Pros and Cons of Using a PEO Company

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? Well, 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, worker’s compensation, compliance and employment taxes. This relationship also reduces liability for the clients of PEOs. 

Pros of using a PEO company

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 advantages of using a PEO:

• 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.

Cons 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?

Is a PEO right for your business?

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 also impact your workplace culture. You may also want to consider timing, and whether you will be locked into a term, plans for growth or expansion and costs.

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 charge a flat rate. They charge as a percentage of payroll or as a flat monthly fee per employee. Employers should be sure to ask about what services are included in the bundle to ensure they are getting exactly what they need—no more and no less. A 2019 study found that the average cost of a PEO was $1,395 per employee (NAPEO). 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.

What is a PEO service and why do businesses use PEOs?

There are several reasons why a business would decide to use a PEO. A business may be in an early stage of development, short-staffed, or have gaps in knowledge, like when hiring international candidates, for instance. There is also an assumption that a PEO will increase efficiency as well as HR overhead costs. A PEO service is just one option to help achieve HR efficiency. Many HR and payroll software companies can help create cost-saving efficiencies while also allowing businesses to maintain control of important decisions that impact employees’ well-being and productivity.

While PEOs have some things in common with HR and payroll software companies, there are key differences. 

What’s the difference between a PEO and a payroll provider?

PEOs are co-employers, meaning that they share the employer’s responsibilities. When a company enters into a contract with a PEO, the PEO becomes the employer of record (EoR) for tax purposes and its employees become employees of the PEO. This allows the PEO to pool the employees of many smaller companies together to get better rates on health insurance, workers’ compensation and state unemployment. Many also offer HR services, which allow businesses to completely outsource the HR management function. The PEOs will help to recruit and onboard new employees and administer programs to help increase employee retention rates like performance management and training. In addition, PEOs are typically regulated on the state level.

Payroll providers, on the other hand, are not co-employers. While they process payroll and file taxes on a client’s behalf, the client’s employees do not become the provider’s employees. Many providers offer HCM software, but, unlike PEOs, the HR function remains in-house. The key difference is that these tools help in-house employees become more efficient. Also, most reputable payroll providers are endorsed by the IRS.

What’s the right fit for your business?

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 1.

If you’d like to learn more about finding the right solution for your payroll and HR needs: check out our free Buyer’s Guide to HCM and Payroll Technology. If you have questions on specific challenges impacting your business, our team would love to help. Contact us today.

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