To lighten the load of HR tasks and liabilities, some companies opt to work with professional employer organizations (PEOs) to provide human resource services, give employees access to health and retirement benefits, and ensure timely tax filing.
Having some of that work taken off of your hands sounds great, right? Although some of those benefits would be helpful, it’s important to investigate all of the information before you sign on the dotted line. As you make your decision about whether a PEO might be right for your business, here are a few things you should keep in mind.
What is a Professional Employer Organization (PEO)?
A PEO is an organization that manages employee-related responsibilities for its clients by serving as an official employer and then leasing employees to the employer. PEO services enable employers to outsource HR duties including payroll, benefits, workers’ compensation, compliance, and employment taxes. This relationship also reduces liability for the clients of PEOs.
Benefits of a PEO
So, what are the benefits of using a PEO? Often, small to medium businesses who choose not to manage HR functions in-house consider using a PEO for a number of reasons. Here are a few PEO advantages:
- Reduces liability and HR workload
- Provides employee benefits at a lower cost
- Manages payroll taxes and unemployment administration
- Allows businesses to focus on strategy and core functions
- Gives businesses access to HR services
However, it is important for the company to consider whether working with a PEO will result in long-term gains. Although a PEO may offer or promise low-cost benefits up front, a PEO aims to create a large pool of employees (across yours and other organizations) for economies of scale and can often feel pressure to add new clients (regardless of their risk), which can result in increased rates and higher long-term costs.
Drawbacks of Using PEO Companies
Some companies opt not to use a PEO because they do not want to relinquish control. Here are some other disadvantages of using a PEO:
- Costs of benefits can fluctuate
- Lower quality of HR services
- Compliance is not guaranteed
- Employees have limited access to HR
- Company data is out-of-house, not immediately accessible
- High expenses of PEO services outweigh value
- Can negatively impact culture, morale, and engagement
- Loss of control over HR processes, including benefits
Businesses often find that they want to remain in control of benefit plans, carriers, and risks. If their employees love their current benefit carrier, but the PEO wants to move to a different one, there isn’t much the company can do. Many organizations also prefer to keep the human resources function in-house, opting to invest in technology tools to increase the efficiency of the team. Business owners must also be careful to ensure the role of building workplace culture does not fall within the responsibility of the PEO, but that can be difficult to manage since the PEO is responsible for HR functions. As the business grows, business owners will inevitably need access to HR data to make the best business decisions.
In addition to these challenges, some companies struggle with the delineation of employer responsibilities between them and the PEO. If the PEO makes a mistake when filing taxes, is the employer responsible? Who would the IRS penalize? What are the employer’s options for recourse? Additionally, how does a PEO affect employees? Employee engagement impacts results. But with a PEO, how much control will you have over your employees’ sentiment?
Why Use a PEO?
There are several reasons why a business would decide to use a PEO for payroll, benefits administration, or other tasks. A business may be in an early stage of development, short-staffed, or have gaps in knowledge, like when hiring international candidates, for instance. According to the National Association of Professional Employer Organizations, PEOs provide services to more than 200,000 small and mid-sized businesses.
There is an assumption that a PEO will increase efficiency as well as HR overhead costs. Any business owner considering a PEO must determine if the temporary convenience of outsourcing HR tasks is worth handing over control of a portion of the business.
Companies who are thinking of using a PEO for HR services must ask:
- Will the PEO make a commitment on the number of hours a week they will provide HR support?
- Would they come on-site for an emergency?
- Will they provide a dedicated contact, or will your employees have to communicate with several different people?
- Does the PEO understand our core values?
- Do they truly have the best interests of your employees at heart?
- Will they be able to make impartial recommendations, knowing that they could be legally liable for their advice?
- Will the PEO also assist with training, career development and performance management?
The answers to the above questions will determine whether outsourcing HR is the best choice for your organization. It is also important to understand that because a PEO functions as an employer, it can impact your workplace culture. You may also want to consider timing plans for growth or expansion, and costs, especially if you’ll be locked into PEO contract terms.
What’s the Cost of a PEO?
One other disadvantage to working with a PEO is often the pricing structure. PEOs frequently bundle services together and offer them as a percentage of payroll or as a flat monthly fee per employee. Employers should ask what services are included in the bundle to ensure they are getting exactly what they need—no more and no less.
According to NetPEO, a flat-fee PEO usually costs between $900 and $1,500 per employee each year. Businesses paying a percentage of the company’s overall payroll should expect to pay 3-10% on average.
Of course, true costs for PEOs will vary according to the requested services, the cost of insurance, an organization’s size, and more.
Without HR data, it is difficult to measure whether the cost of hiring a PEO will save your company in the long run. One of the benefits of managing HR in-house with HCM software is the ability to collect insights from data. Once you can quantify time spent on tasks, labor costs, and recruiting bottlenecks, you will be able to refine processes and save additional costs.
PEO vs Other HR Solutions
A PEO service is just one option to help achieve HR efficiency. You can also opt for in-house HR or outsource services to HR and payroll software companies that can help create cost-saving efficiencies while also allowing businesses to maintain control of important decisions that impact employees’ well-being and productivity.
PEO vs. In-House HR
The comparison between PEOs and in-house HR teams reveals nuanced trade-offs. PEOs provide significant advantages in cost reduction, offering access to enterprise-level benefits and minimizing compliance risks related to payroll taxes, unemployment insurance, and workers’ compensation insurance. However, in-house HR offers unparalleled advantages in direct employee relationship management, immediate accessibility, and the ability to craft HR strategies deeply aligned with company culture.
Scalability becomes a critical consideration in this decision. PEOs excel at providing instant, adaptable HR infrastructure, making them particularly attractive for growing businesses with evolving needs. In-house HR teams, while more resource-intensive, offer greater customization and deeper organizational integration.
PEO vs. HR Outsourcing
When comparing PEOs to other HR solutions, businesses must carefully evaluate their unique needs and organizational structure. Traditional HR outsourcing differs from PEOs primarily in its approach to employee management. While PEOs operate through a co-employment model, becoming a legal employer of record and providing comprehensive services like payroll, benefits, and compliance management, traditional HR outsourcing offers more targeted services with greater client control.
Administrative services organizations (ASOs) and human resources outsourcing (HRO) services present alternative approaches ASOs provide administrative support without the co-employment model, offering payroll processing and basic HR services while allowing businesses to retain full legal liability. In contrast, HROs typically serve larger enterprises with more advanced, strategic HR solutions. Unlike PEOs, both ASOs and HROs do not share legal employment responsibilities, giving companies more direct control over their workforce.
How Paycor Helps
As you weigh the options to make your final decision about a PEO, remember that there are options for reducing the HR workload outside of handing over control to a PEO. If you are looking for ways to automate common HR administrative tasks including payroll, taxes, compliance, and even providing learning management and performance management to your employees, consider HCM software. With the right tools, these tasks don’t have to be a burden – even for a team of one.
Paycor creates HCM software for leaders who want to make a difference. Our HCM platform modernizes every aspect of people management, from the way you recruit, onboard, and develop people to the way you pay and retain them. But what really sets us apart is our focus on business leaders. For 30 years, we’ve been listening to and partnering with leaders, so we know what they need: HR technology that saves time, powerful analytics that provide actionable insights, and personalized support. That’s why more than 30,000 customers trust Paycor to help them solve problems and achieve their goals.
Check out our free Buyer’s Guide to HCM and Payroll Technology to learn more about finding the right solution for your payroll and HR needs.
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