What Are the Pros and Cons of a Professional Employer Organization (PEO)?

When you dreamed about growing your business as an entrepreneur, you probably didn’t imagine that you’d need to become an expert in labor regulations, health care mandates, and safety guidelines, along with HR administration, payroll, benefits, and compliance. The fact is small businesses spend 17 percent of total manpower on non-core business tasks. Most of these tasks revolve around employee management. Understanding the pros and cons of a PEO may be able to take many of these challenges off your hands.

At Human Capital Concepts, we understand the complexities of human resources. That’s why we’re here to explain the advantages of partnering with a PEO and how it can help you grow your business.

What is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) is a third-party company that handles HR tasks and employee management responsibilities for small and medium-sized businesses.  Partnering with a PEO will do more for your business than just freeing up resources to focus on higher-value business activities. PEO clients consistently provide a better employee experience. Businesses that partner with a PEO experienced twice the revenue growth of their non-PEO competitors. PEO clients are also 50 percent less likely to permanently close.

Discover what a PEO can do for your business. Contact Human Capital Concepts at 800.419.4037 or [email protected].

Pros of Partnering with a PEO

Cost Savings

One of the primary benefits of using a PEO is cost savings. By pooling together several businesses, PEOs can leverage economies of scale to negotiate better rates for employee benefits, workers’ compensation insurance, and other HR-related expenses. You join a collective force of businesses, leveraging group buying power. The result can be substantial for businesses using a PEO, saving them time, resources, and money. 

Expertise and Compliance

Navigating the labyrinth of employment laws and regulations can be a daunting task. PEOs employ HR professionals who stay at the forefront of industry trends and legal requirements. The right HR professionals and compliance specialists ensure your business stays compliant and avoids costly mistakes, legal fines, and other potential issues. By partnering with a PEO, businesses can rely on this expertise to navigate through HR challenges, ensuring compliance with relevant laws and regulations.

Time-Saving

Your energy and team resources should be invested in strategic growth, not bogged down in administrative tasks. HR-related tasks such as payroll administration, employee onboarding, benefits administration, and tax reporting can be time-consuming for business owners. By outsourcing these responsibilities to the right PEO partner, entrepreneurs can reclaim valuable time and redirect important team member resources to focus on core business activities and strategic growth.

Access to Comprehensive Benefits

PEOs offer a wide range of employee benefits tailored to the needs of small businesses. These benefits often include health insurance, retirement plans, and other perks that might not be financially feasible for an organization to provide on its own. Access to a robust and competitive benefit package at a lower cost than you might otherwise negotiate can help attract and retain top talent, improving employee satisfaction and retention rates.

Cons to Consider

Limited Customization

PEOs typically offer prepackaged HR services, which include what most organizations need for their business. However, this set of services may need to be augmented to align with your specific goals and company culture. If your business has unique HR requirements, you might find yourself wanting more. Additional services at additional costs are not always an option with every PEO. Make sure your PEO partner has the flexibility to support your organization the way you want.

Integration Challenges

Integrating a PEO into an existing business structure can be challenging, especially if the organization already has established HR systems and processes. It requires time and effort to synchronize the PEO’s services with the company’s existing infrastructure. Missteps in onboarding and integration can lead to disruptions in your operations. Limited flexibility can hinder integration efforts. Make sure to understand the onboarding process before partnering with a PEO. 

Partnering with a Professional Employer Organization

Partnering with a Professional Employer Organization can be a strategic decision for small and medium-sized businesses. There are many pros and cons of a PEO that you need to carefully consider. While you benefit from cost savings, access to HR expertise, and significant time savings, you should be careful to evaluate the limited customization, additional options available to purchase, and the challenges of integration. Ultimately, every company should analyze its specific needs and consider the trade-offs and benefits before deciding if a PEO is the right solution for them.

Pros and Cons of HR Partnerships

When considering teaming up with a third party for your HR needs, you have several options. Each of these options have pros and cons. A PEO versus a payroll broker or HR administrator, such as an HRO or ASO, may look similar on the surface. They are, in fact, very different.

