The initial appeal of the PEO model is often savings on workers compensation and group health insurance premiums. That is a real, tangible benefit of this relationship, obtained by putting your company in a larger group for insurance purposes.

But another benefit that is just as real, but not as readily evident, is the protection of the business from employee lawsuits. To illustrate this, a quick story:

A few years ago I had a client that was benefiting in many ways from the PEO relationship. But the owner hired a "business coach," and one of the ways the coach proved his worth was to find cost savings by eliminating the PEO.

After a couple years or so, the owner called me in a panic because he had found himself on the radar of a local plaintiff's attorney. Once this attorney had filed suit, and won a settlement, on behalf of one ex-employee, news traveled fast. Soon the attorney was filing suits for other ex-employees, all of which involved claims for unpaid overtime under the Fair Labor Standards Act (FLSA). The claims for unpaid wages paled in comparison to the attorneys fees, though, and total exposure was rapidly approaching 6 figures.

If he had stayed in the PEO relationship, several things would have worked to limit, and most likely eliminate, this exposure:

1. ADR: Each employee would have signed an alternative dispute resolution policy (ADR), which would have mandated that the employee use mediation to resolve any disputes, and then arbitration if the claim was not able to be resolved in mediation. That would have greatly reduced the attorneys fees involved, and made him a less-lucrative target for the plaintiff's attorney.

2. Time & Attendance Tracking: The client would have been using the PEO's time-tracking system, which would have documented the time worked by each employee via a time clock, giving the necessary documentation to support his defense to the overtime claims.

3. HR Assistance: The client would have had access to the ongoing HR support that had helped him in multiple other occasions involving employee issues. This could have entailed advice about how to ensure employees were not working off-the-clock, policies regarding clock in/out procedures, etc.

In addition to the financial impact of the claims, they cost the owner untold hours of his time.

The avoidance of such claims represents a significant advantage of the PEO relationship, but one that is often overlooked in the initial analysis. In the case above, the savings from mitigating these claims would have dwarfed any possible savings in workers comp or group health.

Of course, that is predicated on using a PEO that provides HR assistance, including employee handbooks and policies. Many PEOs provide mainly payroll processing and workers comp coverage, limiting the advantages of the PEO model in protecting the business. Help in finding the right PEO options out of the more than 700 currently in the market can be found at www.peocounsel.com.
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