will have to do the filing on your own, which can create additional work on your end and negate some of the benefits of using a PEO in the first place.

Conclusion

That’s a wrap on the seven questions. You should of course still do your diligence and ask all of your standard questions to assess the PEO, but my goal here was to give you a few outside-of-the-box questions that you may not have initially thought of. Hope it helps!

Resources

To learn more about PEOs and understand the pros and cons, here are a few articles to get you started. Keep in mind that many of the articles you will find when googling this topic will be written by PEO providers or others trying to sell you an HR service.

• Overview of how PEOs work from Kranz Consulting
• Another good overview from Forbes
• The high level benefits of using a PEO
• An article that breaks down the differences between a PEO and an EOR