It’s not just hiring staff that’s difficult — managing them can be a major roadblock for growing businesses. One solution for that is the professional employer organization, and Kristen Appleman, senior vice president and general manager of ADP TotalSource, explains how they work and when they might be a good fit.
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Dan Hood (00:02):
Welcome to On the Air With Accounting. Today I’m editor-in-chief Dan Hood. The silver lining of the ongoing hiring problems in the economy is that if you can’t hire anyone, you don’t have to worry about all the compliance burdens that come along with paying them and giving them insurance and workers’ comp and doing all the reporting that comes along with all of that. In fact, handling all of that is a major stumbling block on the path to growth for a lot of small and mid-size businesses. There are alternatives to doing it yourself and no, for all the accountants listening, and I’m not talking about asking your CPA to handle it, don’t worry. The whole other way we’re going to talk about it is the PEO I’D here to talk about the PEO at his potential is Kristen Appleman. She’s a senior vice president and general manager of a DP Total Source. Kristen, thanks for joining us.
Kristen Appleman (00:39):
Welcome. Thank you for having me.
Dan Hood (00:42):
Excellent. Alright, well let’s start. I’ve said PEO just casually, I’m just throwing it out. I know acronyms for what exactly is A PEO.
Kristen Appleman (00:50):
Yes. And so PEO, it stands for Professional Employer Organization and many times the next question I get is, okay, those are three words. What does that actually mean? Because that doesn’t necessarily tell you in those three words. So the best way I describe A PEO is you think about being a traditional employer and you’re having to do all those things yourselves as that business owner, that head of hr, and you’re having to plan and manage all of those relationships. However, there’s this alternative solution called the PEOA professional Employer organization, and it allows that business to outsource certain functions of their day-to-day responsibilities through something very uniquely called a co-employment relationship. And that PEO is the one that through this co-employment relationship works with the employer to provide those human resource needs, employee benefits, workers’ compensation, regulatory guidance, all the things that as a business owner, business manager, you have to worry about that keeps you up at night. You have to think about, and really it allows you to do that with scale so that you as that business owner, that CPA, that VP of hr, whomever is tasked with that component day-to-day, can really focus on what matters most to the business without trying to wear all those different hats and do everything else that occurs in the business.
Dan Hood (02:30):
Gotcha. And correct me if this is a bad way to describe it, it sounds a little bit like outsourcing your HR function or major elements of your HR function. Is that in any way fair?
Kristen Appleman (02:41):
It is a very fair statement and you see very different types of HRO or Human Resource Outsourcing models. What makes the PEO unique is the element of the co-employment relationship. So it’s this shared responsibility and key items like payroll, the annual taxes, the benefits of workers’ compensation, that’s the uniqueness differentiated from potentially a traditional HR outsourcing arrangement.
Dan Hood (03:11):
Gotcha. So the employee becomes an employee of the PEO or a partial employee of the PEO?
Kristen Appleman (03:16):
That is absolutely correct. So that employee is going to receive their W2 by the PEO and on behalf of the PEO and the filing of it, in many cases, the benefits that are offered, the healthcare benefits in many cases in A PEO, the workers’ compensation is also provided through the PEO and you see these elements that are very regulated, had lots of compliance associated with it, and that co-employment relationship defines who’s responsible for what. But it really takes a lot of that day-to-day burden off of the employer.
Dan Hood (03:58):
Sure. Now you said that the agreement determines that. How do they vary a lot? Are there lots of different kinds of pos or lots of different types of agreements or some pos that say, well, we’ll do these three things but not that fourth thing? Or how varied are they?
Kristen Appleman (04:10):
Wow, this might surprise you, but there have, as we’ve looked in the PEO industry, and I work very deep within what’s called NPO, national Association of Professional Employer Organizations, we’ve identified that there are anywhere between 400 and 900 PEOs across the country. That might blow your mind. It certainly is mine because you start to think about what defines A PEO, but there’s probably a few hundred that really make up the lion’s share. And that vastly varies from a PEO that only operates in a certain city with a very small service outreach and solution to here at Total Source where we are the largest PEO in the country with over 720,000 work site employees, over 20,000 clients that partner with us. And you do see some differences. So a great example is I mentioned the healthcare benefits. There are some PEOs that due to their size or the scope of what they want to be responsible for may not offer a benefits offering.
