The 3 Pros (and Cons) of a PEO
Payroll people, man. They just can’t get enough acronyms. FLSA, PPP, ERC, ACA, HCM? Now you’re reading an article about a PEO. When does it end?
As boring as they are, it’s important that you understand them as a business owner. Whether you take care of payroll, accounting, and HR in-house, or you’re looking to outsource, understanding industry lingo empowers you to choose what’s best for your business.
At Whirks, we help business owners build a better back-office. Our clients range from restaurant owners to lawyers, home health care providers to contractors. And we know we aren’t experts in any of those fields.
But we want to empower you to understand these industry terms – even if you decide to leave the heavy-lifting up to a payroll provider or outsourced bookkeeper.
What is a PEO?
A Professional Employer Organization (PEO) lifts the responsibility of employees off of a business owner’s back and takes care of things like:
- Payroll processing
- Outsourced HR
- New Hire paperwork
- Medical and health benefits
- Retirement benefits packages
- Workers Comp Insurance
A PEO, however, technically becomes the official employer to your employees. You are essentially leasing your employees to a larger company.
According to SHRM, a PEO is an organization that enters into a joint-employment relationship with an employer by leasing employees to the employer, thereby allowing the PEO to share and manage many employee-related responsibilities and liabilities.
As you can imagine, there are pros and cons to this relationship.
Think about a PEO like Costco or Sam’s Club. For a yearly fee, you can buy thousands of different groceries in bulk. You can also purchase appliances, clothing, auto parts, and more. It’s like a one-stop shop for life.
But have you considered the quality of your products and where they came from? Are they the best ingredients? Can you find your favorite brands?
Additionally, you’re not buying them from a local company or a farmer’s market. And even though that’s usually a couple of dollars more, your money is going back into your community and helping you build connections and relationships.
In the end, you have to figure out what benefits you the most. It may not be economically feasible to go to the farmer’s market every weekend. On the other hand, Costco may seem impractical if buying in bulk is equivalent to a lot of food going to waste.
Depending on your size and industry, a PEO can be a great fit for your business. While we discuss the pros and cons in this article, keep in mind that they may not apply to you and your company.
For example, the owner of a contracting company may choose a PEO because it’s a high-risk industry and the rates are extremely high. He may opt to send his employees to a PEO so he can keep his safety rates down and maintain his contractor licenses.
On the other hand, an advertising agency may avoid a PEO because the value of an internal HR department is indispensable to them. Their company culture is what breeds their creativity and success, so outsourcing pieces may diminish employee trust and relationships.
Without further ado, let’s dive into the pros and cons of a PEO, and if it’s the right fit for you.
The Pros of a PEO
If you’re a busy parent trying to manage basketball and ballet schedules, you want to get your grocery shopping done quickly and painlessly. You’ve got more mouths to feed and limited time.
Shopping at Costco means that you can buy more food for your family while eliminating the need to go grocery shopping every week. Similarly, a PEO allows you to offer more to your employees with less of an administrative burden on you.
Privately held businesses that use PEOs are approximately 50% less likely to fail (permanently cease operations) from one year to the next when compared to similar companies in the overall U.S. population of private businesses.
1. You can offer more to your team.
If you’re a small business owner with under 35 employees, you may not know about federal and state law compliance, when payroll taxes are due, tracking over time, or how to afford health benefits because you can’t find any competitive plans.
However, a larger company with 3,000 employees can get better rates than a smaller business could never get. This gives you the opportunity to offer medical benefits or 401k plans to your team, regardless of your business size.
2. It lifts the administrative burden.
The minute you hire your first employee – things get complicated. Filing new hire paperwork, payroll taxes, and ensuring you’re compliant is confusing for any new (or seasoned) business owner.
A PEO handles all the administrative burdens and shares responsibility for compliance.
3. It helps you focus on leading and managing.
If you choose to go with a PEO, you’ll pay a large lump sum for all of the services, which is based on how many employees you have (per employee pricing).
Now, you no longer have to worry about HR, compliance, taxes, or ACA reporting. Your only job is to lead and manage your team, which will help you grow as a business.
You treat them as your staff, but technically, the back-office administrative and compliance burden is on someone else.
The Cons of a PEO
If you’re single and the nearest Costco is an hour away in the suburbs, why bother? You want to meander through your local farmer’s market, say hi to neighbors, and piece together the perfect Saturday night dinner.
You have more time, you enjoy buying food from friends, and you’re supporting your local community. If building relationships and controlling your culture is imperative for your business, a PEO may not be the best fit.
1. It can affect company culture.
If you hire a PEO, your team’s administrative and HR interactions are going to be with them, not with you. If a paycheck is wrong, or time is miscalculated, your employee is responsible for contacting them and resolving the issue.
Alternatively, if you choose a payroll provider, you would be more responsible for making sure your employees got paid – but you’d also be more in control of the process.
Think about the difference between losing your phone at Costco and leaving your phone in your friend’s local shop. One situation is obviously way less stressful – because you know and trust your friend, not thousands of Costco shoppers.
Your values as a company may not line up with what a PEO values. They also may not understand your industry which can create friction between the two parties.
2. It’s difficult to get out of a PEO.
A PEO covers every back-office need – from payroll to HR, to benefits and 401ks. If you’re not happy with your experience, you’re going to need to find vendors who are going to take care of those administrative tasks.
For example, if your contract renews in May with your PEO, you have to realize that by May, you need to find someone to process your payroll, manage your benefits, find a broker for your 401ks, and even hire an HR manager, depending on the size of your company.
Additionally, you need to gather sensitive employee documents and information, such as tax forms, benefits elections, paystubs, and PTO balances. You’ll also need to be prepared to fully understand payroll and HR compliance, such as COBRA and Worker’s Comp.
3. The quality of your HR department can suffer.
As the leader and owner of your business, you’re responsible for repairing any cracks in your company culture – no outsourced or in-house HR can do that for you.
Whether your team isn’t performing well or they aren’t adhering to OSHA regulations, an HR manager who can’t be in your physical office isn’t as valuable to you and your employees.
If you want to maintain and monitor employee relationships while your business grows, employing outside HR could disrupt that dynamic.
Shop around before you make your decision.
If you are a small or midsized business, leasing your staff to a PEO and minimizing HR and benefits costs may be the right choice for you and your team. It lifts administrative burdens and empowers you to focus on growing your business.
However, there are other options outside of a PEO that do not require an annual contract renewal and give you more control over your employees, while still lifting administrative burdens off your back, such as payroll providers.
At Whirks, we process payroll, manage benefits, track time, help you hire the right people, and make sure you’re compliant with local and federal law. While we do most of the heavy lifting, you’re more involved with us on a day-to-day basis.
We want you to get back to your passion, lead your team, and get one step better every day. Whether that’s going with a PEO or hiring a payroll provider, research which one makes the most sense for you and your employees.
You can start here by reading about the 4 Main Payroll Provider Types and Which One is Best for You.