In today’s HR landscape, it’s becoming more and more common for companies to work with a Professional Employer Organization (PEO). In case you haven’t heard of PEOs before, they partner with companies to provide comprehensive HR outsourcing. This includes managing human resources, employee benefits, payroll and regulatory compliance.

A PEO works through what’s known as a “co-employment arrangement,” meaning that the PEO contractually shares certain employee responsibilities with the company. It’s also common for multiple PEO clients to be pooled together under a single Federal Employer Identification Number (FEIN). That way, they receive similar benefits, and leverage volume as a large employer.

But PEOs still need to understand the state unemployment insurance systems that their clients operate in, so they can service them best. Here’s why.

Managing UI Claims

One major concern for PEOs, and their clients, is how each entity's unemployment insurance (UI) is affected and managed. At the end of the day, it varies by states. Some states allow for pooling of all clients under a single UI Account Number. Others require individual clients to report their unemployment under their own UI Account Number. Still other allow PEOs to move entities around in multiple pools to get the most advantageous UI tax rates.

Why Partner with a PEO?

With so many rules, laws and regulations concerning unemployment insurance, it’s critical to understand why employers would enter a partnership with a PEO. This is especially true with how states vary so greatly in how UI costs are handled in a PEO relationship. The answer is fairly simple. In states where pooling is allowed, there are advantages to having a large entity to migrate fluctuations in payroll or UI costs for each smaller client.

But what about states where pooling isn’t allowed? Often, it boils down to other factors that determine the relationships. This could be savings in health benefits, worker’s compensation, payroll, or other costs. But as far as UI is concerned, the PEO usually brings a great deal of experience in managing UI claims and costs. This allows clients to achieve a better UI tax rate, thereby lowering costs. For PEOs to be able to keep the UI costs of their clients down, there are several best practices that should be a part of their UI cost management program, which we’ll discuss further.

Why PEOs need a Strong Understanding & Best Practices

As we discussed earlier, effective UI claims management ca lead to a competitive advantage for them over other PEOs. Conversely, it can result in a competitive disadvantage if they don’t do a good job in this area. Another key component to controlling UI costs is having a strong understanding of how unemployment works in states that their clients are based. Without this knowledge, they’re simply at the mercy of the system. This makes PEOs unlikely to be effective at managing these costs.

So, how does one elevate the level of UI knowledge in their state? Here are several ways:

• Talk to an expert. There are consultants throughout the industry with knowledge of how UI works in multiple states. They’re great resources to tap into and learn from.
• Attend training. Many said consultants schedule regular web or onsite training sessions about different UI-related topics. Check around the web for ones in your area.
• Government education. Outside of private training, some states offer basic UI training, courses, and educational resources for employers. Check with your local and state offices to see what they offer.
• Practical experience. There’s often no better teacher than trial and error. Each protest you make, win or lose, will provide you with some practical insight moving forward. So don’t be afraid to protest, and think about what you’ve earned after each one is resolved.

Partnering with a PEO can be a great way for employers to contain UI costs. But it’s just as important that when working with a PEO, you know they have a strong understanding of the state UI system where you’re doing business.