That is the PEOs sponsored plan. You also see this differentiated in 401k. So in the PEO relationship, many times the PEOs, you see what’s called a multiple employer plan, and that MEP brings it all together under the PEOs as the sponsor, but the employer becomes the adopting employer and still has choice. But you also see PEOs say, Hey, I’m not going to force you into the map. There may be elements that you want to maintain your own plan, so we’ll provide, you have the ability to have payroll deductions, but you can keep your own plan. Over the last few years you’ve seen what’s called PEPs, just so we need one more acronym,
Dan Hood (06:17):
Never have enough acronyms.
Kristen Appleman (06:19):
And a PEP is very similar to a mep. There’s some technicalities under the IRS and differentiating in erisa, essentially, is it single? Is there some type of locus of control? And so there’s a lot of differentiation. But PEOs are also vary just in terms of the HR solutions that they provide and total sources being super robust and everything from hire to retire where other PEOs may have limited solutions and services. And those are really good things to understand because they may change the type of PEO one is looking for or how that might be the best fit. As well as what is that relationship between how does the PEO see their client or the customer, that business and the partnership that it’s desired. So I’ll give you a great example. I have seen PEOs that say, you are going to make all the hiring firing decisions and there’s not access to something called EPLI, employment practices liability insurance.
And so you are on the hook as that business and all those decisions. I’d say the swing of that is like a total source. We want to help our customers make good decisions. And so we’re providing the EPLI, we want to talk through those terminations and make sure our clients are thinking through all those things that could create risk or liability or litigation. And if our partner, our client is listening to that advice and then still gets into a litigated type situation, we’re providing legal defense benefit. And so that varies in the spectrum and all sorts of flavors of PEO that are out there in terms of what’s the tech versus more paper-based or low tech. And that can depend on what again, is your workforce, what is you as an organization, as a business owner are seeking to achieve? And all those flavors of PEO, because there are a lot, Dan. Definitely a lot of differences.
Dan Hood (08:41):
Gotcha. Excellent. Well, I want to get into a little bit more about how businesses and their advisors can determine what kind of PO is a good fit for ’em. But before we do that, maybe we can talk a little bit more broadly about are there any particular signs for a company that, hey, now’s time for you to start thinking about. You might start thinking about A PEO. Are there particularly milestones in business development or situations that come up that they should start when those happen? They should say, ah, I should probably start looking for A PEO
Kristen Appleman (09:11):
Dan. I would say that I think any small, medium-sized business could benefit by A PEO. But I will, I’ll put that one aside because I do recognize that there are a lot of complexities that a small, medium-sized business owner are dealing with. But, and I think about what is really that milestone or trigger, if you are going into multiple states, the moment you’re going into multiple states, you are contending with the different laws of those different states where the employee is, where insurance plans are sited, what requirements that state has, not only just in terms of taxes, but also potential paid leave requirements on final pay pay transparency, which is one that has come up as a late, that paid family medical leave. Again, another one that’s transpired state requirements around retirement plans. We’re seeing more and more states move to that. So definitely moving into multiple states because you don’t know what you don’t know.
And sometimes as a small business you are desiring and it is a thoughtful move into another state, but sometimes, especially in this very hybrid out there, people moving around and being able to work in a virtual environment, the employee has made the decision to move and surprise now their employer has to figure this out. And that may not be something that’s planned and it can have potential liability and risk for that employer and inadvertently doing the wrong thing and implications also to the employee. So I always say going into multiple states automatically adds complexity. And you also have states that even going into a new city adds complexity. So if you’re in New York, New Jersey, Pennsylvania, California, notably San Francisco, you absolutely see this happen. And that’s a complexity. But the other milestone I would say is when you start to get to certain size in terms of how many employees do you have as a great example, affordable Care Act, and are you an applicable large employer, a LE?
It’s tricky because you might hear somebody say, oh, it’s 50 employees. Well no, it’s actually 50 full-time equivalents. And what is that calculation? What goes into it? And if that’s not my specialty and I don’t live and breathe these rules every day, I might not think that I required or I think I am, but really I’m not. And how does that all go into it? Not only in the annual reporting, but in things like the affordability calculations, when does an employee become eligible? All those tricky dynamics. So a CA is a great example, but there are also other laws that an employer becomes required to comply with both on a federal and state level. So family medical leave act, every state is different and may have a state leave law, and that differs. And so all of those dynamics, and that becomes a dynamic in terms of size.