HRO stands for “Human Resources Outsourcing.” As the name suggests, an HRO allows you to outsource some or all of your HR tasks. The HRO will offer a la carte services. The downside of an HRO is that you are still responsible for decisions surrounding the minutiae of your human resources administration. You’ll still need at least one expert on staff who can make these decisions. Another disadvantage is that your company won’t enjoy lower benefits costs when you partner with an HRO.

An ASO is a cross between an HRO and a PEO. ASO stands for “Administrative Services Organization.” Unlike an HRO, an ASO will administer all of your HR tasks. But unlike a PEO, an ASO does not provide workers’ compensation or liability coverage. Also, partnering with an ASO will not help your company save money on benefits coverage.

Partnering with a professional employer organization, or PEO, offers more pros than cons. The advantages of using a PEO range from tax reporting to benefits procurement. The PEO will administer all of your HR needs. A PEO will withhold employees’ taxes and employment tax liabilities. A PEO will also take care of the yearly tax reporting. Your company will benefit from partnering with a PEO to handle many of the aspects associated with having employees.

Higher health insurance costs are a downside of being a small business. Companies that partner with a PEO can leverage the PEO’s size when purchasing health insurance and other group benefits. The PEO will also carry workers’ compensation and liability insurance.

Pros and Cons of PEO Services

Partnering with a PEO provides many benefits for business owners, startup founders, nonprofit executives, and others. For starters, you’ll be able to focus on your core business activities. You strive to be the best in your industry, and growth is exciting. But with growth comes more employees and a larger HR burden. HR compliance, workers’ compensation laws, and employer liability issues are complex and divert resources from your company’s main focus.

A PEO will provide expert support as your HR partner. Human Resources expertise is crucial to the success of your business. Errors from your HR department can potentially cost your company thousands. Hiring the wrong HR personnel can increase your risks of fines, workers’ compensation claims, and lawsuits. A PEO with recruiting expertise can protect your organization from hiring the wrong people.

You’ll enjoy cost savings when you partner with a PEO. A study conducted by noted economists Laurie Bassi and Dan McMurrer of McBassi and Associates on behalf of the National Association of Professional Employer Organizations (NAPEO) found that businesses enjoy a cost savings of 27.2 percent when they partner with a PEO. According to the study, the average cost savings can a PEO is $1,775 per year per employee, which also reinforced the findings of earlier research, again showing notably lower employee turnover, higher rates of both employee and revenue growth, and enhanced employee benefit offerings.

Partnering with a PEO will help you get lower rates for group insurance. Your PEO benefits specialist will leverage the PEO’s larger size, meaning you get better rates for your company. Small businesses that partner with a PEO save up to 40 percent on their health insurance premiums, according to the National Association of Professional Employer Organizations (NAPEO).

You may find the advantages far outweigh the disadvantages of using a PEO. According to the NAPEO, businesses that used a PEO grew 7-9 percent faster. They experienced lower employee turnover rates and were 50 percent less likely to go out of business.

PEO Group Insurance

When the Affordable Care Act rolled out in 2010, employers saw a 40 percent increase in insurance premiums. Over the next ten years, healthcare premiums increased another 54 percent, according to the Kaiser Family Foundation. In 2020, the average health coverage for a family costs $21,342.

The Affordable Care Act also gave employees insight into the high cost of healthcare. The pandemic drove this point further in employees’ minds. As a result, good benefits are more important than ever for employee retention. More than two-thirds of employees say that benefits are an important part of their overall compensation. Half of employees say they’d consider taking a new job for better benefits.

As a small to medium-sized business, your insurance costs are higher than what large corporations pay. In the past, you may have been forced to provide your employees with less-than-stellar benefits. But, partnering with a PEO can lower your costs and provide better options. This is because the PEO negotiates with insurance companies for coverage for all of their clients. You get to pay rates similar to the big corporations when you have PEO group insurance.

The Affordable Care Act did more than raise premiums. Increasingly complicated regulations also increase your administrative costs for health care benefits. An in-house HR team must spend more time ensuring your company remains in compliance. Additionally, an in-house HR team often becomes a sort of middleman between the insurance provider and the employees. When issues arise, your HR staff redirects their time contacting the insurer or deciphering the policy.

PEO Payroll

Payroll administration demands hours that could be spent growing your business. The tasks start with getting withholding information from your employees. From there, you need to track hours and calculate withholdings. You must also track direct deposit information for your employees.

