Right now, PEOs provide services to around 175,000 small and mid-sized businesses around the country and employ approximately 4 million people. Over the past decade, hiring a professional employer organization has become a popular option for small businesses that need help managing various administrative details for their employees. But although they can help several businesses, PEOs aren’t for everyone. In this article, we’ll cover all the PEO pros and cons as well as everything you need to know about what they are.
Let’s dive in.
What Are PEO Companies and What Do They Do?
A professional employer organization (PEO) is a service that allows small businesses to outsource their human resources. In this joint-employment arrangement, a PEO will perform several different types of employee administration tasks.
This can include:
- Employee benefits
- Compensation and payroll administration
- Workers Compensation
- Employment taxes
PEOs will usually play the role of the employer for the small business’s employees. The client company of the PEO will report wages under the PEO’s federal employer identification number (FEIN). This means that all employee liability shifts to the PEO.
Not all PEOs are the same. Depending on the contract, a select few or even all of the HR functions of the small business can be outsourced.
Pros of PEO
As mentioned earlier, PEOs can significantly help some companies but might not work for everyone. Therefore, it’s essential to do careful research to ensure that it will help your company’s unique frameworks. Let’s take a look at some benefits of PEOs first.
Offer Better Employee Benefits and a Smoother HR Experience
Competing with big corporations for the best talent can be challenging for a smaller to mid-sized business. A big part of this is because you can’t offer the same competitive salaries and benefits as those companies.
It’s not getting any easier, either — the Society for Human Resource Management says that most companies increase their benefits yearly.
However, because PEOs have so many workers under co-employment, they can act as a larger company and provide much better benefits for small business employees. This gives them access to higher-quality as well as affordable options.
Depending on the PEO, they usually offer some combination of the following:
- Healthcare plans
- Worksite benefits
- Life insurance and disability insurance
- Mental health support
- Commuter benefits
- Retirement plans
- Dependant care
Typically, most of these benefits are much less costly for the employees. By taking advantage of a PEOs ability to give Fortune 500-level benefits to your employees, you can stay competitive when looking for top-tier talent. These benefits are also vital to keeping your current employees happy.
Outsourcing your HR tasks to a PEO can also give your employees a better experience. If your company does not have an experienced human resources department, you can take advantage of a PEO’s expert knowledge and experience.
They can answer questions and process benefit claims quickly.
Save Money in Certain Areas
Another benefit of PEOs acting as your “big corporation” partner is that they can usually negotiate better rates with insurance companies and other benefits providers.
According to NAPEO, administrative costs are about $450 lower for every employee in a PEO partnership. This is because PEOs are experienced and can use their existing infrastructure to perform HR tasks much more efficiently than a small HR team.
Maintain Payroll Compliance
No matter where you are located in the country, both federal and state employment laws are complex and are constantly changing. If you aren’t up to date with them, you can incur costly penalties.
The IRS estimates that around 40% of small and medium-sized businesses pay penalties every year. This number will likely increase with fewer remote workers introduced to companies.
Staying compliant is no easy feat. Companies spend up to 35 hours a week on compliance-related work. This can include keeping track of regulatory changes and communicating new stand-alone policies to workers.
A PEO can significantly streamline this process and give your business peace of mind. They typically employ compliance experts and are always on top of new laws. These can include:
- Payroll compliance
- Benefits compliance
- Labor compliance services
- Out-of-state compliance
Helping your business run without having to look over its shoulder for new regulatory laws is a huge benefit that PEOs can give small businesses.
As any small to mid-sized business knows, human resources-related work is incredibly time-consuming. Whether it’s filing paperwork, negotiating with benefits providers, or sifting through new laws, the work never ends.
PEOs free your team up to focus on more important work. This includes tasks in:
- Tracking employee hours and PTO
- Reporting wages
- Paying employees
- Withholding and paying payroll taxes
- Paying vendors and contractors
- Negotiating with providers
- Enrolling employees in benefits
- Processing claims
General employee management:
- Managing leave of absences
- Administering unemployment
- Managing workers’ compensation
- Creating an employee handbook
- Running performance evaluations
- Training managers
- Terminating employees
Risk and Safety:
- Reviewing safety practices
- Training employees about safety
- Providing support for Occupational Safety and Health Administration (OSHA) inspections
Having an experienced partner handle time-consuming tasks is one of the main reasons businesses choose to partner up with PEO companies.
Cons of PEO
PEO companies are not without their cons. Let’s take a look at some of the more common reasons business owners and managers don’t opt for a PEO relationship.
Loss of Internal Control
Most business owners don’t like giving up more control of their business to an outside entity. When partnered with a PEO, employers have to give up the ability to choose vendors that they partner with — usually health and workers comp carriers.
