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s your business grows, so do the administrative tasks associated with managing employees. Handling human resources needs, such as benefits administration, payroll processing, and labor law compliance, can eat up bandwidth and/or funds that you may not have as a small business owner.
Partnering with a professional employer organization (PEO) can save you the time, money, and resources associated with hiring and running an internal HR department. With their help, you can focus on strategic planning and building your business.
What is a PEO?
A PEO lets you outsource human resources management through a co-employment arrangement. The PEO manages employee-related administration tasks for your business, such as payroll processing, benefits administration, and risk management related to employment and labor laws.
Although the PEO will serve as a co-employer of your employees, you’ll maintain full control of the non-administrative, day-to-day supervision and management of your workers, such as hiring, firing, assigning duties, and promoting.
Additionally, PEOs offer a range of services. Some only offer basic HR services, while others include strategic, end-to-end talent assistance, including sourcing, hiring, onboarding, and employee engagement solutions.
HR management
While PEOs offer various services, the primary functions they perform are related to core HR tasks. These include:
Payroll administration
A PEO can take care of payroll administration for your business. This service includes functions such as calculating employee wages, managing tax withholdings and deductions, and paying employees.
Employee benefits
If you want to offer employee benefits, a PEO can offer your employees access to health insurance, retirement plans, and other benefits that may be more comprehensive and affordable than you can provide on your own. The PEO can also take care of benefits administration, such as enrolling employees and managing claims.
Risk management
Complying with labor and tax laws can be tricky, especially when you’re employing a remote workforce located in different states or countries. A PEO can help mitigate the risks and liabilities associated with managing employees by handling workers’ compensation benefits, safety training, and compliance with all applicable labor and employment laws.
Pros of using a PEO
A PEO can provide your company with several strategic advantages that can save your business money and boost employee recruitment and retention, including:
- Access to better benefits and discounts: Because PEOs act as the employer of record for many companies and employees, they can often offer access to more competitive benefits and group discounts on health insurance, retirement plans, and other benefits. These benefits can help you attract and retain top-quality talent.
- Time and cost savings: Outsourcing your HR functions can save you time and money compared to handling it in-house. PEOs are typically more affordable than hiring your own HR team if your company is small to mid-sized.
- Legal compliance and risk management: Labor and tax laws vary by location. Those differences can be difficult to manage, especially if you employ remote workers. A PEO can ensure you stay compliant with employment laws wherever your employees are located. It can also provide guidance on common liability issues, such as workplace safety.
- Improved HR management: Because PEOs are experts in HR practices, they can help you improve your HR management strategy. From recruiting top talent and improving employee engagement to offering training and development opportunities, PEOs can help with many aspects of employee management. Because of this expertise, businesses that use PEOs have turnover rates that are 10 to 14% lower than businesses that don’t use PEOs.
- Reduced administrative burden: Offloading your HR tasks to a PEO will allow you to focus on more value-generating activities related to your primary business functions.
Cons of using a PEO
Although there are significant benefits to using a PEO, it’s not the best option for all businesses. You should be aware of some drawbacks before deciding if a PEO is right for you.
- Loss of control: Outsourcing primary HR functions will leave you with less control than if you were to handle HR internally. For instance, you may not be able to customize your benefits package or choose the provider you want because many PEOs have a set group of providers they work with.
- Cost: Depending on the size of your company, using a PEO may be more expensive than handling HR yourself. Different PEOs offer different pricing structures. You’ll need to compare the costs of individual PEOs to find the best option for your budget. You should also compare PEO provider costs to the costs of hiring an HR professional or team.
- Limited flexibility: A PEO will have many other clients besides your business, so it may not be able to provide customized solutions for you. Flexibility may not be a concern if you only need basic services, but if you have highly specialized HR needs, it may be a problem. For example, if you currently offer your employees a wide range of benefit options, a PEO may not be able to continue that. Or, if your employees are accustomed to handling some HR functions through self-service options, they may not like having to go through a third-party service instead.
- Potential communication issues: Anytime you work with a third party, there’s a potential for miscommunication. You’re adding an extra layer between your business and your employees, which can become burdensome if issues arise.
Considerations when choosing a PEO
There are several key factors you should consider when deciding if you should partner with a PEO.
Company size and needs
PEOs are generally best suited for small and mid-sized businesses. Once your business grows large enough, it will likely be more cost-effective to hire your own HR staff. The tipping point will depend on many factors, such as how many employees you have, the cost of a PEO, and any unique needs that affect your specific situation.
Reputation and track record
Before you choose a PEO, look into their reputation. Read online reviews, ask your network for their input, and ask for references from current customers.
Service offerings
Consider the types of services you want. If you only want basic HR services, there’s no need to pay more for additional services. However, if you want help with extra services such as talent recruitment and development, compare offerings from different companies.
Cost
There are two standard pricing models among PEOs. The first model is per-employee, and the second is a percentage of payroll. Companies that charge per employee usually charge between $40 and $160 per employee per month, while companies that charge a percentage of payroll usually charge between 3% and 12% of monthly payroll.
Contract terms and termination
Many PEOs have employee minimums and contract requirements. The industry standard for the minimum number of employees is five. Contracts usually last one year, although most PEOs give you the option of canceling services with a 30-day notice. Make sure to read the fine print and get a complete understanding of the terms you’re agreeing to.
Integrations with existing systems
If you already have systems in place that you want to keep using, make sure the PEO offers effective integrations. It can be cumbersome and time-consuming to switch over to new systems. For example, many PEO platforms can integrate with your existing time-tracking software so your employees won’t have to learn a new system.
PEO FAQs
Who is the employer in a PEO?
The PEO is the employer of record, but the company that hires it is the executive and retains full rights to direct the company, make decisions regarding employees, and decide what services it wants the PEO to handle.
How do PEOs make money?
PEOs make money by charging either a percentage of your payroll or a flat fee per employee.
What’s the difference between a PEO and HR outsourcing?
A PEO is a co-employer, so it assumes some of the risks and liabilities associated with having employees. An HR outsourcing company is a third-party provider that handles services for you, but you still assume all risks related to your employees.
Takeaways
Managing HR functions for your employees can be overwhelming, but working with a PEO can make it more manageable. When you’re deciding on whether to use a PEO, consider your HR needs, the size of your business, and the associated costs.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
Novo is a fintech, not a bank. Banking services provided by Middlesex Federal Savings, F.A.: Member FDIC.
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