Like any other payroll administrator, a PEO can do all these tasks for you. But there are advantages to partnering with a PEO versus a payroll broker. Your PEO becomes your co-employer. The PEO’s EIN number will appear on all employee tax forms. This allows the PEO to handle tax withholdings and reporting. When tax time comes around, your PEO, not you, will file the litany of related employment tax forms.

But be careful about the downside of PEO tax implications. If you choose a PEO that is not certified by the IRS, otherwise known as a CPEO, you’re on the hook for unpaid taxes. Not every PEO completes the stringent qualifications to become an IRS-certified CPEO. Those that do, take on 100 percent of the liability for unpaid employment taxes for your company. Choosing a CPEO is the only way to be confident the money you earmark for taxes makes its way to the IRS.

Another of the pros of a PEO is that you don’t need to employ a Human Resources professional to handle HR administration, benefits, and workers’ compensation issues. According to Salary.com, the average salary for a full-time human resources manager is $116,800, plus an additional 40 percent, or $46,720, for recruitment, benefits, and taxes. The Society for Human Resources Management says businesses need 2-3 HR team members per 100 employees to deliver essential HR services.

Professional Employer Organization Tax Reporting

Partnering with a PEO has important and beneficial tax implications for your company. A PEO will become your “co-employer.” Under this arrangement, the PEO is able to withhold employee federal and state taxes. The PEO then pays the government the withholdings.

A PEO will handle all of your other time-consuming payroll tasks, such as tracking employee wages and other payroll expenses. Your PEO will handle direct deposits and employee classifications. PEOs also take care of all employee documentation and compliance reporting, including new hire paperwork.

But what if your PEO fails to forward employment taxes to the IRS? Some unfortunate companies discovered a significant disadvantage of using a PEO when their provider failed to pay the IRS. Even though you’re entering into a “co-employer” agreement with the PEO, in the eyes of the IRS, you are still the primary employer liable for employment taxes.

That’s why you need an IRS Certified Professional Employer Organization when it comes to tax reporting. A CPEO is certified by the IRS. A CPEO undergoes financial audits and background reports, among other qualifications. Most importantly, once a PEO becomes certified as a CPEO, they assume liability for employment taxes. In the eyes of the IRS, the CPEO is on the hook if it fails to pay your employment taxes. 

The PEO will also help handle many of the administrative tasks associated with workers’ compensation.

PEO Cost

Before you decide to purchase PEO services, you should understand how much money and time you’re spending on in-house employee administration. The Small Business Administration says the cost of an employee is up to 1.4 times his salary when you include recruitment, benefits, and taxes.

The time you and your team spend on payroll and HR-related tasks is a little tougher to pin down. A survey by the National Retail Federation found that 69 percent of small business owners feel “overwhelmed by regulations, rules and mandates such as labor regulations, health care mandates, tax codes and safety guidelines.”

The PEO will relieve you of the administrative burden of HR-related tasks. A PEO will also have the expertise to navigate the regulations, mandates, tax codes, and safety guidelines that, frankly, take too long for any layperson to unravel. Your PEO employs a team of HR experts who can navigate the complexities of the Affordable Care Act. They’ll also field questions from your employees. Your PEO will also stay on top of the ever-changing regulations.

Remember, PEO clients average a 27.2 percent return on their investment. A PEO can likely negotiate better rates for all of your employee benefits. Companies that use a PEO experience lower turnover and higher growth. But a PEO may also shield you from unexpected trouble.

The NAPEO recently compared the pandemic’s impact on PEO clients with other small businesses. Its findings suggest that PEO clients were better insulated from the catastrophic impact of the pandemic. PEO clients were twice as likely to have received Paycheck Protection Program loans. Most importantly, PEO clients were 91 percent less likely to still be temporarily closed and 60 percent less likely to have permanently closed.

Conclusion

The reality of employee management may cast a shadow on your dreams when you’re a business owner. But an HR partner can tackle the tedious, yet necessary, administrative tasks that are bogging you down. Once you have a trusted ally who can navigate the burdens of HR administration, you can go back to focusing on your core business activities.

You have several choices for HR support. However, only PEOs have been proven to boost their clients’ revenue and prevent company closures. Only a PEO will truly be a partner for your business. Are you ready to learn more? Contact us today.