Dirty Little Secret

James Oliveri has been an employee benefits broker for nearly 30 years, so he knows not every client is with him for the long haul. Still, the day he lost the law firm is seared in his memory. It wasn’t a big client or a tremendous loss of revenue, but the axe fell just weeks after a restaurant group also told him it no longer needed his services.

“It was the small law firm that put me on my heels,” recalls Oliveri, who runs the employee benefits practice for Signature B&B Companies, an Acrisure agency based in Garden City, New York. “If these guys are going to consider leaving, there is something going on.”

There was, in fact, something going on, and it hasn’t stopped. Call it the invasion of the PEOs.

Like many brokers, Oliveri knew about professional employer organizations, whose co-employment arrangements give smaller businesses access to large-group insurance benefits while providing payroll and tax services, human resources support and technology, compliance assistance, and workers compensation and employment practices liability insurance in an increasingly complex regulatory landscape.

And like many brokers, he viewed PEOs as the enemy.

Fielding an aggressive sales force, large PEOs get their tenterhooks into clients through payroll services, then sell them on the idea of cheaper insurance and an all-in-one HR solution. Some brokers can recite a litany of reasons—some true, some not—why clients should stay away from them, but it doesn’t really matter. By the time they find out about the client’s interest in a PEO, it’s usually too late.

“They were a competitor and very much a threat,” Oliveri says. “It took losing a second client to the model for me to say, ‘Wait a second here, I’d better understand what’s happening or I’m vulnerable.’”

Leaning In To PEOs

To combat that vulnerability, Oliveri and a growing number of employee benefits and property/casualty insurance brokers find themselves dancing with the enemy. While offering PEOs is still largely a defensive move to avoid losing clients, for some brokers it has become a strategic imperative. By moving the right employers into PEOs, brokers can expand their book of small and midsize business clients without a lot of the attendant handholding and personnel costs. Sometimes they can carve out part of the insurance package and maintain the relationship until the client outgrows the need for the PEO.

Acrisure and USI are among the large insurance brokerages that actively encourage producers to introduce clients to the PEO concept before payroll companies like ADP, TriNet, PayChex and Insperity come knocking.

“Part of our mission in promoting the PEO space to our agency partners and producers is so we can get ahead of those types of calls,” says Daniel Mannes, practice leader for AcriSource, the division of Acrisure that focuses exclusively on helping its agency partners evaluate PEOs and negotiate contracts for their clients. “Payroll is the Trojan horse into our accounts. We are seeing payroll companies today take over policies from the broker of record. That should scare every broker out there.”

Eric Raymond, the CEO of BrokerQuoter, a platform for insurance brokers to get PEO quotes, says PEOs took an estimated $40 million in commissions out of the pockets of insurance brokers last year. A former benefits broker, Raymond is developing software to ease the frustrating PEO quoting process.

“As these PEOs continue to go direct and bypass or backdoor insurance brokers, brokers are starting to understand they need to show PEOs as an option,” Raymond says. “It’s also an opportunity for P&C brokers, who have not penetrated the benefits of their clients as much as they may have wanted.”

Oliveri’s law firm client moved into its payroll company’s PEO around the time the agency became part of Acrisure in 2014. Stung by the string of losses, Oliveri turned to Mannes for advice.

“If you are not taking the time to really understand this market segment, you are basically a sitting target,” Oliveri says. PEOs now represent about 10% to 15% of his agency’s benefits business.

Many brokers still resist placing clients with a PEO, fearing that it will reduce their compensation and damage relationships cultivated over time. But among large brokers investing in education and resources regarding PEOs, the idea is catching on.

Nicole Albicocco, an account executive with Emerson Reid, the benefits wholesaler for USI, can barely keep up with the requests for PEO quotes pouring into her office. “More often than not, the phone calls I get say, ‘ADP was the incumbent payroll company. They stole my client, and now they are in the PEO,’’’ Albicocco says. “Well, shame on you. You need to talk to your clients and let them know if they are ever approached by a PEO—and all the big PEOs have very aggressive sales forces—please come to me, because I can help you look at various PEOs to help you negotiate and be your consultant in that regard.”

Post-Pandemic PEO Surge?

