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The Pros and Cons of Professional Employer Organizations

By October 14, 2021June 26th, 2024No Comments
The Pros and Cons of Professional Employer Organizations - Abstract View of Office Buildings

Working with a PEO, known in full as a Professional Employer Organization, could take your business to the next level. Let’s look at some pros and cons of Professional Employer Organizations.

Successful businesses invest time and focus on delivering friendly customer service and positive customer experience. To achieve these two things, you need to attract and maintain a quality workforce, which is possible when working with a PEO.

Engaging the services of a PEO allows you to focus on the core aspects of your business. You peacefully maintain your focus on delivering quality to your clients, without worrying about back office issues that can pull you away from your core competency.

The quality of your staff is what distinguishes your business from the rest. Partnering with a PEO enables you to afford qualified and experienced staff at costs affordable to your business.

What is a Professional Employer Organization?

A PEO provides an outsourced solution for your back-office needs, including:

  • New Hire and onboarding processes
  • Benefits administration
  • Payroll compensations and employee benefits processing
  • Performance evaluations
  • Training and development courses
  • Drug testing programs
  • Disciplinary and dispute resolution
  • Family and medical leave administration
  • HR compliance with state and federal employment law requirements
  • ACA – compliant health insurance plans at group rates
  • Terminations, outplacement, and COBRA benefits
  • 401(k) retirement plans
  • Safety programs (OSHA compliance)
  • Handling unemployment claims
  • Workers’ compensation insurance

A PEO is very different from a payroll solution provider or a staffing agency.

Payroll companies provide tools and software to ease the payroll process for your company. Your relationship with them is only focused on providing payroll, building your capacity to use it, and solving problems that arise during implementation.

A staffing agency is your head-hunting partner. You tell them your talent needs, and they move out to find the best talent for you to hire.

But a PEO is a long-term partner and a co-employer. Hiring an entire professional staff in HR, payroll, work comp, & risk management for less than 1 full-time employee sounds too good to be true. You still get to control who is hired, retained, or let go. You also get to make significant decisions concerning employment policies, including benefits and holiday pay.

The arrangement you have with your PEO is one of co-employment. Your PEO is legally defined as your ‘employer of record.’ An employer of record is an organization with the legal responsibility of paying employees, including managing employee taxes, benefits, insurance, sponsorship and visa applications and other aspects of human resource management.

In essence, the co-employment arrangement means that there are actually two employers, one is the site employer (the client) who is responsible for hiring, firing, directly managing the employees and work site on a day to day basis, and the other is the administrative employer (the PEO) who is responsible to handle payroll, 401k administration, payroll tax payments, workers’ compensation insurance and claims, and potentially health benefits. The PEO also helps the employer stay compliant with handbooks, safety training, HR procedures (hiring, firing, recruiting, etc) if needed by the client.

A few more details on that:

  • You execute your payroll under the PEOs tax identity number.
  • Because the PEO takes on responsibility as an employer, they also share risks that would have been squarely on you.
  • The PEO is the final custodian of your joint employment policies, and therefore, in situations where opinions differ, they may want a greater say because they are at risk with you (due to the co-employer relationship) and only want to help mitigate the risk for both of you.
  • You have the benefit of accessing your PEO HR tools, such as timekeeping, scheduling, recruitment, and learning management systems.

Is a PEO Right for You?

If you have a small business and you’re without the in-house experience of HR including benefits schemes and payroll expertise, get a PEO. If you require highly specialized talent to grow your business and cannot afford the market rate of hiring such a person, then opt for a PEO. With a PEO, you can offer a competitive salary with all the perks that your staff would get working with big corporations.

Some of the businesses that benefit from PEOs are:

  • Start-ups who want to offer competitive salaries and benefits to their employees.
  • Small businesses in need of part-time staff as a measure to control personnel costs and overheads.
  • Any business that wants to be HR legal compliant without incurring the costs of maintaining an in-house HR person.
  • The small business owner who feels overwhelmed by back-office jargon, legal compliance, and wants to focus more on their core competency.

Ask yourself the following questions to assess whether your business is suitable to work with a PEO:

  • Are you experiencing growth, or are you likely to grow in the near future?
  • Are you able to relinquish the autonomy of being in full control of the HR aspects of your business?
  • Are you ready to consult another before making decisions to terminate employees or amend contracts?
  • Do you want benefits and insurance plans customized to your business?

What are the Cost Implications of Working with a PEO?

PEOs have two main types of cost structures that you can choose from:

  1. Percentage of Employee Payroll (PEP)
  2. Per Employee Per Month (PEM)

Percentage of payroll means you pay a determined percentage of the total payroll amount for each pay period. Under PEM, you pay a flat rate per employee. The model and costs should depend on your employees’ average compensation and the scope of your contract with your PEO.

Factors that affect the fees and prices you attract from your PEO include:

  1. Account setup fees
  2. Staff capacity building and training fees
  3. HR consulting fees
  4. Monthly administrative fees
  5. Health insurance premium contributions
  6. Workers compensation and any other company-sponsored benefit

PEOs have different service offerings. For instance, if you want your PEO to include recruitment, training, and benefits, you will pay more than when you only need a PEO for staff training and benefits management.

Prices may also vary depending on whether you want to offer or contribute to employee benefits and your staff’s size.

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Examples of the different payment methods:

Your company has three employees, and your total gross wages are $8000 per biweekly period. Your costs will be as follows:

Percentage of Employee Payroll (PEP)

  • You’re charged 2% per payroll cycle for the service.

