Compare Pros vs. Cons of Using a PEO
Partnering with a professional employer organization offers a wide variety of benefits, but it also has a few downsides. You can mitigate many of the cons by thoroughly researching the PEO and the packages it offers before entering into any agreement, but not all of them. Developing a thorough understanding of PEO partnerships helps you weigh the pros and cons to determine what the best solution for your business is.
What Are the Advantages of Hiring a PEO?
PEOs offer a wide range of benefits, which is the reason companies choose this option to begin with. Businesses that partner with a PEO enjoy increased productivity, cost savings, and a variety of protections.
- Attract Top Talent: One of the reasons big companies seem to attract the best employees is the benefits packages they offer those employees. The buying power of a PEO helps even small companies provide benefits such as healthcare, retirement savings plans, and dental insurance, leveling the playing field to help you attract the best of the best.
- Benefits Savings: Smaller companies nearly always pay more for their employees' benefits, as they don't have the buying power of a large company. However, if you join with a PEO, that organization has the negotiating power of hundreds if not thousands of employees. Rates are typically better than even a medium-sized business can get on its own, much less a small company employing fewer than 50 people.
- Government Compliance: Federal and local governments impose a variety of labor laws and other regulations, which differ by location and industry. PEOs have in-depth knowledge of compliance requirements, as well as of the system itself. What's more, any compliance failures fall back on the PEO, not you.
- HR Personnel Savings: PEOs handle nearly all HR-related tasks and services. The result is that you don't need to staff your own in-house HR department. If you decide you want at least one HR person on-site, you can take the time to find the perfect candidate. What's more, that hire's primary focus can be creating and implementing policies and practices that make your organization an amazing place to work, instead of spending the majority of their time on compliance issues and paperwork.
- Risk Protection: Unfortunately, making a mistake with your payroll is both easy and common. Every year, around one-third of all small businesses face fines for payroll errors. With the complexity of the U.S. tax code, this is hardly surprising. Most startups and small business owners are not tax experts. The folks working for your PEO, however, are. They not only know what you need to file, they also file it for you if you choose that level of service.
- Time Savings: PEOs handle the vast majority of the administrative paperwork and tasks associated with your employees. This allows you to focus on those parts of your business that require your time and expertise.
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What Are the Disadvantages of Hiring a PEO?
Despite all of these pros, there are some cons to partnering with a professional employer organization.
- Health Insurance through the PEO: Many small businesses (fewer than 50 employees) take advantage of the Affordable Care Act's SHOP Exchange to provide healthcare insurance and take advantage of tax credits. If you offer your employees benefits through the PEO, however, you lose this ability. Benefits packages through the PEO are not always cheaper than what you find on the SHOP Exchange, so you need to compare the costs and benefits of each option before entering into an agreement with the PEO.
- Loss of Autonomy: When you partner with a PEO, you become co-employers, meaning that the decisions that directly affect your employees must be made jointly with the PEO. This includes any HR-related changes, such as hiring and firing employees, reducing the level of control you have over your business and introducing time constraints, since you must consult with the PEO before implementing an HR-level decision. However, there is a plus here, as well, since the PEO is an expert on employment law. That expertise helps you avoid making an expensive legal error.
- Paying for Unneeded Services: Most PEOs bundle the services they offer into packages. The result is that companies often pay for services they neither want nor need. Look carefully at the services offered, as well as the packages. The ideal PEO offers flexibility in choosing or designing a package that fits your needs.
- Risk Category: PEOs conduct a risk assessment of your company before partnering with you. However, they also perform this type of cost-benefit assessment periodically throughout your partnership. If the professional employer organization determines your company to be a higher risk, they'll change your risk category, resulting in a higher price for their services.
- Terms and Conditions: As with any contract, you must read the fine print before signing any agreement. If you have an attorney, ask him or her to review the contract with you. If you don't, it makes sense to hire one for at least this task. At the very least, talk to the legal team at the PEO. You need to understand everything included in the contract. If there's anything that doesn't make sense, don't sign it.
- You Still Have Paperwork: Your PEO doesn't relieve you of all HR responsibilities. You still need to complete paperwork to send to the PEO and act as a liaison between the PEO and your employees. The level of "busywork" you have depends on the package you choose, as services provided vary.
The Bottom Line
Whether the pros outweigh the cons depends entirely on your unique situation. There is no one-size-fits-all answer as to which is better. Professional employer organizations offer enormous benefits that help small and mid-sized companies compete with the big boys while still remaining compliant with all tax and labor laws. Compare your options carefully, including whether offering health insurance through the PEO is better than what you get through the SHOP Exchange.