Starting Up & Right : Episode 06 : To PEO or Not to PEO?



Trae Nickelson: Hello, welcome back to Starting Up & Right conversations with the startup CFO. I am Trae Nickelson, your co-host. Joining me is Ryan Keating, your other co-host. Hey, Ryan, how's it going?

Ryan Keating: Great. Good. Good to see you.

Trae: This is going to be a good episode. I think we've got in store some good content, some good information, some good advice coming. One of the funnest things about doing this show, every month or so, is we sit down and we discuss what we're going to talk about. We always take it from the point of view of what are the questions we get, or that you get, basically, from startup founders? What are the things, the decisions they're making as they try to start a startup?

This is one that comes up all the time. Basically, they're trying to grow a team, they've got to put together payroll and benefits and they're faced with the decision, do I go with a PEO or do I go with another alternative to a PEO? To PEO or not to PEO is the question at some point?

Ryan: When a client is ready to make this move, to bring on employees and offer benefits, there's two paths they can go down. One is the PEO path where you have companies like TriNet who's very traditional in this space. Newer companies that have more technology and are actually designed for earlier stage companies like Rippling as a great PEO. We have Justworks that we'll see a lot as a PEO.

A PEO is an option where a lot of it is very included. You get a lot of these services from one vendor and there are additional fees involved. That's one of the things to consider, especially for early-stage companies, sometimes the fees aren't worth it. The other path is to go and put all these pieces in place on your own. The pieces include a payroll provider, somebody who's going to provide benefits to you.

Then some HR administration, whether that's technology delivered or if that's an individual that's working on it for you. Many of our clients end up piecing it together instead of going down a PEO. PEOs have changed a lot in the last, three, four, five years, where they're much more technology-driven, a lot more of a platform and they're more geared towards addressing the pain points of early-stage companies. It is becoming much more of an option for startups than in the past.

Trae: Great. Speaking of options, let's bring in our two guests today who are going to discuss those options with us and help us answer the question to PEO or not to PEO. First is Mr. Bruce Jobson of The Jobson Group. A senior HR strategist for startups, and the lead of Keating Consulting's own HR team. And Mr. Ronald Bland, President of Bay-Area firm AEIS. A firm that specializes in advising and designing benefits and insurance solutions for startups and small to mid-sized companies. Bruce, why don't you start? Tell us a little bit about yourself, what you do and why you're on our screens today?

Bruce Jobson: Well, hello, everybody. Thank you, Trae. As Trae mentioned, I'm the practice leader for HR at Keating consulting. Over the past eight-plus years, we've had quite a bit of experience working with clients to help them figure out if the PEO model is the right model for them or if another model is the right thing for them. We even work with existing clients that already have a PEO in place and we help them make sure they're maximizing the benefits of PEO. Pretty well-versed in the world of PEO and it can be complex.

Trae: It can be complex and that's why Ron's here with us today because when a PEO is not quite the right fit, AEIS and Mr. Ron Bland has some pretty creative solutions to that and some good-- Can advise the nuances of that PEO decision. Ron, a little bit about AEIS and yourself there.

Ronald Bland: Thanks Trae and Ryan. Ron Bland here in San Mateo, California. We're a boutique brokerage firm that works with employee benefits and we have a national footprint through multiple states through our organization. We help people, we take a look at PEOs and non PEOs going direct and as we say the numbers will make the decision for you of which way to go.

Ryan: Well, I'd like to start off with a question that we hear quite a bit from our clients. Oftentimes with our groups, we're working with them the first time that they raise other people's money. Really, one of the first actions they need to go through is to start to make a real business out of the idea that they've had up to this point. One of the first steps is we need to convert the 1099 contractors that we've been working with, to employees. We need to set up payroll. We need to bring on W2 employees.

Part of that is we need to give them benefits. Usually when this happens, we're talking about a small single-digit number of people. Two people, five people, seven people. Oftentimes, they'll ask me, what do we do? How do we start? Oftentimes, they're like, "Is a PEO the right way to go?" Even Ron, I'd love to even understand what does PEO stand for? For people that are out there listening? What's the real jest of it? Then what's the other option?

I'll advise them that there's really two paths, PEO versus piecing it together. Can you give some context into what that means? Again, thinking very-- This first step, they're like, "I'm ready to bring on employees. I'm ready to start offering benefits. Where do I go from here?"

Ron: A PEO means professional employer organization, and there's five or six PEOs that we work with. What they do is they combine small and medium-sized businesses together to give you creative business solutions. With that comes in an administrative fee. We have to take a look at that. There's HR solutions, payroll solutions and also employee benefits solutions that you'll get the large group rates.