Therefore, the total amount payable to the PEO is $160

Per Employee Per Month (PEM)

  • PEO is charging $ 30 per employee for the biweekly pay cycle

Total amount payable to the PEO is $90

The Pros and Cons of Using a PEO

PEO Pros

Freedom to focus on your core competency areas: You do not need to focus on HR needs. A PEO will shoulder the burden of all your HR depending on the service offering you choose. Your PEO is thoroughly conversant and updated on HR needs. Therefore, you have peace of mind knowing that you’re compliant with all of the HR requirements.

Advice on industry standards and best practice: A PEO will also advise on industry best practices for human resource management. Such advisory services include, among others, salary scales for different talents, training, and capacity building opportunities.

Low staff turnover: You’ll experience low staff turnover because your staff will be compensated competitively, and the PEO will advise on providing a conducive working environment for your staff.

Attract the best talent: You are positioned to attract the best talent in your field with competitive benefits and strong HR policies.

Available legal and HR expertise: Your PEO legal expertise means that you have access to a licensed HR professional, which mitigates employment-related risks. The PEO shoulders part of the HR risks, thus reducing your exposure.

Performance management and evaluation: A PEO will support your company in managing your staff’s performance to meet institutional objectives. Subsequently, the PEO will also be able to undertake a performance evaluation to ensure to help you track staff performance.

PEO Cons

Adjusting to new Partnerships: You may need to adjust to working with a PEO. By using a PEO you’re entering into a partnership, therefore, you’ll be expected to consult and build consensus with your PEO before making HR decisions.

Transition: When you engage PEO services, you and your staff will need to go through a transition period to align with the contractual and practical working arrangements of using a PEO.

Potential for Impersonal Service: Given that PEOs service multiple corporations and handle a lot of staff, depending on your choice of PEO, you may experience impersonal service and inattention to your business. Therefore, while vetting a PEO you get a sense of their value proposition and customer service.

Once you determine that working with a PEO suits your business needs, you should consider a 10-point checklist when selecting the PEO to work with:

  1. Does the PEO have relevant industry accreditation? An Internal Revenue Service (IRS) certification proves that the PEO is in good standing with the financial ability to offer services and an Employer Service Assurance Corporation (ESAC) is an industry accreditation that proves the PEO has the capacity and industry knowledge to operate as a PEO. ESAC accreditation is also evidence that a PEO has fulfilled all the legal requirements for setting up.
  2. Is the PEO agency able to grow with you as your business and HR needs to grow? What services do they offer, and do they cover all you may need in the short and long-term?
  3. What contract structure does the PEO offer? What options do you have? Do they charge per employee or a percentage of your payroll?
  4. What is the PEO cancellation policy? How easy is it to exit the contract? Can you cancel anytime?
  5. Does the PEO team demonstrate capacity and qualifications in local, state, and federal labor laws?
  6. What kind of tools will the PEO avail to your business? Scheduling tools? Time tracking tools? Payroll software?
  7. How will the PEO customize its services to meet your business needs and expectations?
  8. What does the PEO offer? What kind of customer service is being offered? Will you have access to a team of skilled professionals? Is there an account manager attached to your business? Can you get after-hours consultation should you have the need? Live chat? Phone support?
  9. Is the PEO willing to come to the site in case of an emergency?
  10. What are people saying about the PEO? Do they have positive referrals?

If there is an aspect of PEO you do not understand Here are Frequently Asked Questions (FAQs)

Q: What is a PEO?

A: A PEO is an agency to which you can outsource a range of your business human resource needs, including recruitment, compensation, benefits, payroll, and termination. Your business and the PEO works in a co-employment model in which the PEO hires employees for your business and legally becomes the “employer on record.”

Q: What type of businesses hire a PEO?

A: Any type of for-profit and nonprofit entity can hire a PEO. It doesn’t matter the sector of business you’re in; you can still hire a PEO. What matters are your HR needs, and assessing the value-add a PEO will bring to your business.

Q: Do small businesses use PEOs?

A: Yes, typically. Though even big businesses can use a PEO it is usually the small businesses that have the greatest opportunity to benefit from a PEO. Small companies in tech, manufacturing, construction, health and wellness, retailers, mechanics, firms, plumbers, among others, use PEOs.

Q: What is the difference between using a PEO and outsourcing your HR Needs?

A: The PEO works in a co-employment model. With HR, there is no co-employment. Yes, you hire a service that takes care of your HR needs, but you’re still responsible and liable for all the outsourced work. Using a PEO provides greater employment security because your employees will continue to work even after the lapse of the PEO contract.

Q: What is co-employment within the context of PEO?

A: Co-employment, also called employee leasing, an arrangement in which the PEO is the employer on record for tax and is responsible for all HR-related tasks, including administering benefits.

Q: What type of liabilities will the PEO assume on behalf of my company?

A: The PEO company may assume the responsibility to comply with HR-related laws and regulations concerning wages, benefits, insurance and taxes.

Q: Does this mean I have to relinquish control of my business by using a PEO?

A: No. Your relationship with your PEO is a partnership, as far as employee administration is concerned. The PEO will not interfere with how you manage your business and supervise your employees.

Q: Will a PEO offer options of health insurance plans I can choose from, or do they offer just one plan?

A: PEOs will generally give you options from different insurance types, including provider organizations and deduction options. However, others may have a negotiated competitive deal that they offer to their clients. Some PEOs have a pre-qualified plan and require their employees to sign up for it. Whatever the case, you can and should always ask for a justification of the plan identified.