Pros and Cons of Using a PEO

Conceptual business illustration with the words professional employer organization

Is your business considering a professional employer organization (PEO)? There’s a lot of buzz about this outsourced human resource solution as it becomes more common for organizations of all sizes and across industries. But is using a PEO truly worthwhile? Like most outsourcing options, it comes with advantages and disadvantages. Here are some of the biggest pros and cons to keep in mind as you weigh the potential merits of a PEO.

PEO Pros 

One of the most compelling features of using a PEO is the simplicity it offers organizations. Outsourcing some or all of the company’s traditional human resources functions brings a big reduction in staff and time required for running payroll, vetting and onboarding new hires, administering benefits, making employee tax filings and other resource-intensive HR activities that don’t directly relate to core work.

Access to comprehensive benefits packages is another significant attraction of PEOs. For small and mid-sized organizations, using a PEO may be the only way to provide employees with the expansive range of group benefits and perks they’d find at a larger entity. Being able to offer top candidates a competitive benefits package allows smaller companies to compete with the Fortune 500 set for the best talent and can increase retention rates for established employees.

The cost savings that a PEO brings can significantly impact those benefits, too. By purchasing in bulk, the PEO is able to buy into benefits programs that would remain financially unfeasible for most small and even some mid-sized organizations to access independently. It’s not just benefits that are often more affordable with a PEO, either. Workers’ compensation insurance rates are sometimes dramatically thanks to the PEO’s purchasing power, and the overall cost of HR can drop as well.

Depending on the industry and the specific client service agreement (CSA), an employer might reduce HR-related legal exposure and regulatory compliance risk by working with a PEO, many of which offer compliance insight and support.

Often, these advantages add up to put fledgling businesses in a stronger position than they’d otherwise be able to attain. According to the National Association of Professional Employer Organizations, “Small businesses that work with a PEO grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business.”

PEO Cons

With all those potential benefits, it seems like using a PEO is a no-brainer. However, that’s not necessarily the case. For example, a business that has managed to negotiate strong benefits at an affordable price may not find cost savings through a PEO. The same is true for organizations that have earned a good rating and found well-priced workers’ compensation insurance. And don’t forget the cost of the PEO itself, which can range from 3% – 15% of gross payroll.

Flexibility is a central concern when organizations partner with a PEO. Even if the cost of benefits is lower, the PEO may not offer the range of insurance plans employees want or need. Be aware that employee resistance can create problems for organizations that transition to a PEO from an internal HR department. Some businesses also perceive a negative impact on company culture when a PEO takes over HR, or even a loss of institutional knowledge.

Before you sign on the dotted line, be sure to analyze your CSA and consider all the ramifications of the provisions it contains. Will you be giving up some control over standards for employee performance and behavior? How much control will you maintain over hiring and firing decisions? What about your internal processes – will they be affected?

While working with a PEO can reduce certain risks, there are others to be aware of. If the PEO is helping with regulatory compliance issues, you need to know that the advice and implementation it’s providing is sound and adequate to protect you from penalties.

A PEO that closes may not give you enough notice to properly prepare for the transition. If it disappears virtually overnight, your organization could be on the hook for wages and payroll taxes already prepaid to the organization.

Similarly, a PEO that goes out of business can leave you without workers’ comp insurance, and if the PEO didn’t report your organization’s payroll and claim history you could struggle to purchase coverage at an affordable price.

The Takeaway

The decision to work with a PEO must be assessed in the context of your organization’s specific needs, goals and culture. If you do decide to go that route, perform due pre-hire diligence by checking ratings and reviews. Also verify that the PEO is accredited by the Employer Services Assurance Corporation and find out whether it has undergone the voluntary certification process through the Certification Institute.

Once you’ve found the right PEO, you can help it help your organization by becoming an active and involved partner. This allows the PEO to understand what your company wants and helps you feel confident that it is fully meeting your needs. Managing your PEO relationship is less demanding than managing an entire HR department, but it’s still a critical step to help your organization thrive.