PEOs have been around for decades, having first gained popularity as a tax dodge so companies could set up rich pension plans for high-paid executives without also offering them to ordinary employees. After Congress closed that loophole in the mid-1980s, so-called “employee leasing” firms found new purpose providing human resources outsourcing and lower-cost benefits and workers comp insurance by pooling employees in large groups while still giving business owners control of day-to-day management.

Reducing fast-rising health insurance costs has always been a key selling point for PEOs, but interest grew after the Affordable Care Act required comprehensive coverage and community rating for small groups, driving up premiums for many businesses. This was especially true in New York, California and Colorado, which defined small groups as organizations with up to 100 workers.

Beyond containing insurance costs for small employers that lack buying power, PEOs can also be a good fit for businesses facing administrative and compliance headaches associated with employees working remotely or in offices based in different states. PEOs can be especially helpful for fast-growing businesses whose HR resources can’t keep up, from life science companies to the emerging cannabis industry.

“For a growing company that is multi-site and multi-state with one person in HR, it’s very hard to stay compliant with all the regulations that are coming out every day,” Albicocco says. “Setting up taxes and payroll for people in different states is a monumental task, and PEOs are really good for things like that.”

Some observers see another surge coming in the aftermath of the COVID-19 pandemic. Companies in PEOs had a far easier time navigating the complexities associated with layoffs and furloughs, remote work and PPP loans and complying with fast-changing regulations on unemployment insurance, COBRA subsidies and paid-leave policies.

“During COVID, a lot of employers found out a lot that they didn’t know and that they needed to know,” Mannes says. “The PEOs can really plug a lot of holes inside a company, and compliance is a big one.”

PEOs may also be appealing to businesses that downsized during the pandemic to replace some functions with technology as they retool and rebuild.

“There is a little more recognition of PEOs’ being not as much the enemy as they could be a strategic partner,” says Anne Burkett, USI’s national practice leader for workforce solutions. “If we have clients that are shrinking with tight budgets and they are considering other options from an HR perspective, that certainly could be a way for us to maintain a client even if we are outsourcing that to the PEO.”

As more millennials move into leadership, Mannes expects technology-based outsourcing to accelerate. “The future is going to be more tech-driven versus relationship driven,” Mannes says, maintaining that brokers play an important role guiding clients through this evolution. “If my broker is endorsing it, I feel better about my decision. They bring security to the equation.”

Growing Market Share

At the end of 2020, just over 15% of businesses with 10 to 99 employees were in PEOs, up from 7.8% in 2008, according to The PEO Industry Footprint 2021, published in May by the National Association of Professional Employer Organizations (NAPEO).

Employment in PEOs has grown much faster than overall U.S. employment. The number of worksite employees in the nation’s 487 PEOs grew by an average annual rate of 7.6% from 2008 to nearly four million in 2020. While the pandemic caused overall employment to sink by 6% in 2020, the PEO workforce was relatively stable, declining just 0.4%, according to NAPEO.

The average employer signing up with a PEO has about 20 employees, but the number varies widely, and larger insurance brokerages tend to feel the heat from PEOs going after larger fish. The typical business AcriSource places in a PEO has 40 to 45 employees, though some are much larger. G&A Partners, a midsize PEO based in Houston, has clients ranging from five to 1,800 employees, with the average at about 35, says John Allen, president and CEO.

While Albicocco’s typical case today is a business with 75 to 100 employees, she’s no longer surprised when asked to provide PEO quotes for companies with 500 employees.

“I am seeing much larger companies come to me, either because they have gotten skinny on the HR infrastructure or their HR people are not savvy enough to know enough about COVID to understand all of this guidance,” she says.

Broker Revenue Generator

While PEOs will never be an insurance broker’s bread and butter, “it’s important to embrace a PEO as another tool in the toolbox,” says Tracy Podzimek, executive vice president of Ahern Insurance Brokerage, an Acrisure agency in San Diego that specializes in providing insurance for small to midsize law firms. “For smaller clients, it really is a good solution.”

After losing a few clients to PEOs, Podzimek now discusses them before each benefits renewal for clients that might be a good fit.

“Having a department completely dedicated to the PEO market has been a game changer for us. Some may not be interested out of the gate, but it is still something we include to be sure they know we are experts in this area,” Podzimek says. “PEOs are only a small subset of our overall business, but they are an important part now that we have subject matter experts that tap us into the right PEO for the right client.”

