Ross Mayfield has a great post that introduces the notion of a professional employer organization (PEO) like Administaff, and I wanted to add some caveats based on my experiences with small organizations.
Companies like Administaff provide a product that encompasses a number of things, one of the most beneficial things being that one can get lower rates for benefits (especially healthcare insurance) because Administaff essentially gets purchasing power discounts by aggregating employees into a larger pool. The mechanics of using a company like Administaff are such that employees essentially engage in dual-employment arrangements. For the purposes of cash payroll and benefits, the employees are employed by Administaff. For the purposes of stock option compensation, intellectual property and invention, etc. rights, employees have a co-existing, direct relationship with the small company. (As a note, when adding Administaff coverage, sometimes employers need to perfect pre-existing agreements or add additional agreements with employees – as examples, literally firing employees may trigger severance clauses & simply adding people to a form Administaff employment agreement may not cover special terms like performance and milestone bonuses, etc.).
When exploring a company like Administaff, however, I think its also important to look at independent brokers that can get companies a mix of health insurance, dental, STD, 401(k), etc. In the end, Administaff (or another PEO) may make sense, but there are some other levers that I see for considering an independent broker:
- Who coverage is provided by – Companies like Administaff currently only provide health insurance via United Healthcare. Your employee base may have a preference for Blue Cross Blue Shield (perhaps because of coverage by state), and the company’s demographics (and foreseeable demographics for a year) may be such that marginal purchasing power benefits passed on to the small company are not that big.
- Tax and cash flow adjustments – If your company uses something like QuickBooks Payroll Service (where payroll and the accounting system are tightly coupled) and has an able finance person, your company can sometimes be more agile and flexibile in accelerating, decelerating, or changing benefits withholdings (e.g., 401(k) withholdings) across payroll periods. The end result could be substantial and creative tax savings (say $4K-$7K per employee/yr if one considers both 401k and Section 125 plan fringe cases) for both the employee and the company.
- Between bootstrap and having enough cash – Although companies like Administaff have different tiers of plans, beyond simply changing deductibles, etc. using benefits brokers one can literally form fit a plan into the demographics. For example, you may find that only health insurance, 401(k), and cafeteria plan (or whatever) have any meaning for the company. When using a particular PEO, you may be canned into a plan that throws in some extra stuff (e.g., dental, STD) that you don’t want $wise.
On yet the other hand, there are a lot of headaches that people can avoid by using something like an Administaff. When employees depart, for example, administering COBRA and/or continuance benefits come to the top of mind. It is a pain in the neck to manage yourself. Multi-state employees are also a pain, but some of the pain is alleviated when using QuickBooks deluxe payroll service (which I find that people rarely use, but I swear by it – just get it in early in an org and at the very beginning of a tax year).