Evaluating the Pros and Cons of Partnering with a Professional Employer Organization (PEO)

Evaluating the Pros and Cons of Partnering with a Professional Employer Organization (PEO)

December 27, 2023

Before deciding whether to partner with a Professional Employer Organization (PEO) to handle critical human resources tasks, it is wise for companies to carefully examine the potential professional employer organization's pros and cons. Taking time to learn what are the pros and cons of a peo could either assist or hinder your business goals allow you to make an informed decision aligned with strategic needs.

There are compelling reasons why rapidly growing startups and mid-sized firms commonly consider PEOs. Effectively outsourcing key HR functions like payroll, compliance, benefits management and more to an external specialized service provider can greatly simplify these complex administrative burdens. This frees up internal resources to concentrate on core business objectives.  It is important to know the professional employer organization’s pros and cons before making a decision.

Pros of Using a PEO

Engaging a professional employer organization (PEO) can provide numerous benefits for a company. A PEO serves as a co-employer, managing key HR functions and employment-related compliance on a company’s behalf. Using a PEO leverages economies of scale, allowing access to benefits, technology, and expertise that may be cost-prohibitive for smaller enterprises.

Is a PEO worth it?
Is a PEO worth it?
  • Can save money through economies of scale: A major advantage of partnering with a PEO is cost savings. By aggregating employees from client companies, PEOs can negotiate better rates and prices on things like health insurance, retirement plans, and other employee benefits. These economies of scale get passed down as savings for the client company. PEOs may also have proprietary HR platforms and technology that would be expensive for an individual company to invest in.
  • Reduces HR administrative burdens: By delegating payroll, benefits, compliance, recruiting, and other HR tasks to the PEO, companies free up significant time and resources. This allows leadership to focus on core business objectives rather than administrative burdens. The PEO handles the cumbersome paperwork, filings, and recordkeeping required to manage HR compliance.
  • Provides access to benefits and HR expertise: Through a PEO, even small companies can offer robust benefits packages typically only feasible for larger corporations. This improves the employee experience and serves as an attractive recruiting tool. Further, the layers of HR specialists at the PEO provide guidance and insights not viable for a single small or mid-sized HR manager to match.
  • Simplifies payroll, taxes, and compliance: Payroll management brings serious risks of tax penalties, fines, and legal liability if errors are made. PEOs assume these burdens for client companies, leveraging teams specializing in payroll and compliance across states and jurisdictions. The PEO also takes on liability for compliance failures.
  • Manages workers’ compensation program: A PEO consolidates workers’ compensation policies across client companies, allowing for the superior leverage, pricing, and risk management capabilities unavailable to individual businesses. This provides financial protection for employers with a simpler, more cost-effective program.
  • Improves employee experience and retention: With access to big-company benefits and a reliable, smooth HR infrastructure, employees enjoy a much-improved experience. This aids retention, keeping institutional knowledge and talent within the company. It also provides a level of reassurance to employees that expert support and resources are available if workplace issues emerge.
  • Helps attract and recruit talent: Through their HR expertise and technological capabilities, PEOs can enhance talent acquisition for clients. Recruiting and onboarding processes can be elevated and streamlined. Competitive benefit packages give an edge in attracting skilled applicants. This expands the talent pool to give clients optimal hiring choices.
  • Lower HR costs and overheads: The economies of scale and shared resources in a PEO arrangement directly reduce a company’s HR expenses. There is no need for expenditures on HR personnel, technology, systems, or other infrastructure with the PEO managing these operational aspects. This frees up budgets for other investments.
  • Employee benefits management: The guidance and resources of PEO benefit specialists allow companies to offer more choice and variety to meet diverse employee needs and attract top talent while maintaining compliance. Customization and flexibility in benefit plans can improve recruitment, satisfaction, and retention.
  • Assistance with compliance: Staying legally compliant with HR laws and regulations brings substantial administrative burdens. PEOs comprehensively handle filings, paperwork, policies, eligibility checks, and other compliance processes to prevent penalties or lawsuits while allowing clients to focus on core operations.
  • Bring peace of mind: The multitude of risk exposures for noncompliance with employment, payroll, safety, healthcare, retirement plan, discrimination, leave management, and other regulations can weigh heavily on business leaders. Engaging an established, reputable PEO to handle these complex compliance matters brings significant peace of mind.

Key Considerations When Deciding on a PEO

When evaluating whether to engage a PEO, there are several important factors for companies to analyze for choosing the right PEO:

Pros and cons of using a PEO
Pros and cons of using a PEO
  • Current size and stage of your company: The services and support required from a PEO depend heavily on the size and phase of a company. Early-stage startups may benefit most from tactical HR guidance and basic payroll/compliance needs whereas a more mature small business may require comprehensive benefits, technology infrastructure, and specialty HR expertise.
  • Compliance needs and risks: Every company faces HR compliance mandates but the specifics differ across industries, company size, and other variables. Assessing your firm’s headcount, locations, and key compliance exposures allows properly weighing the risk mitigation value a PEO can provide.
  • Cost analysis of PEO services: While cost savings are a prime advantage of PEOs, a thorough analysis should still be conducted on the pricing model, fees, and expected financial impact for your organization when compared to current HR costs. What level of services, support, and capabilities justify the investment?
  • Reporting and transparency: Ongoing communication and reporting around HR metrics, compliance, incidents, risks, and employee data is crucial even when working with a PEO. Ensure prospective PEOs allow adequate transparency and access to information to make leadership decisions.
  • Communication and account management: Clearly defined channels for interacting with HR specialists and key contacts for assistance, guidance or raising issues is imperative for a smooth PEO engagement. Account management models vary so assess communication protocols.
  • Company reputation and stability: Leadership places immense trust in a PEO as a co-employer so conducting due diligence on factors like industry standing, client reviews, leadership tenure, litigation history, and financials is wise before entering a long-term partnership.

PEO services can provide valuable HR support and benefits for companies through economies of scale, compliance assistance, technology infrastructure, and other capabilities. However, consider business needs when evaluating PEOs to ensure the partnership aligns strategically.

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