Is a PEO the Right Choice for Your Company?

02/06/2023 / Patti Goldfarb

Small business employees of a flower shop looking at the computer

A professional employer organization (PEO) enables small and mid-sized businesses to provide their employees with access to better, more affordable benefits, and to streamline many administrative HR functions—like payroll, benefits, compliance, and workers’ compensation.

Typically, the PEO offering may include:

  • Human resource consulting
  • Safety and risk mitigation services
  • Payroll processing
  • Employer payroll tax filing
  • Workers’ compensation insurance
  • Health benefits
  • Employers’ practice and liability insurance (EPLI)
  • Retirement vehicles (401(k))
  • Regulatory compliance assistance
  • Workforce management technology
  • Training and development.

The PEO enters into a contractual co-employment agreement with its clientele. Through co-employment, the PEO becomes the employer of record (EoR) for tax purposes through filing payroll taxes under its own tax identification numbers. As the legal employer, the PEO is responsible for withholding proper taxes, paying unemployment insurance taxes, and providing workers’ compensation coverage.

PEOs allow companies to concentrate on their core business activities while outsourcing tasks such as payroll and benefits administration. They also offer employee training services and can assist with performance management and talent acquisition. Perhaps most valuable, they keep up with regulatory changes at all levels, which helps ensure compliance, reduce HR’s workload, and minimize the concerns of both HR practitioners and business owners.

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.

Let’s look at the pros and cons of using PEOs.

Pros:

  • According to the National  Association of PEOs (NAPEO) the estimated expected ROI for POE clients, based on cost saving alone is 27.3% per year.
  • Protection from legal risks such as payroll fines and HR compliance violations.
  • Management of workers’ compensation programs and better rate because the rate is blended with the other companies in the PEO.
  • Better health insurance rates because carriers use large group rating platforms.
  • A wider array of available benefits programs.
  • A large pool of employees to help with recruiting.

Cons:

  • The PEO owns your payroll data.
  • As a co-employer, you may be responsible if you PEO makes a mistake.
  • Loss of control over internal processes that the PEO assumes. aA PEO can control nearly every aspect of HR, saving you a lot of time and energy. However, PEOs are not ideal for businesses that want complete control over their HR processes. One way around this is to partner with a PEO solution that offers customization rather than preconfigured service bundles. This allows you to maintain control over certain processes and receive assistance with others.
  • Your PEO experiences is only as good as your relationship with the people assigned to work with you.  If there is a high turnover at the POE, it will mean restarting the relationship again and again.

Should you decide to explore PEO coverage, make sure you work with an experienced broker.  There are approximately 980 PEOs operating in the United States today, and this is one situation where numbers on a spreadsheet will not tell you the whole story. For example, there can be a huge disconnect between the PEO and the prospective client in understanding needs from the onset. This is often reflected in the service that a business receives.

Some PEOs will change their rates if the employee census changes. Others will shift expenses into different categories to look more competitive (i.e. showing a lower workers’ comp rate and hiding the excess premium in their administrative rate). The renewal rates for the benefit programs are tied to the renewal of the PEO’s master contract, not the date your company signs on.

There are countless variables, and each contract needs to be analyzed and compared. You also need to take into account how your company software will integrate with the PEO’s programs. For example, can payroll runs be uploaded or will they have to be done manually and sent to the PEO?

Want to find out more? We’re happy to discuss your options. Contact us at 201-255-6239.