| Professional Employer Organizations (PEOs) have | | | | very low health insurance costs, but then charge |
| various methods of billing their clients. | | | | non-competitive administrative fees, worker's comp |
| This series will help clients understand the differences | | | | rates, even higher state unemployment rates to make |
| between these various methods in order to make | | | | up for it. |
| more informed decisions when shopping and | | | | Two Type of Fully Bundled Billing: With cut-offs, and |
| comparing vendors. | | | | Without cut-offs. |
| Percentage of Payroll - Fully Bundled | | | | "Cut-offs" refers to payroll taxes and the income |
| Fully Bundled Billing is when the PEO bundles every | | | | thresholds they adhere to. For example as of 2010 the |
| individual cost component (administrative fees, payroll | | | | FICA tax in for Social Security is 6.2% of all income up |
| taxes, worker's comp insurance, and the employer's | | | | to $106,800. |
| contribution to benefits) into one percentage, and | | | | With cut-offs: |
| assesses that percentage as a charge on each | | | | The PEO adjusts the employees' billing percentages |
| employee's amount of income. | | | | by the specific tax thresholds they meet throughout |
| This is by far the most confusing and non-transparent | | | | the course of the year. The first payroll of the year |
| methodology of billing in the PEO industry, and it is | | | | should be most expensive (the highest percentage), |
| becoming less and less popular. In most scenarios | | | | and the payrolls towards the end will be cheaper |
| finding the individual cost of any component is not | | | | (lower percentages). |
| openly communicated to clients. Many PEOs will | | | | With cut-offs Signs of danger: |
| present their costs in this manner unless requested to | | | | If a PEO utilizes fully bundled billing with cut-offs, clients |
| do otherwise. | | | | should pay very close attention to each employee's |
| In most cases each employee will have their own | | | | billing percentage on each payroll. Theoretically, the |
| percentage, and this will be dependent on a few | | | | percentages should get lower throughout the course |
| factors: (Note that in some cases a percentage is | | | | of the year in order to represent when employees |
| assessed for the entire employee base, or for a group | | | | break out of certain payroll tax thresholds. For |
| of employees that falls into a specific workers comp | | | | example, in New York the state unemployment tax |
| class code, both of these methodologies, more so the | | | | cuts off after an employee has made $8,500, once an |
| first, are extremely non-transparent and clients should | | | | employee has earned more than this, the percentage |
| request to see other methods of billing.) | | | | should be adjusted. The amount it is adjusted by |
| · How much income they earn | | | | should be equal to the state unemployment tax rate |
| · The Worker's Compensation classification code | | | | the client is being assessed for the specific state. |
| they are in | | | | Unfortunately this is not always the case, often |
| · Which State they work in: (1): Workers Comp | | | | percentages sporadically adjust with no apparent |
| classes vary across states | | | | rhyme or reason. |
| · Which State they work in: (2): State Unemployment | | | | Without cut-offs: |
| Insurance taxes vary across states | | | | The PEO is not going to adjust each employee's |
| · The benefit plan they're utilizing - (HMO, POS, etc.) | | | | percentage throughout the course of the year; instead |
| · The benefit tier they've elected (employee only, | | | | they will average the percentages into one flat |
| family, etc.) | | | | percentage that remains constant for the entire year. |
| · Any supplemental benefits they're using and the | | | | Without cut-offs signs of danger: |
| associated tier (Dental, family plan) | | | | For high income employees, especially those who earn |
| Advantages: If you'd rather keep things simple this is a | | | | more than $106,800 (FICA - Social Security cutoff), |
| good option - companies that do not mind are usually | | | | clients must be very careful that they're not being |
| venture-backed, non-profits, and staffing companies | | | | overcharged with a billing percentage that doesn't |
| that forward internal costs directly to clients. | | | | cutoff, even though the payroll tax burden is very low. |
| Disadvantages: Not breaking out each individual cost | | | | Be extremely careful when income levels for |
| component can be frustrating for a business that | | | | employees go up, and the PEO doesn't lower the |
| demands to know exactly what they're paying for. It | | | | percentages. There have been many cases where |
| can also lead to various reporting issues; especially | | | | clients feel very comfortable with their PEO, only to |
| when reporting labor costs and/or tax burdens to a | | | | find they've been overcharged for years when they |
| board of directors, or for government contractors. | | | | finally open up to consider and compare what is |
| There is also much room to bury extravagant fees, | | | | available in the competitive landscape. |
| many PEOs that use this methodology will purport | | | | |