The Hidden Costs of Professional Employee Organizations (PEOs) to Dallas Fort Worth, Texas Businesses

Professional employment organizations, or PEOs, are a convenient way for small to mid size businesses to handle their human resources requirements.  Most PEOs will offer employers a wide range of back office support services, including payroll and benefits, such as group health insurance.  Other PEO services may include legal, tax, administrative, and outsourcing of the entire HR and accounting function.

PEOs often base their rates for their services on a modest percentage of billings, plus various charges for services rendered.  For growing businesses, Professional employment organizations may allow companies to hire more "front office" positions such as in sales or marketing, which could help the company secure the talent they need to grow faster.

There is a hidden cost to PEOs which is usually not discussed  prospective business clients in Dallas Fort Worth, Texas.  These costs could add significantly to the actual cost of a company joining a PEO.

When a company joins a PEO, the business's employees legally and technically become employees of the PEO, and not the business entity.  Employees then are paid a salary or wage by the PEO, enroll in benefits provided by the PEO, and then the PEO bills the business entity.

Because the PEO usually has thousands of employees in under their Texas group benefits program, one would think that the PEO could offer more affordable group health insurance than if the company offered benefits to its own employees. 

This could in fact be the case if the Texas business has unhealthy employees, as insurance carriers would "rate up" (charge higher rates) to unhealthy companies.  In fact, according to Texas insurance laws, insurance companies can rate up the group health insurance premiums to a texas small business by up to 66% over standard rates if the company has unhealthy employees.

Because of this, PEOs may tend to attract companies with unhealthy employees.  And over time, companies with healthy companies may tend to leave PEOs as they could qualify for lower group health insurance rates on their own.

And group health insurance carriers, knowing this tendency of PEOs, often rate up PEOs vs. other business industrial classifications.  So the rates may start higher for employees of PEOs, and may climb at a higher rate over time.

So a Dallas Fort Worth small to mid size business that starts out thinking a PEO is a good deal vs. staffing up for back office positions should know all of the hidden costs of PEOs. 

Any such staffing savings could easily be negated by the higher rates for benefits through a PEO.  For example, since the current annual cost of health insurance for an employee in Texas is about $4500 to $5,000 (less the portion that the employee pays), if there is a premium of 20% in the cost of group health insurance through a PEO, that could mean an employer with employees of average age and health would pay perhaps $1,000 more for purchasing group health insurance benefits per employee per year through a PEO.

Knowing this, before signing a contract with a professional employer organization, a North Texas business should first get an independent assessment of their company's employee health and obtain quotes for employee benefits and group health insurance for their company from a Dallas group benefits advisor or texas group health insurance broker.   And any Texas business currently contracted with a PEO should annually check the cost of obtaining group health insurance and other employee benefits as a stand alone company.

If your Texas business is  contracted with or is considering contracting with a PEO , you can receive a a no obligation assessment of your group health insurance and employee benefits and receive recommendations for alternate employee benefits solutions by contacting Mike Chapman of Group Benefits Advisors, Dallas Fort Worth, Texas, (888) 398-6246.