We find for the more micro-groups, the ones of two to five, most of the PEOs don't want to deal with them but if they do, they charge them higher rates. What we want to take a look at is, let's take a look at going direct and let's take a look at PEO and then we can see the numbers they come in at. A lot of startups have a unique ability, and they want to focus on that and they don't want to have to deal with the other items of payroll benefits, et cetera. They want a single-source solution for them.

Trae: I oversimplify it in my simple head. As a founder, there are two things that appeal to me about the PEO model. It would be just the compliance, the 50 state compliance. I don't have to worry about staying compliant. That's a big headache that I don't have to worry about. The second would be at least a perceived buying power that I'm getting more for less, that volume buying that a PEO can do for benefits. 

Then the thing that scares me on the PEO side is startups have to move fast hiring and firing. If you've got a bad bad seed on the team, as a founder or a CEO, that you need to walk them out the door today. That's hard to deal with. There's some rules and regulations and some hoops to jump through with the PEO side. Is that a fair-- Those three things are the way I've measured it up in mind at least.

Bruce: Yes, I think that's fair, but from an HR person, you do need to be careful about [crosstalk] decision walking somebody out the door.

Trae: Depending on your state.

Bruce: There is an extra layer of complexity because as Ron mentioned, it's a call employment type of scenario. They're going to need to be tucked in as it relates to what you're planning on doing. There is a hoop. That's not necessarily a bad thing but it can be frustrating for some.

Trae: You make a good point... that hoop is there, whether I'm thinking PEO or not, if I'm a single employer.

Bruce: Yes, but well, yes and no. The PEOs, they're organizations or businesses, there's a layer of bureaucracy that's there whether they tell you one way or the other. It's an organization and there's people that need to be brought into that process whereas if you're just working with a standalone HR consultant like me, or a peer or legal counsel, there isn't that extra layer that's that you have to work with.

Trae: We're making assumptions that our audience knows everything about PEOs. They need to understand they're actually co-employers, right?

Bruce: Yes.

Ron: Absolutely.

Trae: Everybody they bring on, they're being hired by the PEO. Explain that co-employment concept.

Bruce: For all intents and purposes, employees are being directed, they're part of the organization but the actual paycheck in benefits and all that thing, you'll see, [unintelligible 00:09:52], whoever the PEO is that's who's paying them, but because of that they have their own handbook. It's that in terms of some of the processes that are around when how and employees get paid and if you're going to have a leave situation which is not a bad thing.

There's resources that you have that you can go to, but it is just another process that you're going to have to be familiar with or at least have somebody on your staff that can navigate that or work with somebody like us that can help you navigate that.

Ryan: That's really where we come in. When we have clients that use a PEO, our role is to really interact with that PEO on their behalf. We have the ability to understand where are the benefits that we can derive from that PEO, from that relationship because, as Ron pointed out, there's an administration fee. There's a fee, if you want them to handle benefits. There's a fee, if you want them to handle your payroll. The fees just stack up.

If you have somebody that knows how to take advantage of the value that you're paying for, you can get quite a bit out of the relationship. The point is, it still needs someone to understand how to work with that provider. It's not just something you can put in place. It will run things, it will allow you to bring on people and offer benefits and run payroll. If you really have someone, whether that's in-house, or someone like us that can interact with that platform for you, you can get quite a bit of value out of it, because you're paying for it anyway.

No matter what, their fees are going to be what their fees are. It's up to our clients to know, "Okay, I'm already paying for this. I'm paying for this and these are the things that are available to me." That's something that we help our clients with is to be able to understand how to maximize the value that comes out of paying for a PEO relationship.

Ron: 1,000% correct, Ryan. Different PEOs have different cultures. Some are more hand holding, some have a team approach, some have a personal account manager for you. Every PEO is different. We've had people that were upset with some of the PEOs and it's like, but you're not taking full advantage. You're paying for all the services, but you're not taking advantage of those. What's that old joke? You have to know the answer in order to ask the question and that's where they have us so that you can help guide them through the process.

Ryan: One of the things that I have seen that really a PEO can be a benefit to, and Trae mentioned this, but I think we're seeing a lot more of this especially this pandemic situation we're in and where workforces are becoming more dispersed. We're seeing early-stage clients have many more employees in multiple states than where it used to be that everybody would come to the Bay Area, everybody would have employees in California. It was really straightforward.

I understand, and this is complexity above my head, when you have employees in multiple states PEOs seem to bring a lot of value specifically to managing the registration and the compliance when you have employees across different states. Is that fair to say?