One reason brokers are reluctant to put clients in PEOs is that they pay lower commissions than health insurance carriers. Podzimek acknowledges that she earns higher commissions when she places business directly with insurance carriers, but she sees PEOs as a growth opportunity.

“Once that business is placed, we never hear a peep from them,” she says. “We check in, they renew with the PEO every year, they are happy. We continue to make revenue, and I don’t have the cost associated with personnel supporting that client. I’d rather have a client on the books earning fewer dollars that could turn into a revenue channel for us rather than going after those big dollars and perhaps losing the client to somebody else in the future.”

Albicocco says many brokers fail to understand that, while they receive less per employee from a PEO than they do placing the business directly with an insurance company, PEO compensation is based on every employee on the payroll, not just those that enroll in the benefits program. And when it’s to the client’s advantage to carve out the benefits, the broker can get a windfall.

“They can get paid for all people in the PEO for workers comp and payroll and HR and also carve out the medical and get paid on both,” Albicocco says. “It’s an incredible revenue stream because the PEOs do everything—from compliance to HR, they have benefits specialists, payroll specialists, some of them even provide legal counsel. You don’t have to assign account managers, so it’s like a pass through for revenue.”

Broker Friendly PEOs

While many PEOs make more money if they can sever clients’ relationships with benefits brokers, a few actively seek them out as partners, protecting their status as broker of record, sharing revenue and paying referral fees.

“There was antipathy between PEOs and insurance brokers because they each perceived the other as trying to go after the same customer with a perceived winner and loser,” says Todd Cohn, who founded the consulting firm Fidelio Business Advisors in September 2019 after a decade at TriNet, the second-largest PEO. “But the most successful PEOs have figured out that brokers are a more trusted advisor for clients than the PEO will ever be.”

While many PEOs describe themselvesas “broker friendly,” Mannes estimates that just 10% really fit the bill.

Every two years, G&A Partners resurrects a marketing campaign called “We Are Not the Enemy.” It targets life/health and property/casualty brokers whose clients represent at least a third of the PEO’s new business each year.

“There is definitely a perception that PEOs are brokers’ enemy, that we steal business, and there is some truth to that in that some PEOs disregard the broker relationship and pursue business no matter what the cost,” says John Allen, G&A’s CEO. “But there are a number of broker-friendly PEOs that understand clients, and prospects have a number of trusted advisors they count on. Rather than fighting against them, we want to work with them.”

G&A is one of the few PEOs where the insurance broker retains the broker-of-record designation and insurance commission, in addition to receiving compensation based on the fees the employer generates for the PEO. Developing and strengthening broker relationships are key performance indictors on which G&A’s 40 sales representatives are evaluated.

“It increases the broker’s income, but it also increases client retention,” Allen says. “They are building a wall around their book of business so other PEOS or other brokers can’t easily steal that business.”

While that’s a costly proposition for G&A, Allen says it’s worth it.

“Brokers have sound working relationships with their clients, who trust their advice,” he says. “We get a number of referrals from brokers that trust us to take care of their clients, so we’ve been able to grow faster than we otherwise would have if we had treated brokers as the enemy.”

Client Service

Whatever the revenue calculus, brokers demonstrate their own value when they provide clients a clear picture of the costs and benefits of using a PEO and can recommend those that have the financial, management and technology wherewithal to serve the client. And if the client outgrows the PEO, wants to carve out some of the insurance pieces, or, as happens on occasion, is dissatisfied, the broker-client relationship will still be intact.

“Internally, we have two paths: we have assistance to help a client come out of a PEO when they are ready, and we want to also recognize that there are reasons why an employer would be better off in a PEO,” USI’s Burkett says. “Having the ability to assist a client in either direction is important to us because we want to be consultative to our clients and to be able to help them in all sorts of scenarios.”

While it’s hard to break through the enmity that has built up over the years between brokers and PEOs, Burkett says theknowledge, experience and education an expert like Albicocco provides raises the comfort level. “Some producers still say, ‘Nope, they are the enemy, and I can’t let a PEO in there,” Burkett says. “But if you ignore it, it’s going to bite you at some point.”

Mannes remembers the day five years ago when he visited one of Acrisure’s agencies to talk about PEOs. He could see the doubtful looks, but only one person was bold enough to say what was on everyone else’s mind: “I specialize in taking companies out of PEOs. I don’t put them in them.”