And I think about that small business that’s a family run business and they begin to grow, they begin to have great success, and they start hiring outside the family. That is a trigger because how do you manage in this changing environment that you now are having to think about hiring employees that maybe you dunno, maybe you’re meeting for the first time and how to assess the talent and make sure it’s the right talent for your organization. And so I think about those things and go, that can be a trigger just in terms of the type of business you are or you’ve moved into a publicly traded company, your organizations become publicly traded, which usually is in the larger size. But nonetheless, those are things to think about because there’s going to be different optics, different views that have to be assessed. And so I think those are some of the key triggers, Dan, that I would share that I typically say, Hey, you absolutely want to consider A PEO in addition to this isn’t my day-to-day job as a business owner. This isn’t my
Dan Hood (13:43):
Right. Obviously the first trigger is I just don’t want to do this. That’s a great trigger. Oh, absolutely. But that’s a trigger for a lot of different things. So that was awesome. I think those are great milestones for people to bear in mind in a good range of them. I want to talk more about what a businesses should be looking for A PEO. You talked about this’s, a number of different kinds of ps, so maybe we get a sense of what kind of things people should be looking for in them, depending on their type of business. But first we’re going to take a quick break. Alright, and we’re back talking with Christian Appleman of a DP about PEOs and what they do and what they can do for your clients, for your business clients. We were talking about milestones and when a business might start to think or start to need to think of, Hey, A PEO might make sense for me, is there a lower threshold, sort of a size threshold at which point if you’ve got two employees, it’s not worth talking to a PEO or is there anything like that, even a rough estimate for that?
Kristen Appleman (14:39):
Sure. I mean it is a fantastic question. It’s one that I commonly get to as those smaller businesses are looking for a PEO offering, and it will also vary by PEO. We talked a few moments ago about the differences PEO to PEO. So some PEOs will say, absolutely, I can take two or three employees. Others may say, no, my minimum requirement is 10. I can also potentially expect to see differences to say, Hey, if I’m three employees, maybe I can do my PEO services, but I will not be able to offer the health insurance or maybe some of those other additional offerings. So it really varies from a size dynamic.
Dan Hood (15:18):
Gotcha. So that beautifully leads me to my next question actually, which is, so obviously what kind of size of company a particular PEO might take would be something you’d need to know fairly early on in order to make sure that your business fits in their sweet spot. What are the sorts of things should businesses be looking at when they start vetting PEOs? What sort of things should they be concerned about?
Kristen Appleman (15:42):
Oh yes, absolutely. And you mentioned one of the first, the element of size and I would be highly surprised that’s not one of the first questions you may get asked when you are calling into A PEO to assess is how many employees are you, where are you located in one industry? Because the industries can also matter in that regard. Specific to the question of not all PEs are the same, what should an organization be looking at? And I look at these things too in terms of as an organization, what is important to you? So looking at A PEO that has that super strong financial retention record compliance, I would highly recommend looking at A PEO that is EAC accredited and is a certified PEO by the IRS. What does that mean likely to be your question. And what it means is those PEOs are being held to a higher standard.
They have insurance policies and surety bonds, but they’ve also specifically for A-C-P-E-O, the IRS has said they’re doing the right things. They are remitting the taxes timely and accurately, which is important because that is a mutual decision and you want to make sure that that foundational requirements being done. I think one of the other questions you want to ask is understanding what is important to you, where are your pain points in your business or things that you would like to be offer you would like to offer to your employees, but maybe you can’t do today because you have to pick where your time is going to be. I also think to look to what’s the role of technology? If you are in an industry or in an environment where you want to be fully self-service, you don’t mind that you actually desire it versus, hey, I want to work with a P that will meet me where I’m at.
And so maybe some of my employees do want to do everything via a self-service, but then others want to be able to call and get support or if there are different that play into it. How does that relate to your decision making? I always say too, talk to other clients that are using the PEO specifically some that are in your business industry because that can also help you understand what might the relationship look like. I do always recommend also choosing A PEO that provides and thinking and asking about their comprehensive support because as you grow, I think that’s usually an organization’s desire as a business is to continue to grow and drive profit. Being able to grow with A PEO that is not going to just fit your needs today, but how are they going to fit your needs in the future? One of the other elements I always say too is how do I pay for what you do?
What’s included, what’s not included? Because some are very inclusive of fees and others it is line items and maybe those solutions aren’t included. How does that play into the decision making in comparison of what do I spend today? What will be my spend in the future in this relationship? I would also be very remiss if I didn’t talk about data security. It has become a very hot topic. You see a lot of states that are privacy laws and requirements. You’ve seen situations of breaches and it’s very tricky. It’s very costly. It’s damaging to a reputation not only for that PEO, but also potentially when that employee’s data is exposed. And so I would ask the question, how does your PEO manage data? What things are put into place? How are you evolving that as the requirements evolve over time? Because I truly do feel that is going to come up more and more in conversations.