Ron: Absolutely. In California, there's SDI, State Disability Insurance. If you have an employee in New York, you have to get the DBL. Bruce worked with one of our clients that went to Hawaii and they have TDI Total Disability Insurance and what a nightmare, because even though you might have a Blue Cross program here in California that will cover you in Illinois, it doesn't cover you in Hawaii.

You have to go with one to Hawaii Blue Cross and Kaiser. Bruce can add a little color commentary to that of doing business with Hawaii, but it's just different states. Washington has a long-term care program. It's just you don't know the laws.

Bruce: Yes, and that's the beauty of you don't have to worry about that. It's not to say that it can't be done, but the value that we bring to our startup clients is we want to take those things off the plate. Whether that's working with them through the PEO, we can certainly do that too, so they can focus on growing the business. That's what we like to do.

Ryan: When we started this off, and I'd love to just get your thoughts on this, you said there's really two options that people go. It's either going direct or PEO. What does it mean when you say going direct? What's involved in that? What are the pieces that you would need to pull together?

Ron: For me, the first step is having an HRIS and payroll system, because again, to take things off the plate of the founders, so they don't have to deal with that. Then we try to get to know the culture of the company and what they're looking for, and then we go directly to the marketplace to shop the Blue Cross, the Blue Shield, the United Healthcare, the different health insurance carriers.

If they want ancillary lines which is a long-term disability, dental, vision, et cetera. What we do is we shop the market and then present them a package to see what they're interested in. Every company is different. Some want the best benefits, some have a program where they need to be more cost-oriented. We just have to find out what they're looking for.

The same thing when we shop the PEOs for people, it's what are they looking for? What's the culture? What are they looking to accomplish? Most of the time, as you said earlier, Ryan is, "I've got a unique ability. I need to grow this company. I have other people's money. What's the most efficient way for me to do it?

Trae: Ron, in preparing for the show you sent over some notes. You have an interesting process where you've had clients that were in a PEO decided to leave the PEO. You've basically got a checklist for untangling them for a PEO. That's pretty complex stuff. Talk about that process if you will a little bit and what made them make that decision? How did you help them through that process? Did they end up better off outside of the PEO?

Ron: The latest company that we just did was they were growing up that they wanted to have a Bruce on-site, more consulting arrangement and they didn't like the fees because they were getting up there for that. On some of the PEOs, not all of them is they rate you by your health insurance, that is by your claim. Some of the carriers got a 3% to 4% rate increase and one client Bruce, what they got a 51% rate increase. They wanted to get off.

In going off, you have to take a look at who's going to handle the worker's comp? Who's going to handle the leave management? Who's going to handle the HRIS system, the payroll, or who's going to handle the HR aspects? We have a checklist of what is the client's responsibility? What's the third-party administration? I'll need to get my EPLI Employees Practice Liability Insurance, because that's required by the PEOs. They all make sure you have that now, but just to go through a process to make sure that everything's covered for that aspect.

Bruce: I was just going to say the numbers do the talking. This is really more Ron's arena versus mine, but he mentioned that most of the PEOs have what's called a composite rate or a number in terms of a dollar amount that they'll pay for benefits across the board for the plan not based off of age. If you're a relatively young company that has a younger workforce, you very well may be subsidizing because that's the decision, you go with a PEO.

You may find that this from a pure dollars and cents perspective, the PEO, may be a more expensive option, and it may be worth it, but that's what we help them prioritize is that make sense for you right now in your trajectory or does it make sense to go direct as Ron mentioned?

Trae: That's interesting. Most startups, just demographically, are younger people, younger humans. There's a very good chance they are subsidizing the pyramid to a certain degree joining a PEO.

Ron: Going direct as Bruce said, it's age-rated. The 20-year-old is cheaper than the 30-year-old is cheaper than a 40-year-old, but when you go with a PEO, you get composite rates. Again, you can't say one's better than the other until you evaluate both sides and see what's going on. Sometimes people just outgrow a PEO because they want the flexibility of going direct and tailoring their own models. Sometimes people like the convenience of not having it on their plate that they can focus again on their unique ability.

Ryan: Along that thought process, do you see that there is a natural level of employees that a PEO makes more sense, or maybe even a level below which it just doesn't?

Ron: At five employees, that's the minimum, but the minimum the fees are really expensive, the administration fees. You got to want to make sure you're going to have some rapid growth because as your number of employees grow, they drop the administration for you.

Ryan: More economical.

Ron: You want to make sure you have that.

Ryan: On a per employee per month basis, which is [crosstalk].

