Small business owners in the service industries aren’t immune to today’s hiring challenges. Despite the shortage of qualified labor in the marketplace, you are looking for candidates to fill your open positions. When the stars and moon align, you find the right candidate, are excited to make them an offer, and it seems it will all fall into place. You pick up the phone, give them a call … and within a few minutes the conversation turns to what benefits you offer over and above the base salary. You take a deep breath and think, “Oh no, not again.”
Has this happened to you? You’ve set up your business and have it running smoothly, but you’ve lost a few good potential hires and had some employees leave because you don’t offer additional benefits over and above cash compensation. They come to your shop, you train them, and they gain valuable knowledge and experience … only to be lured away to the shop across the street. And not for an extra 25 cents an hour like the old days. Now it’s for benefits, and not just health insurance.
Maybe you’ve thought, “I’m not a Fortune 500 company. I can’t offer the same benefits those companies do.” Actually, yes, you can. A lot easier and for less money than you might think.
Some of your fellow small business service providers have been doing this for years. It’s just a well-kept secret. Why a secret? That’s puzzling, because once companies join this solution, they have less than a 3% return rate of going back to their old way of thinking about compensation, benefits, and the cost of offering something competitive to their employees. And that 3% stat is based on pre-pandemic labor shortage metrics.
The solution is utilizing a Professional Employer Organization, often called a PEO. Perhaps it’s a secret because it’s difficult to explain in a 30-second commercial in our short-attention-span world.
A PEO is an IRS-recognized organization that enters into a co-employment relationship with client “site employers,” allowing the PEO to share and manage many employee-related liabilities and responsibilities. This arrangement essentially allows employers to outsource many of their HR functions to the PEO including benefits administration, payroll, workers’ compensation, and tax processing, all while maintaining direction and control of their workforce and client-specific culture.
Let’s focus on how PEOs help offer more-robust, Fortune 500-type benefits.
Most PEOs will have large-group health plans that they allow their clients’ co-employed employees to join. The cost of these health plans are often lower, with better offerings available, because the plans are rated based on a large number of participants rather than on a small group (i.e. 15 employees), which would be rated based on each employee’s age and/or current health factors. A typical small business would be doing well to offer and manage just one health plan. In a PEO, the clients’ employees have access to many health plans, allowing each employee to pick a plan based on their own needs versus those of the business owner’s personal impressions of health insurance.
In addition to group health insurance plans, PEOs offer and manage a wide variety of additional benefit offerings such as dental insurance, vision insurance, life and disability insurance, flexible spending accounts, and health savings accounts. Even pet insurance may be available! These offerings are purchased via each employees’ payroll deduction and it doesn’t cost the client a dime more in time or money. It’s already in place. All an employee needs to do is elect it or not.
PEOs will sponsor Section 125 Cafeteria plans for their offerings, so any of the benefits that can be pre-tax are and this is all managed by the PEO, relieving the client of the liabilities of doing so themselves.
Most PEOs also offer a 401(k)-retirement savings plan that is offered to all co-employees and is included in the overall PEO proposition. This means that all employees (even sometimes the business owners) can take advantage of these benefits.
Different types of employers have different contribution strategies based on a wide variety of factors ranging from industry trends, competition, and now more than ever, labor shortages. For example, historically, white-collar industries offered and contributed more toward benefits packages than blue-collar industries. Conversely the HVAC contractor or machine shop didn’t need or want to offer, much less contribute to, health insurance for their employees—not to mention additional benefits. Now these employers are finding they must do so in order to attract and retain quality talent.
In a traditional small business environment, many business owners may feel that offering supplemental benefits (i.e. dental insurance) is a hassle to administer. “Offering dental” means contracting with the dental insurance provider, having an open-enrollment education meeting for employees, deciding what portion of the plan the business owner will pay for (and for what levels), making the premium deductions from employee paychecks, reconciling those deductions with the actual dental insurance carrier’s monthly invoices, adding and dropping employees as they come and go, and making sure there are no geographic requirements or restrictions. In a PEO environment, all this is handled as part of the relationship. And not just for dental coverage; they do this for every type of benefit offered!
All the client needs to do is decide if and how much they wish to contribute to the various products. They don’t have to contribute. Typically the only contribution requirement is toward any health insurance offering. But they can choose to contribute based on their preferences.
In a PEO, the client may be able to contribute as little as possible to just the health insurance but still be able to offer everything else. Or they can pay for it all. Or be somewhere in the middle. The point is, the individual client can decide what their benefits contribution strategy looks like while being able to say to the applicant honestly and proudly, “Yes, we offer a full benefits package.” Whew! Which takes us back to the start …
In today’s competitive labor market, even small business owners with only a few employees can look and feel like their bigger competitors when it comes to taking care of their employees, thanks to this well-kept secret: the Professional Employer Organization or PEO.
There is a cost for using a PEO. Most will charge a flat administrative fee per employee per month. This fee can vary wildly depending on the PEO, along with what industries the PEO is targeting. The administrative fee includes access to all the benefits, all the administration of those benefits, and the compliance filings required for benefits offerings (i.e. 5500s and annual filings, COBRA administration, etc.)
Although not explored here, as we focused solely on the benefits aspect of PEO offerings, there are also many other features and benefits that PEOs offer in terms of payroll processing support, tax and compliance filings, Workers’ Compensation insurance, risk and safety, and HR/legal expertise.
Most small business owners say they don’t offer additional benefits to employees because they simply don’t want to be “in the insurance business,” meaning they don’t have the time and resources to devote to sourcing, comparing, and administering benefits, so they have chosen not to offer them. PEOs take care of this for them for less than it would cost them to do it themselves.
PEOs are a game changer for small businesses. Those who understand that time is as valuable a commodity as everything else in business remain confident that they are taking care of their employees, and thus their business, most efficiently and effectively by utilizing a PEO for these non-productive but necessary tasks.
There’s a cottage industry of PEO brokers—like independent insurance agents—who can do the analysis for business owners. Naturally, every problem can’t be fixed with the same solution, and a PEO may not be the best option for every small business, but it is certainly one that is largely unknown and should be considered by most.
