Looking for insights into co-employment (PEO) for start-up Business

Ron,

As a general rule, co-employment organizations (they prefer the term PEO for professional employment organization) require clients to have either 5 to 10 employees minimum. There are two reasons for this - the fixed costs and liabilities to service an account and because insurance companies generally require a minimum of 10 employees to start a group benefit plan.

There are a handful of PEO's that will provide service to a client with 1 or 2 employees but most restrict access to their group benefit plan until you reach 10 employees. I know of only one PEO that will provide benefits for a 1 or 2 person account but they charge a high administrative fee that more than offsets any savings you receive from the group benefits.

For most start-ups, the more cost-effective solution is to buy an individual health policy for each employee and use a basic payroll service from your bank or Intuit. However I have seen several cases where it made sense for a start-up would pay the higher administrative fee for a PEO. Most of these needed to facilitate a VC funding or to attract that "must-have" employee. Another option is to use an ASO and buy a small group benefit policy if you have more than 1 but less than 10 employees.

In short, there are several ways to facilitate the HR and benefits for your start-up but there are some parameters that you have to consider in structuring a solution. Please contact me if I can be of assistance. I'm happy to answer any questions you may have.

Scott

Scott gives some good advice. But I would add there are plenty of payroll vendors that provide excellent service for a fair price.

DO NOT, I repeat DO NOT do payroll yourself. One mistake and the penalties will cost you more than the cost of a payroll service for an entire year.

After talking with many a HR person this last year, I really haven't heard a true success story with PEO's. That doesn't mean they are not out there, but you did ask for opines.

With the current crackdown by the IRS and States on who is and isn't an independent contractor (IC), I think again Scott's advice makes sense.

If you do go the IC route, cross all your "i's" and dot all your "t's" (okay, it's the other way around) and make sure a) they are truly IC's, they understand that they are IC's and they understand the law. Then re-think their use and follow Scott's advice :)

I agree with both Scott and Wayne. We were on a PEO for about 7 years and had a good experience with it. We had several employees over 50 and healthcare costs were prohibitive without the PEO. Our situation has now changed and we are no longer with a PEO. If you aren't utilizing all of the services of the PEO the admin fees can be rather high.

I completely agree on the payroll issue. We are a CPA firm and we don't even do our own payroll. The potential risks and compliance issues are much better handled by the pros in that area.

Regarding independent contractors - audit activity is up from all the taxing authorities so you really do need to make sure your folks meet the tests to be considered an independant contractor vs an employee. If you loose that battle with the IRS the employer is liable for ALL the taxes - both the employees share and the employers share.

Good luck!

I agree with the above comments.

There is a company called Algentis which will take many of the administrative burdens off of your hands (choosing benefit providers, onboarding employees, HR advice) but the benefits are based on basically the age of your population as your employees are not employees of the PEO ( as the health care rates in California are the pretty much the same for all small plans of under 50 people).

If you have a very young population of employees then you probably don't want a PEO as I have found that the benefit costs thru a PEO tend to be more expensive as the age of the population is not at the very young end of the spectrum

Do not do payroll yourself and you can buy benefits on your own as discussed above as another alternative.

Joan