The Pros and Cons of PEOs (Professional Employer Organizations)

Many businesses consider using a professional employer organization (PEO) at some point to help manage human resources, payroll, benefits, and more. But the decision is not always forthright. While PEOs offer numerous advantages, they also come with some notable disadvantages.

This article explores the benefits, potential drawbacks, and challenges of PEOs. By examining these factors, readers can assess whether a PEO aligns with their business needs. With the insights provided, readers will be equipped to make an informed decision about PEOs.

What Is a Professional Employer Organization (PEO)?

Professional employer organizations (PEOs) provide outsourced HR services to small and midsize businesses. They handle payroll, benefits, and compliance for their clients. For a fee, PEOs assume the role of co-employer, helping businesses reduce the burden of HR management.

The Benefits of Using a PEO for the Business

Reduced Administration

With a PEO, companies can hand over tasks like payroll processing, benefits management, and compliance management. The PEO has the resources and expertise to handle these complex tasks efficiently and accurately. This frees up time for business owners to focus on strategic plans rather than getting bogged down in paperwork.

Access to Benefits

PEOs leverage their size to access affordable benefit plans. These include health insurance, retirement plans, and compensation coverage. They make these benefits available to employees of their client companies. For small business owners, this allows them to offer competitive benefits that they may not be able to provide on their own.

Compliance Assistance

Employment laws and regulations are always changing. A PEO helps ensure companies comply with federal and state laws regarding employment. They have compliance experts to monitor changes and update policies and procedures accordingly.

For companies without a dedicated HR team, partnering with a PEO can reduce the risk of potential lawsuits and legal penalties due to noncompliance.

Better Talent Recruitment

With a PEO, companies can offer attractive benefits and a supportive work environment. This makes the companies a more appealing place to work, allowing them to recruit top talent. Access to HR resources also means PEO can assist in crafting job descriptions, screening candidates, and handling the interview and onboarding process.

In short, partnering with a PEO provides resources and expertise to help the business thrive. While there are costs involved, the potential benefits to operations, employees, and the bottom line can make it worthwhile. The option is complex, so companies must do research to find a PEO that suits their unique needs.

Potential Drawbacks and Concerns of PEOs

While PEOs can offer many benefits, businesses must also consider some potential drawbacks before partnering with one.

Loss of control

By outsourcing HR functions to a PEO, companies’ hand over some control and decision-making authority. The PEO will manage tasks like payroll, benefits, and compliance according to their policies and procedures. Some companies may find this lack of control and customization challenging.

Cost

PEO services do not come cheap. Fees for their service can be high, often calculated as a 3-6% percentage of a company’s payroll costs. For large companies with many employees, this can amount to hundreds of thousands per year. While PEOs can save money in some areas, like health insurance, the overall costs may still be higher than handling HR internally.

Dependence on the PEO

Once a company begins using a PEO, it becomes dependent on them to handle critical HR functions. If the PEO goes out of business or drops the company as a client, it can be challenging to bring those services back in-house quickly. To minimize risk, companies must choose a reputable PEO with a stable business model.

Compliance responsibility

While PEOs assure compliance with employment laws, the legal liability still falls on the client company. If the PEO makes a mistake or oversight, the company could face penalties and legal issues. That said, it is vital for companies to remain actively involved in compliance, even when using a PEO.

PEOs are not a perfect solution for every business. Companies must weigh the potential benefits of outsourcing against the drawbacks. For many growing companies, partnering with a reputable PEO is worth the trade-off. But companies must assess their own priorities and risk tolerance. With eyes open to the possible downsides, PEOs and companies can build a mutually beneficial relationship.

PEO vs. HR Outsourcing: Which One Is Better?

When it comes to handling HR functions, companies have two main options: PEOs or HR outsourcing. Both provide businesses with human resource solutions, but there are some key differences to consider.

PEOs act as a co-employer

PEOs not only handle HR management but also become the co-employer of a company’s employees. The PEO assumes certain HR tasks, such as payroll, benefits, and compliance. Employees are paid and receive benefits through the PEO, but they still report to their company's management.

For small businesses, partnering with a PEO allows them to offer competitive benefits and HR services they may struggle to provide independently. However, some companies prefer to employ and manage their workforce directly.

HR outsourcing involves choosing services

With HR outsourcing, companies can choose which specific HR functions they want to outsource. The outsourcing provider handles the selected services, but the company remains the sole employer. HR outsourcing gives businesses more flexibility and control but may require more management and oversight. Companies must ensure the different outsourced services are integrated and cohesive.

Cost and customization vary

In the end, whether PEO or HR outsourcing is better depends on a company’s priorities, needs, and budget. PEOs provide an all-in-one solution at a fixed cost. HR outsourcing allows for more customization at a potentially lower cost.

For small or fast-growing businesses, a PEO can be an easy, affordable way to overcome HR challenges. More established companies may prefer the flexibility and control of HR outsourcing. Either way, both options can help businesses simplify HR management so they can focus on growth and success.

Conclusion

PEOs can take on many responsibilities for the company, but they involve relinquishing some control, which can get costly. Take the time to weigh the pros and cons to determine whether the advantages of saving time and gaining access to benefits justify the cost and loss of control. Companies must do their homework to find the PEO that best fits their specific business needs.

With the right partner, a PEO can be a game-changer, allowing companies to focus on their passion for growing the business. But it’s important to go in with eyes open to the trade-offs. Either way, hopefully, this breakdown gives the company the knowledge to make the most informed decision.