He asked for a show of hands: how many accounts did you take out of PEOs? The answer was four or five. How many producers lost business to PEOs? At least 20 hands went up.

“Brokers are frustrated with PEOs because they are not all good, and PEOs are taking their business away,” Mannes says. But he contends it doesn’t have to be that way. “We have a lot of brokers that say they specialize in taking companies out of PEOs, and my response to that is: ‘Why?’” he says. “The shift in mentality is happening where we are going to be customer-focused no matter what. Ultimately, that’s what’s going to win the day for us.”

Evaluating PEOs

Operating on different coasts and with different types of clientele, Oliveri and Podzimek both take comfort in the ability of Mannes and Michelle Yeager, the AcriSource sales operations manager, to lay out the best PEO options for their clients. AcriSource receives commissions, which flow to its brokers, from about 60 PEOs, actively places business with about 25, and presents each client to three or four that are a good fit. Once Mannes and the brokers get to recommending the best options, 50% of clients close the deal with the PEO, and in 90% of those cases, the arrangement lasts at least six years.

Today, USI promotes PEOs as a new business offering for its producers across the country. When a USI or Emerson Reid broker wants to help clients evaluate PEO options, Albicocco gets to know the business, obtains quotes, performs a financial analysis comparing the current program to the PEO model with various plan designs, then negotiates contracts and assists with implementation. She’s also working with clients and private equity firms interested in getting into the PEO business, advising them on compliance issues and helping to obtain master health insurance contracts.

“If you are a PEO rep and write 200 to 300 lives in a year, you are a superstar,” Albicocco says. “My department has written thousands of lives. It’s incredible and growing and scaling. I wouldn’t doubt if they have to hire somebody else on my team because it’s becoming unmanageable.

“I was like this dirty little secret, and not everybody knew about me unless you really needed a PEO or somebody brought it up. Now this is the new sexy.”

The Data Drag

Albicocco works with a broader universe of producers, some who want to seriously evaluate PEO options and others who use it as a defensive play. She can tell who is serious by how committed they are to collecting the necessary data.

An accurate assessment requires much more information than a benefits broker will typically know about a client: payroll and tax data, the workers compensation declaration page and codes for employees, up to five years of currently valued loss runs, details about the status of open workers comp and EPLI losses, a dependent-level census for health insurance, plan design summaries, a detailed health insurance invoice as well as state-specific reports.

“We have a universal RFP form and a universal census template, where I try to make it easier to facilitate collecting all the documentation,” she says. “But it’s a laborious task and usually it is the biggest obstacle.”

Raymond, the BrokerQuoter CEO, is on a mission to make that task easier with software he developed over the past two years out of his own frustration trying to evaluate PEOs for clients. “Getting quotes is so, so very difficult,” he says. “Getting multiple quotes and figuring out how to compare and present them is a horrible experience.”

Raymond is convinced that making it easy for brokers to gather employer information for submissions and to compare PEO offerings can help end the feud between PEOs and insurance brokers. His thinking is that if the process were easier—and if PEOs valued brokers’ client relationships and paid fair compensation—brokers would be less resistant. And if brokers were less resistant, PEOs wouldn’t have to use aggressive direct tactics to claw clients away.

“An amicable solution between brokers and PEOs could quadruple the size of the industry,” Raymond writes in an upcoming article for NAPEO. “If we manage that, all our boats will rise on the new tide.”

Despite their growing success helping producers establish successful PEO relationships for their clients, Mannes and Albicocco are clear-eyed about their revenue impact on the large organizations they work for. “On a scale of one to five, I’m probably number nine in importance,” Albicocco deadpans.

Mannes estimates that, of Acrisure’s more than one million commercial clients, about 1,600 use a PEO, amounting to about 50,000 employees.

“It’s very humbling for me to say I don’t move the needle that much inside a $2 billion company,” Mannes says. “In our world, we have just barely scratched the tip of the iceberg.”

Yet Mannes clearly sees PEOs as an important part of Acrisure’s future, which includes using artificial intelligence to pinpoint clients’ risks and technology to help address them. “We see Acrisure now as a distribution company with a primary focus today on insurance products, but that is changing very rapidly, and the mentality is let’s find out what our customers need,” he says. “PEO is one component of something much bigger in the quiver of things that bring value to our agency partners and our customers.”