Dan Hood (19:56):
Absolutely. Absolutely. That’s great. Well, that is a fantastic long checklist of things, but if you’re handing over this function to somebody, that’s a lot of things you’re going to want to check. So those are all worth looking at. You brought up the question of pay. We talked about it. Is there a standard model? Is it sort of basically a fee per employee and then depending on what services they’re providing, is that the general model for it or does it vary? Yeah,
Kristen Appleman (20:19):
It’s a good one because I usually see that a pe EO will fall into one of two ways. One is a percentage of payroll, and that percentage of payroll covers everything from federal. So social security, Medicare, it covers the state unemployment and as well as if there’s a state disability employee pay tax, employer tax, it includes the elements of administrative fees, includes the workers’ compensation coverage based on that industry, what that employee is doing, their workers’ comp classification. So I see probably like 50% of PEOs in a percentage model, and I see 50% in a peppa per employee per month. A flat rate as you, I think referred to it as. And even within those two variations you may see, what does that actually include? Does it include all these services or am I going to have to pay in a la carte? Is this a buffet or is it a la carte? And what does that mean in terms of the solutions I want, the solutions I intend to use. But also just when you’re looking at the affordability and the cost comparisons, those two approaches
Dan Hood (21:34):
Got excellent. Alright. Let me ask you, let’s assume you’ve, you’ve vetted a whole bunch of PSS and you’ve settled on one that meets your needs. It might be in your industry or it handles the services you need handled and so on. You’re pleased with that. What kind of things do you need to bear in mind as you sign up with them? And one of the things I’m thinking of particularly is are there things that the business or their advisors need to be thinking about that they need to be ready to do to have a good relationship with A PEO?
Kristen Appleman (22:03):
Yeah, I think about this one and there’s the aspect of how do I start off with a really good relationship with my PEO that I’m choosing? I think if you look at it from that lens is understanding really what are the aspects of that. PEO wants you to alert them of how do you use the technology? What’s the relationship When I do have an employee who maybe isn’t performing or has done something, violating a company rule, just hasn’t shown up in days, what’s the level of consultation that you can rely on and how does that partnership look? Because as I mentioned earlier on, there is potential protection that some PEOs have, and so you want to benefit from that. And so I think that’s some of the aspects is asking those questions about what does rate look like in terms of your other client relationships?
As I think about making the implementation experience also positive, getting together your employee data because you’re going to have to set employees up. And sometimes there’s that opportunity as well to make corrections if something’s been missed in an I nine or a W four and new benefit elections. And so being able to have that information because if I was talking to you as a new client into total source, I would want to make this as smooth, as seamless, as efficient. And having that information ready just makes it quicker, it makes it easier, and it takes that burden that you’re to have much quicker off of your plate. And really, I’d say the other component is communicating to your employees, ensuring that, okay, this PEO thing not only was new to the business owner or decision maker, it would be new to the employee to say, well, what do you mean by W2 is going to say X, Y, ZPEO?
What does that mean? Do I work for them? Do I work for you? And so thinking through how to best communicate, because I think there’s a lot of credibility and gold stars is so to say that organization can have, when they tell their employees, I want to invest in you. I care about you. I want you to be able to show up as your best self every day. And to do that, I want to be better as an employer, get you access to the most competitive benefit rates, benefit plans as we grow. And so therefore, I’ve partnered with A PEO, what does that mean? What are the next steps in this relationship? Because that I see can sometimes derail and it goes against the intent of what that business owner is actually trying to accomplish.
Dan Hood (24:59):
Right, right. Awesome. And I think a lot of people are going to be writing down exactly what you just said so that they can tell to their employees when they announce their new relationship with the PEO. This is all fascinating stuff and I think it’s all worth thinking about. People who want to bear in mind, again, a lot of our readers, a lot of our listeners will be advising their clients on this kind of thing. So a lot of great advice for them to bring out to those businesses and a lot of things for those businesses to bear in mind, Kristin NAPman of a DP, thank you so much for joining us.
Kristen Appleman (25:30):
Thanks so much. Thanks for allowing me to join.
Dan Hood (25:33):
Thank you all for listening. This episode of Omni the Air was produced by Accounting Today with audio production by Adlon k, a rate of review us in your favorite podcast platform and see the rest of our content on accounting today.com. Thanks again to our guest and thank you for listening.
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