More and more agents are thinking about working with professional employer organizations and human resources outsourcing companies.
There are many reasons to do so: Partnering with a PEO increases retention of clients; introduces a new revenue stream to the agent (with increased commissions); creates a differentiation from other agencies; positions the agent as a true trusted advisor for their clients; expands the universe of prospects for the agency; and, most importantly, brings a business solution to the true business problems of companies.
In fact, more and more agents are competing for clients leveraging this burgeoning industry relationship.
But how do you protect yourself as an agent? How do you make sure the interests of your clients, in addition to your own vested interests, are protected? For the answers to these questions, we first need to look at some of the history behind these growing industries.
HROs represent a very broad category of businesses, which provide single or multiple functions for client firms. This can range from payroll companies to firms that handle virtually all human resource requirements. HROs, which handle multiple HR functions, can be broken down further to firms which handle those functions on an “administrative services only” basis, and PEOs, which deliver such services by acting as a co-employer to the client firm’s employees and providing payroll under the PEO’s employer ID number.
Co-employment permits PEOs to deliver services more efficiently, as the PEO acts as a single source to aggregate many HR functions. Further, the PEO can aggregate many forms of insurance under master policies, which can also reduce administrative expenses.
PEOs and insurance agents have traditionally been competitors. When a PEO engaged with a client company, the agent would typically lose the workers’ compensation, employment practices liability coverage, health insurance and the 401(k) business. In the late 90s, this traditional competition between insurance agents and PEOs began to change when a small number of PEOs recognized that insurance agents were a cost-efficient marketing channel.
The trend of PEOs contracting with insurance agents has accelerated in the last several years. Commission arrangements and contract terms continue to differ greatly. Agents looking to contract with a PEO should be aware of the fact that most PEOs do not understand the culture of the agency system. As a result, PEOs and insurance agents often fail to communicate, as each party attaches different meanings to contract terms and policy statements.
Points to consider prior to executing a contract and referring clients to a PEO:
1. Is the PEO accredited? There are more than 700 PEOs in the United States. They range from small mom-and-pop offices to large, publicly traded firms. Before referring a client to a PEO, the insurance agent needs to find out if the PEO is financially sound.
There is no rating system of PEOs. The Employer Services Assurance Corp., Little Rock, Ark., however, is an accreditation agency that imposes higher financial, auditing and operating standards than are imposed by any state requirements. ESAC also provides financial guarantee surety bonds to all of the clients of its accredited PEOs. Verification of a PEO’s accreditation can be obtained at the ESAC Web site (www.esacorp.org). There has never been a failure of any ESAC-accredited PEO. There now are 23 accredited PEOs in the United States.
2. Does the PEO provide E&O coverage for an insurance agent? Some PEOs do. It’s an important point to research.
3. Does the insurance agent make the PEO sale or does a representative of the PEO make the sale? If the insurance agent makes the sale, the liability exposure increases greatly.
4. Are commissions vested? What is the definition of the word “vested” in the contract? The commissions are only vested for one year in some contracts. In others, they are vested as long as the client remains with the PEO.
5. Are the commission rates guaranteed? Some contracts contain no assurance that the commission rate will remain for any period of time. Other contracts guarantee the commission rate forever. Commission rate guarantees should be viewed with the vesting schedules. If the PEO can change the commission rate at will, the vesting schedule is of little value. Conversely, if the commission is not vested, even if the PEO cannot change the commission rate, it does not have to pay the commission after a period of time and the guarantee is of little value.
6. Is the payment of commissions by the PEO contingent upon anything other than the client remaining with the PEO? Some contracts require the insurance agent to maintain a production level to continue to receive commissions. Others contain a non-compete provision, which penalizes the agent if an account is moved to a competing PEO by the agent.
7. Does the PEO work only with insurance agents or does it have a sales force which calls on prospects directly? If the PEO has its own sales force, the insurance agent needs to know whether the PEO will permit its sales force to call upon the insurance agent’s clients without the agent’s permission and whether commissions will be paid to the agent on those direct sales.
8. What is the broker of record policy? Some PEOs do not recognize BORs after the sale has been made. Some recognize BORs on in-force clients. An appropriate concern is that PEOs could use the BOR to eliminate commissions. Agents should look for contract provisions, which do not recognize BORs on in-force clients.
9. What does the PEO do if a client the agent had placed with a PEO refers another client to the PEO? Does the PEO provide commissions to the insurance agent on the referred account? PEOs vary widely on this issue.
10. Does the PEO offer a guarantee that it will not sponsor any competing insurance covering the account referred by the insurance agent?
11. Does the PEO have a written policy, which governs what happens when 2 insurance agents are soliciting the same account for the PEO? Does the PEO simply recognize the first agent or does it use a broker of record policy?
12. Does the PEO have a consistent commitment to working with insurance agents? How long has it contracted with insurance agents? What insurance agent references does it have? If this is something new, it is likely to change very quickly.
13. Are the PEO’s management and ownership subject to change? Management change is likely to lead to a change in commitment to the insurance agency channel.
When it comes to working with agencies, all PEOs are not created equal. Some just dabble in it, resulting in inconsistent and ever-changing policies, while others base their entire business plan around this relationship. Partnering with the right PEO brings benefits to the agent that makes the necessary research well worth the effort.