The Pros and Cons of Using a PEO

What is a PEO?

If you’re interested in outsourcing HR services, you should understand what a PEO service is before deciding which direction to go. A PEO is an organization that partners with a business through a co-employment model and acts as the official employer of the company’s employees. The PEO facilitates HR functions for the business, such as processing payroll and employment taxes, administering employee benefits, managing legal risk and compliance, creating policies and procedures, and offering training and development opportunities to employees. When you partner with a PEO, you often retain control over general management functions.

To choose the best PEO service, understand your expectations. When you know which of the available services are the most important to your business, it is easier to narrow down the field of possibilities and select one.

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Pros of using a PEO

Choosing a PEO partnership has many advantages. A PEO can save your business countless hours and stress by taking care of HR processes for you. Small and midsize businesses often benefit the most from partnering with a PEO. “Businesses often turn to a PEO when they face challenges like managing multistate compliance, scaling quickly or navigating complex HR needs,” said Ted Crawford, CEO of PEO at OneDigital. 

It can help you recruit top talent.

Finding highly qualified people to fill crucial roles within a small business can be incredibly difficult. Many small business owners don’t have the time or expertise to reach a vast pool of applicants. In the past, they may have settled for whoever was available, even if they weren’t the best fit for their company.

Many of the best PEO services offer recruitment assistance that can increase dramatically the speed and efficacy of the recruitment process. Services may include writing and placing advertisements, interviewing applicants, and administering background checks. Experienced recruiters are adept at asking the right interview questions to analyze prospective employees in ways the average small business owner can’t. When factoring in the costs associated with finding and training an employee, the service is worth considering for companies that anticipate an increase in the number of employees they will need in the future.

It simplifies payroll.

Running payroll can be one of a PEO’s most attractive service offerings. Many small business owners spend inordinate amounts of time dealing with the various administrative tasks associated with running payroll, such as payment processing, payroll withholding, accounting, filing W-2s and garnishing wages. “We often hear that clients need to concentrate on the core activities of their business, as they’re usually drowning in administrative tasks,” said Solomon Amar, founder and CEO of Allstarsit. A PEO can manage all of that with virtually no hands-on involvement from the business owner, which frees up their time to improve the business in more tangible ways.

It provides access to competitive employee benefits.

Offering employee benefits is something that many small business owners feel is beyond the scope of their financial situation. That may be true if you have negotiated benefits individually with insurance and retirement companies, but partnering with a PEO exponentially increases your ability to offer attractive benefits to their employees. “Employee benefit offerings through PEOs are usually better than small businesses can offer,” Amar said. “That includes employee learning and development as well.”

It also relieves you of the tedious task of administering the benefits to your employees. The PEO will take over providing enrollment, negotiating benefits and handling COBRA events as they occur.

Small businesses must offer comprehensive benefits packages to recruit and keep the best employees. Exceptional employees are difficult to find and cultivate. Providing incentives to remain with the business builds loyalty and improves the caliber of employees to choose from during the recruitment process.

It administers workers’ compensation.

Workers’ compensation claims can be time-consuming and costly. In addition to providing coverage, a PEO will direct the administrative tasks that occur if a claim is made. Claims include facilitating the company’s compliance with federal laws, associated paperwork, audits and certifications.

It helps you maintain legal compliance.

HR can be a nightmare for small business owners because of the complexity of various state and federal employment laws. Failing to keep up with the ever-changing tide of requirements can be costly, but a PEO has an entire staff dedicated to legal compliance. That can be invaluable for small businesses with employees in various states, which is common in today’s world of telecommuting.

Wage equity and paid sick leave laws are other potential hotspots for small business owners. They can be difficult enough for companies hiring locally, but the complexity of managing a remote team may make it nearly impossible for a small company to remain current and in compliance without outside assistance.

It can offer legal assistance.

One of the most overlooked perks of working with a PEO is the assistance you can receive in the event of a lawsuit. Many PEOs share the liability associated with specific employment-related lawsuits, such as wrongful termination. They also have teams of experts to help you remain compliant with state and federal laws related to discrimination and harassment. It’s not a replacement for legal counsel or various forms of general liability insurance or professional liability insurance, but it’s an essential tool in preventing issues that could lead to costly litigation.

Cons of using a PEO

Although PEOs offer many benefits, they aren’t always the right HR solution for everyone. There are a few potential disadvantages of using a PEO that can make an employer better suited to hiring an internal HR professional or partnering with a top HR outsourcing company.

You give up some control over payroll and benefits.

PEOs can make payroll and benefits administration easier, but you relinquish some control over those functions, resulting in possible adverse effects. If an employee has an issue with payroll or a workers’ compensation claim, for example, it is not something you can solve internally with a PEO. Resolving issues may become more difficult when your HR department is no longer managing payroll and benefits.

You may also be limited as to which employee benefits you can choose from. That may seem counterintuitive, since PEOs often provide small businesses with better benefits than they may otherwise have access to. Still, you are able to choose only from the benefits they offer instead of shopping around.

You may face employee resistance and delayed claims.

In a similar vein to the payroll issues, taking the control away from your HR department may cause delays with claims. You may also meet resistance from employees who are reluctant to share personal information with a third-party company, which can lower the security of your employees’ paperwork.

You lose some control over hiring decisions.

A PEO can help with recruiting new employees, but it can also be more difficult for you to control essential staffing processes within the company and manage new employees. Using a PEO may also result in the loss of knowledge within the company and make it more difficult for normal processes to take place as employees begin to rely more heavily on the PEO to keep the company functioning.

You may see an impact on company culture.

Another potential disadvantage to using a PEO is its possible impact on your company culture. A PEO representative won’t know the ins and outs of your company culture the same way an internal HR manager would, which can cause your company culture to diminish. When company culture changes, employees can become less engaged or satisfied, reducing overall productivity.

Casey Conway contributed to the reporting and writing in this article.