Ron: Absolutely, correct. We've seen someone that's like, why are you spending so much money on-- You could easily outsource Bruce for the cost of what up five or six-person firm costs on that. Some PEOs are only 10's and minimum. It's just different PEOs work differently for that aspect.

Ryan: In that case, then do you see where companies might start on a going direct method and then grow into being able to take advantage of a PEO?

Ron: Yes. If they don't have a Bruce and they start to get out of control and they start to become problems, it's amazing how a lawsuit or a bad apple employee will get you to go to a PEO to take it off there. With that is one of the questions we always ask people to ask the PEO is, walk me through the process if I have an HR probe. Am I going to get a phone call? I'm going to get on site? Walk me through what's going to happen.

How soon should I expect a phone call? Is it a team or do I get an individual person like Bruce assigned to me? Those are the questions that we want. We know the answers, the founder to find out from the PEO.

Ryan: One of the things that we do at our firm is we really look towards technology to help us make our jobs, especially the transactional aspects of our jobs shifting to technology so we can focus more on the advisory piece. One of the things that we've noticed, especially in the last four or five years, is there have been some really interesting new companies coming into this space if you will.

These came to market to try to be more appealing to smaller companies, to try to be more appealing, I think with a technology solution as opposed to the older way that PEOs have been positioned. How do you see these newer companies, this evolution if you will, if I'm thinking about it correctly, in how PEOs are offered? How has this maybe leveled the differentiation between, is a PEO right for me or not? Has it bridged that gap in terms of making PEOs more mainstream or how do you see those companies changing that these options for early-stage companies?

Bruce: I think what probably is the differentiator between the new entrants is what does their technology stack or that HRIS backbone look and feel like. This looks and feels fresh. I do think that the other PEOs are probably recognizing that and they're in the process of upgrading. I think we're going to see a bit of a race, if you want to call it that. There's going to be some improvements just for all PEO organizations because of that.

Trae: Yes, the competition's good for everybody. It's going to up their game.

Ron: I was just going to say that. It breeds success and it breeds excellence. One of the reasons that I like, we're big Rippling people as well, too. One of the reasons I like Rippling is I can start them off on the Rippling going direct, they're small and then they can go on to the Rippling PEO model. If they outgrow it and want to go direct, then they can go direct but they still have that same HRIS system with Rippling, so the employees are used to it. No one has to relearn everything all over again.

That's one of the benefits of using the Rippling from direct to PEO back to direct is that they're on the same platform. They're not growing [inaudible 00:22:45].

Trae: That's interesting. Like Ryan was talking about, the technology is actually the glue that makes the experience consistent.

Ron: Absolutely.

Ryan: Interesting. Is it relatively easy to move between those solutions, from direct to PEO?

Ron: Yes. Again, if you're going direct, you still have to get the numbers of what the PEO cost or if you're on the PEO, we have to get the numbers of what going direct is for that aspect.

Bruce: Yes, and just from a mechanics standpoint, back to the school employment. That doesn't negate the fact that there's two W2's now need to get generated because you're going from one organization to another to another. There's the whole just the aspect of payroll reporting. It's not to say that you can't do something outside of a calendar year or a quarter, but depending on the timing, there's some complexity there too, for sure.

Ryan: Good point. [crosstalk].

Ron: Yes, you want to make sure it's a certified PEO because a certified PEO will allow you to transfer taxes, so that way you don't have to restart the taxes again. If I move my company to a PEO halfway through the year, it's like, "What do you mean I’ve got to restart my taxes all over again?" But if I'm a certified PEO, I don't have to. Talking about the value of Bruce, you have to verify, do they have an on-site HR team management software or are they using a 1-800 number? That's some of the questions that we have.

Trae: That's a good point. Talk more about service because there's a common denominator here where PEOs have a lot of advantages, if... if you have somebody on your team that knows how to take advantages of those, if you have somebody on your team that can fill the service gap, if there's an 800 number approach, you need to still have somebody there to answer questions and give a personalized touch. I know Ron, that's something that AEIS is very in tune with. That personalized touch is something you differentiate.

Ron: When we work with PEOs, we describe ourselves as the safety net. We're in the go-between. If there's a claims problem or as I told you about the Texas employee that got state taxes coming out, we know who to call and we can elevate to the situation just like if we were going direct with a carrier is that we have certain contacts because we've been doing it so long and have such a great volume of business that the people listen to us, and they respond to us more directly.

You're an individual client or the founder's an individual client where we have a large block of business with them and we can get things done. Again, I would prefer that our clients with a PEO model have a Bruce or somebody that they can call one on one versus an 800 number or the service team. I'm a big relationship person and that's what-- Because the founder doesn't have time. "Hey, I'm working 12 to 14 hours a day, seven days a week. I've got a problem. It's been two weeks. Why isn't it taken care of?"

