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June, 2020

The Pros and Cons of PEO Companies

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The Pros and Cons of PEO Companies

When choosing a solution to help manage your payroll and HR processes, you have many moving parts to consider. It’s important to understand the benefits you’ll receive with different solutions to make the right choice for your organization, depending on its size and future goals. Many small and mid-size businesses consider an option called a Professional Employer Organization (PEO). In this article, we’re going to discuss the pros and cons of PEO companies so you better understand what they can provide.

What is a PEO?

A PEO is a third-party payroll and HR outsourcing firm that acts as a co-employer with your company. While you still manage your business’s day-to-day operations, your workers have two employers: you and the PEO. Through contractual sharing of employer responsibilities, the PEO acts as the administrative employer and your organization acts as the work-site employer. This means the PEO provides and manages human resource services like your organization’s payroll processing, benefits, insurance, and workers’ compensation

Why Would a Company Choose a PEO?

There are several reasons why this co-employment relationship might be beneficial for a company, but this is often contingent upon the size of your business. Many small and mid-size business owners consider PEOs because they are over-stressed and under-staffed with managing HR administrative tasks and compliance.

However, as your organization grows, it will make more sense to transition your employee management in-house by using human capital management (HCM) technology. If you’re considering partnering with a PEO, weigh the pros and cons to determine what best fits your needs:

1. Co-Employment

Shared Liability

Pro: Shared Liability

With a PEO, you are leasing your employees and co-employ these workers. This means your company’s employees are incorporated under the PEO’s tax ID. The PEO shares in risk and liability issues, as well as helping manage tasks like workers’ compensation reporting and state unemployment.

Relinquishing Control of Liabilities

Con: Relinquishing Control

It might sound nice that a PEO partner shares risk and helps with important payroll and HR tasks. However, since your employees are co-employed by the PEO, you’re relinquishing some control of your organization. This means you’ll have to contact them if any issues arise, which can be inefficient.

Something else to consider is the impact a PEO relationship could have on your company culture. Think about how your employees might feel knowing they have been “leased” to a PEO. Employee morale and productivity could take a major hit.

2. Employee Benefits

Low Benefit Rates for PEO

Pro: Lower Benefit Rates

Because PEO companies manage multiple small businesses, they have a larger pool of employees and benefits options than if an organization was shopping for health insurance on its own. Therefore, PEOs can negotiate lower group insurance costs and unemployment insurance rates.

Relinquishing Control of Liabilities

Con: Lower Quality of Benefits

While lower benefits rates for your company may seem enticing, you may be giving up the ability to customize a healthcare plan that meets your employees’ needs. Furthermore, PEOs can switch providers at any time, which can lead to fluctuating prices and unsatisfied employees.

3. Payroll and taxes

Outsourced Payroll Processing

Pro: Outsourced Payroll Processing

Some PEOs offer payroll processing services, which can help eliminate manual administrative processes that can prevent HR professionals from being more productive. Just keep in mind that some PEOs only process the payroll. Meaning, you still have to prepare the hours and payroll to send to the PEO for processing.

Compliance Not Guaranteed with PEO

Con: Compliance Not Guaranteed

If a PEO fails to properly remit or file taxes on behalf of your company, this leaves your company vulnerable to fines or penalties for noncompliance. Most workforce management providers offer payroll processing with tax compliance. This means the provider will calculate, file, and pay your taxes as the reporting agent on your behalf. Furthermore, if the provider has a tax compliance guarantee, this means they will pay any fees or fines involved if an error occurs on their end.

4. Operational Costs

The Possibility to Lower Overhead With PEO

Pro: The Possibility to Lower Overhead

Working with a PEO can potentially eliminate the need to hire more staff to handle tasks like payroll processing. This can help lower overhead, but it’s important to get a breakdown of all costs from PEO to ensure the option will truly save you money in the long term.

Higher Price Tag with PEO

Con: Higher Price Tag

Although often marketed as a more affordable option for small business owners, PEOs tend to be a more expensive solution as a business grows. So, how much does a PEO Cost? PEO companies typically charge fees one of three ways:

  1. A percentage of payroll
  2. A flat fee per paycheck or employee
  3. A flat minimum amount per pay period

These fees can range from 2% to 11% of your payroll, depending on what services they are providing.

5. Accessibility

Access to HR Services With PEO

Pro: Access to HR Services

Another appeal of PEOs is they can give businesses access to HR services they may not otherwise afford, like training, onboarding, and recruiting. This can be desirable for smaller companies looking to attract and retain top talent.

No Access to Information with PEO

Con: No Access to Information

With PEO services, there is minimal employee access and visibility. CFOs, HR managers, and employees have little insight into their company data. Likewise, communication between those managers and employees is nonexistent. Instead, all communication and transactions have to go through the PEO, even if it is just a simple request that could easily be handled by your organization.

With this relationship, you must contact the third party, relay the message, and wait for them to fulfill the request. This “hands-off” approach actually makes things more complicated and time-consuming.

To PEO or Not to PEO

If you’re still undecided on whether a PEO is the right fit for your business, consider the following questions:

1. Is your organization experiencing growth or will it in the near future?

2. Do you prefer to have more control over your company and employee information?

3. Do you want the ability to customize your benefits plans to better fit your business?

4. Do you prefer to have more control over your employee lifecycle for better retention?

5. How do you plan to manage your liability and risk?

There is a lot to consider when determining if a PEO is right for your organization. The services you receive from a PEO are different from an HR and payroll provider, so weigh your options carefully with the needs of your company.

How APS Can Help

APS has been providing award-winning payroll and tax compliance services for over 20 years. Our all-in-one payroll and HR platform provides accurate payroll and reporting processes, eliminating manual data entry. Contact us today to learn more about how we can help make payroll and HR easier for you.

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