If the PEO does end up choosing a provider that doesn’t fit the business, the employer will be the one that suffers the consequences, even though they had no say in the decision.
Another downside is that the IRS and insurance carriers don’t see your business as a “unique entity.” This means that it won’t establish unemployment and workers’ comp ratings on its own.
Employers will also lose control when it comes to talent management. Most owners will feel like they are more qualified to choose who they hire, train, discipline, and fire because of their proximity to the workers. However, PEOs will typically provide a strict policy when it comes to this to remove them from liability.
Lower Value for Bigger Businesses
As businesses continue to grow to sizes over 100 employees, the cost of maintaining employees begins to go down. However, PEO fees typically stay the same. If your company is growing past its PEO ROI, it might be time to hire internal staff to take on the human resources responsibilities.
Disruptions in Process and Technology
Working with a PEO is a big change for any business. When you start to integrate with their systems, it may require that you change your current technology platforms as well as alter processes that you’ve relied on in the past.
This can be a huge disruption for your employees and might even be a dealbreaker. It could lead to a loss of quality workers if the new technology is outdated or difficult to use.
This is when doing your due diligence for the PEO becomes essential. If the PEO does not evaluate the needs of the company properly, it won’t be able to meet the demands of your business as it grows. It’s important to remember that PEOs are not a one-size-fits-all solution.
Compliance Not Guaranteed
If you choose a trusted PEO to take care of your compliance needs, it can be a huge weight off your shoulders. However, a PEO that isn’t on top of its work might fail to remit or file taxes for your company correctly. This means you could be vulnerable to fines or penalties.
Again, it’s important to find a PEO that you can trust to take care of these issues for you.
Higher Price Tag
Although PEOs are typically marketed as an affordable solution for small business owners, PEOs tend to get more expensive, especially as a business grows. They usually charge in one of these ways:
- Percentage of payroll
- Flat fee per paycheck or employee
- Flat minimum amount per pay period
These fees can range anywhere from 2% to 11% of your payroll, depending on what services the PEO provides your business.
No Access to Information
When you partner with PEO services, there is minimal access and visibility for employees. This can mean important positions like your CFO, HR manager, and other employees can’t gain important insights into company data.
Communication can be minimal to nonexistent between these managers and their employees. Communication would most likely need to go through the PEO, even if it’s just a simple request.
If you’re in this relationship, you might need to contact the PEO first, send the message, then wait for them to fulfill the request. Although PEOs might seem more “hands-off,” they can actually be more complicated and time-consuming.
Frequently Asked Questions
Do you still have questions about PEOs? Below, you’ll find the answers to a few of the most frequently asked questions.
What Is a PEO Insurance Policy?
Another benefit that PEOs can offer is a PEO insurance policy. The PEO can offer co-employees access to health coverage at the same rate large corporations use, which is much more affordable. PEOs can often offer better benefits packages, as well.
What Is the Difference Between a PEO and ASO?
Another similar organization is called an ASO. Although PEOs and ASOs are both HR outsourcing companies, they have some key differences.
An ASO, or administrative services organization, is different from a PEO in that it doesn’t require the small business to sign a co-employment agreement.
Because of this, ASOs do not sponsor benefits plans or pay taxes under their EIN. It will instead simply handle day-to-day HR tasks like running payroll and administrating benefits.
The main difference between the two is the business model. A PEO acts as a legal co-employer. They will entirely oversee any tasks you appoint to them. PEOs offer benefits to the employees as if they employ them – not you. An ASO, on the other hand, is not a co-employer.
What Is the Benefit of a PEO?
A PEO can take several HR administrative tasks off your hands like payroll and benefits administration. Depending on the PEO, they can provide better benefits for your employees and save you a lot of time on time-consuming activities.
What Are the Differences Between the Services Offered By an HRO, ASO, and PEO?
A PEO provides a co-employment relationship, while an ASO does not retain employer status with the employees. An HRO is commonly referred to as an à la carte version that is more focused on specific HR-related tasks based on its specialty.
Is a PEO a Good Idea?
Every business is different. For some, a PEO might not be a great fit, while for others, it could be the perfect match. Click here to see if it’s right for your business.
What Is ASO in HR?
An ASO, or an Administrative Services Organization, provides essential benefits similar to a PEO company but does not act as a co-employer.
PEO Pros and Cons: Is it Right For You?
Now that you’ve read some of the major PEO pros and cons, it’s time to decide if it’s right for your business or not. Other questions that can help you decide include:
Is your business growing in the near future? Do you like having control over your company and employees? Do you want to customize your benefits plans for your business?
If you decide that a PEO is right for your business, you can get great rates from us. Get a quote today!