Benefits and Drawbacks of Using a PEO Company

July 11th, 2023

It’s important to note that the PEO relationship is based on a shared responsibility model. While the PEO handles certain HR functions, the client company retains control over its employees’ daily work, job duties, supervision, and overall business operations. The PEO’s primary focus is on HR administration and compliance, whereas the client company maintains control over strategic decisions and maintaining its unique corporate culture.

What is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) is a firm that provides comprehensive HR solutions to businesses. The PEO essentially becomes the administrative employer, while the client company remains the worksite employer, maintaining control over day-to-day operations and the management of their employees’ job duties.By leveraging the PEO’s expertise and infrastructure, businesses can offload many time-consuming HR tasks and gain access to benefits and services that may otherwise be challenging or costly to obtain on their own.

Pros of using PEO Company

It’s advisable to thoroughly research and evaluate different PEO options to ensure the best fit for your organization. Certainly! Here are some pros of using a PEO company in bullet points:

Access to HR expertise and specialized professionals.
Cost savings through pooled purchasing power for benefits and insurance.
Outsourcing of administrative tasks, such as payroll processing and tax filing.
Assistance with compliance and staying up to date with employment laws and regulations.
Expanded access to employee benefits, including health insurance.
Potential for improved employee recruitment and retention with comprehensive benefits.
Ability to focus on core business functions and strategic growth.

The company should carefully assess the potential long-term benefits of partnering with a PEO. While a PEO may initially provide cost-effective benefits, it is crucial to consider that their primary goal is to build a sizable employee pool for economies of scale. As a result, there might be a tendency for the PEO to onboard new clients, potentially disregarding their risk profiles. This can lead to escalated rates and higher costs in the long run.

Cons of using PEO Company

Careful consideration and assessment are necessary before deciding to engage a PEO, weighing the pros and cons against the organization’s specific needs and priorities. Certainly! Here are some cons of using PEO companies in bullet points:

Loss of control over certain HR functions and decision-making.
Dependency on the PEO for critical HR services, with associated risks if the PEO encounters financial difficulties or fails to meet expectations.
Additional communication layer between the business and its employees, requiring effective communication channels to avoid confusion.

Apart from these challenges, certain companies encounter difficulties in defining employer responsibilities between themselves and the PEO. In cases where the PEO makes errors while filing taxes, determining who holds responsibility and who the IRS would penalize becomes a concern. Companies may also question the available recourse options in such situations. Furthermore, the influence of a PEO on employees should be considered. Employee engagement significantly affects outcomes, but the level of control a company retains over employees’ sentiments may be impacted when working with a PEO.

Is PEO a good fit for your company?

Determining whether a PEO is right for your business depends on various factors and considerations. Here are some key points to help you assess whether a PEO is a good fit:

Business Size: PEOs are often most beneficial for small and medium-sized businesses that lack extensive HR resources. If your company has limited HR capabilities and wants to offload administrative burdens, a PEO may be a suitable option.

HR Expertise: Assess your internal HR expertise. If you lack dedicated HR staff or require specialized HR knowledge, partnering with a PEO can provide access to HR professionals who can handle complex HR tasks and provide guidance on compliance issues.

Cost Analysis: Evaluate the potential cost savings and value-add from partnering with a PEO. Consider the expenses associated with HR functions, benefits administration, and compliance. Compare these costs to the fees charged by the PEO, taking into account the quality and range of services offered.

Business Needs and Goals: Consider your specific business needs and long-term goals. Determine whether the PEO’s services align with your requirements and whether their offerings, such as benefits packages and HR support, cater to your employees’ needs.

Control and Flexibility: Assess how much control you are willing to relinquish in certain HR areas. Understand the level of flexibility the PEO provides in tailoring their services to your business. If maintaining complete control over HR decisions and practices is crucial, a PEO may not be the best fit.

Company Culture and Communication: Evaluate how the introduction of a PEO may impact your company culture and employee communication. Consider how employees may perceive the change and whether the communication channels provided by the PEO align with your desired approach.

Research and Due Diligence: Thoroughly research and vet different PEO providers. Assess their reputation, track record, client reviews, and service offerings. Seek recommendations and references from other businesses that have worked with the PEO.

Ultimately, the decision to engage a PEO requires careful evaluation of your business’s specific needs, resources, and long-term goals. Consider the pros and cons, conduct thorough research, and if necessary, consult with HR professionals or business advisors to make an informed decision.

How does a PEO company charge an employer?

Working with PEO and their charges are always permeative to their services.

PEO companies typically charge fees to employers based on one of the following fee structures:

Percentage of Payroll: One common approach is to charge a percentage of the employer’s total payroll. The PEO calculates the fee based on a predetermined percentage (e.g., 2% to 10%) of the total wages paid to the employees covered under the PEO arrangement. This fee structure is often applied monthly or per payroll cycle.
Flat Fees (Per-Employee-Per-Month): Another fee structure involves charging a set fee per employee per month. The PEO assigns a specific cost for each employee covered under the PEO arrangement, regardless of the employee’s salary or wage level.

A 2019 study found that the average cost of a PEO was $1,395 per employee (NAPEO).

In addition to the core fees, there may be additional charges or fees for specific services or circumstances. These could include implementation fees, termination fees, fees for customized services, or fees related to additional HR support, such as recruitment or training.

When considering a PEO, it’s crucial to understand the fee structure, any potential additional charges, and how they align with your budget and business needs. It’s recommended to thoroughly review the terms and conditions of the service agreement and discuss the fee structure with the PEO provider to ensure transparency and clarity regarding the costs involved.

What’s the difference between a PEO and a payroll provider?

A Professional Employer Organization (PEO) and a payroll provider are two distinct types of service providers in the realm of HR management. A PEO offers comprehensive HR services beyond payroll, including benefits administration, compliance support, and HR consulting. PEOs establish a co-employment relationship, sharing employer responsibilities and liabilities with the client. On the other hand, a payroll provider specializes primarily in payroll processing and related tax responsibilities. Their main focus is on ensuring accurate and timely payment of employee wages and handling payroll tax filings. While payroll providers offer limited HR services, PEOs provide a broader range of HR functions and assume a shared employment relationship with their clients.

It’s always tough to make business decision when you pass on partial or full responsibilities and control of your HR and Accounts with new team who will be taking care of your HR, Payroll and Compliance and many other duties. We would be happy to make your life easy when we come on board with your company as Professional Employer Organization(PEO). If you have questions on specific challenges impacting your business, our team would love to help. Contact us today!