Professional employer organizations (PEOs) provide businesses with comprehensive HR solutions. Human resources, benefits, payroll, regulatory compliance, and tax administration are just a few examples of the services that PEOs offer to grow organizations. According to a report from the National Association of Professional Employer Organizations (NAPEO), small businesses that use PEOs grow 7 to 9 percent faster than those that do not partner with a professional employer organization. When considering whether to hire a PEO, it is important to weigh the pros and cons.
Pros of Partnering with a PEO
There are several key benefits to hiring a PEO. It is not uncommon for businesses to want to make certain changes to their processes as the organization grows.
Partnering with a professional employer organization is a common decision made by companies that want to delegate certain tasks to better focus on core business goals. Here is a look at some of the top advantages of choosing a PEO:
One of the biggest reasons that businesses choose to work with a PEO is for the cost savings. While hiring a professional employer organization may seem counterproductive when trying to save money, the return on investment can be substantial.
According to NAPEO, the expected ROI for PEO clients based on cost savings is 27.2 percent per year. These savings are derived from health savings, HR personnel costs, unemployment insurance, workers’ compensation, and other PEO services like payroll.
When a business partners with a PEO, they enter a co-employment relationship. A co-employment relationship means that the PEO splits all legal responsibilities of the employees. While the business retains control over the worker’s daily duties, the PEO becomes the employer on record, allowing them to file payroll taxes on the business’s behalf.
Businesses that partner with PEOs can enjoy affordable benefits like workers’ compensation insurance. PEOs do all the legwork on behalf of companies, searching and negotiating with carriers to find the best fit and price for the business’s needs.
A PEO will also pay the upfront deposit, meaning the business is only responsible for pay-as-you-go monthly premiums.
Also, PEOs are able to negotiate better rates for health insurance than most businesses are able to do on their own because they pool together a large number of companies under the same policy.
Employee productivity and morale often diminish when forced to complete mundane and repetitive HR administration tasks. With a PEO, these tasks can be delegated to an experienced team of professionals. Taking the burden off employees allows workers to focus on revenue-generating tasks.
Cons of Partnering with a PEO
While there are countless benefits to partnering with a PEO, there are also some downsides to consider. It is important to conduct sufficient research before hiring a PEO to determine if it is the best decision for the business. Some of the most common disadvantages of acquiring a PEO include:
With a PEO partnership, businesses gain access to HR software which acts as a single source of payroll, HR, onboarding, and similar functions. Although this can be a beneficial aspect of hiring a PEO, employees will need to learn new software, which can be time-consuming.
Businesses often want a choice when it comes to group health care insurance. However, some PEOs do not offer many options and may only carry insurance from a couple of carriers. If plan flexibility is a priority, having limited options may be a problem for the business.
Some business owners may be concerned about relinquishing their control over certain aspects of the business. When employees are co-employed by a PEO, a business may need to contact the third party if issues arise, which can be inefficient. In some cases, a relationship with a PEO could hurt company culture.
PEOs can be an affordable and cost-effective option for small businesses. However, as a company grows, the cost of a PEO will often increase too.
PEOs generally charge fees as a percentage of the payroll, as a flat fee per employee or paycheck, or as a flat minimum per pay period. It is important to learn about a PEO’s fees before making a decision.
Lack of Data Access
Businesses that invest in PEO services have little employee access and visibility. This means that HR managers, CFOs, and employees are given little insight into business data, and communication may become nonexistent. Businesses are often forced to contact a third party to get information which can be time-consuming.
Speak with an Experienced PEO Consultant
For the majority of businesses interested in PEO services, the pros outweigh the cons. However, each business is different. It is important to consider the company’s size, budget, and other factors before hiring a professional employer organization or retaining an in-house HR team.
For more pros and cons of a PEO or to speak directly with an experienced PEO consultant, reach out to the knowledgeable PEO consultants at New City Insurance.