Trae: That's a common problem at Keating all the time. There's a very easy decision when you're two to three engineering founders, it's really easy just to pull the trigger on a solution but as your team starts growing, that service level that you didn't need before perhaps, that starts to creep up. It becomes way more important as you start building your team, right Bruce? That's when you get called in when somebody's neglected that for a while.

Bruce: That's where we can just-- Again, what we try to do is solve problems, not exacerbate them.

Ryan: Ron, perhaps to you. At least historically working with PEOs, one of the big advantages that clients would move to a PEO for was the buying power if you will of getting benefits. When you join a PEO as you've both pointed out, you are technically an employee of that PEO. The PEO gets to get benefits at a much cheaper rate, at least that's the way it used to be. Is that still the case today, with how in the last-- Especially with Obamacare and the last couple of administrations, access to health benefits have changed. How is that still looked at as an advantage for a PEO versus going direct?

Ron: That's one of those things, great question, is that we have to take a look at both. We have to take a look at going direct and going with the PEOs. The PEOs sometimes have a good competitive advantage out there but then we have to take a look at transparency. What am I paying in monthly administration costs? What am I paying for the other services? If you talk to every PEO, they're funny. They all say the same thing. "Hey, we're very transparent in our fees but the other guys aren't." They all say the same thing.

Ryan: I have heard that.

Ron: Whenever we take a look at it, I always like to take a look at the hard dollar cost. What exactly am I saving monetary-wise? How much am I saving on the health, if any? How much am I paying for the other services? Then combine. There's also a soft dollar cost. What that is, is I'm not having to deal with it. I've got a system behind me to take care of everything. There is some soft dollar cost on that but coming back to Bruce again, "Do I have somebody, not on-site, but do I have somebody that's going to represent me and what's the best way to go?"

We haven't really seen the tremendous cost savings that we used to see about 10 years ago, but there is some cost savings. It's not like it used to be. If it is, are you getting the services or are you even utilizing all the services that you're paying for?

Trae: To me, that's the key. Ryan has talked about that a lot. I know you mentioned earlier in the show too Ron, that there's a lot of bullet points on the brochures for the things they're providing in their packages, but are you really using those? Do you know they're there even? After six months, you've forgotten everything? Are you taking advantage of it? Are you ever going to use them? That would change the value.

Ryan: That's one of the things that I'll tell clients as well. Having a PEO and someone like us, someone like Bruce, it really optimizes the value you're getting from the PEO because we know what you're paying for. We know what those bullet points are that are on the list of services. A lot of our clients are like, "Look, I want benefits and I want payroll." When you have a PEO, you're paying for a lot more. You're paying for training, you're paying for access to information or reports or legal counsel if you needed to do some HR disciplinary-type actions.

All these things are available to you, but if you don't know they're out there, you don't want them to take advantage of them, then you're really not getting your money's worth when it comes to those administration fees. One of the things that I've said a lot when talking to a client that's looking at going one versus the other, I think it's a good analogy, but I'm sure people that really understand, who know much better would argue.

I think of it very simply as if you have a credit card with a high annual fee. With that high annual fee, you get benefits. You get access to airport lounges, you get a free companion ticket if you fly to Europe, you get a concierge to help you make a reservation for a restaurant in Chicago if you happen to be there, which are all great things if you use them. If you don't use them, it's just a high price credit card. That's the way I think about PEOs sometimes for early stage companies. If you're not taking advantage of the services that you're paying for anyway, you're likely over paying for the services you need.

Trae: Well, let's wrap up. This is good stuff. Let's wrap it up, and here's what I came away with: To PEO or not to PEO? Definitely maybe.


Trae: A lot of things, but get on the spreadsheet and look at the numbers and weigh everything out, and think ahead a few steps, and somewhere out there is the right solution for your particular startup. You need to weigh it out and talk [crosstalk]--

Bruce: What I would add to that is if you're a founder, you don't need to do that on your own. There's resources, whether that's us, or Ron, or another advisor you're working with, you don't have to go it alone.

Trae: Thanks, Bruce. Thanks, Ron. Ryan, thanks again as always.

Ryan: Definitely. Thank you both for coming on. I really enjoyed it. I think it's really important and valuable information and something we deal with every client. There's no client that we have that doesn't deal with this topic of employees and benefits and where to start. Thank you both. I really appreciate it.

Ron: Thank you for having me. I appreciate it. Thank you for having Bruce and I. It was great.

Bruce: Thanks. It was great being here.