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February, 2018

It’s Time to Talk PEOs: The Pros and Cons

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It’s Time to Talk PEOs: The Pros and Cons

When choosing a solution to help manage your payroll and HR processes, you have many moving parts to consider. And it’s important to understand the benefits you’ll receive with different solutions to make the right choice for your organization, depending on its size and future goals. Many small and mid-size businesses consider an option called a Professional Employer Organization (PEO). So let’s talk about PEOs to better understand what they can provide.

What is a PEO?

A PEO is a third-party payroll and HR outsourcing firm that acts as a co-employer with your company. In other words, while you still manage and run your business’s day-to-day operations, your workers have two employers: you and the PEO. Through contractual sharing of employer responsibilities, the PEO acts as the administrative employer and your organization acts as the work-site employer. This means the PEO provides and manages human resource services like your organization’s payroll processing, benefits, insurance, and workers’ compensation.

Why Might a Company Choose a PEO?

There are several reasons why this co-employment relationship might be beneficial for a company, but these benefits are oftentimes contingent upon the size of your business. Many small and mid-size businesses consider PEOs because they are over-stressed and under-staffed with managing HR tasks and compliance. But as your organization grows, it will make more sense (and save you some serious cents) to keep or transition your employee management in-house by using human capital management (HCM) technology.

If you’re considering a PEO, take the time to weigh the pros and cons and determine what best fits your needs:

1. Co-Employment

Shared Liability

Pro: Shared Liability

With a PEO, you are leasing your employees and co-employ these workers. This means your company’s employees are incorporated under the PEO’s tax ID. The PEO then shares in risk and liability issues and they help manage tasks like worker’s compensation reporting and state unemployment.
Relinquishing Control of Liabilities

Con: Relinquishing Control

It might sound nice that a PEO partner shares risk and helps with important payroll and HR tasks. However, since your employees are co-employed by the PEO, you’re relinquishing some control of your organization. This means you’ll have to contact them if any issues arise, which can be very inefficient.

Something else to consider is the impact a PEO could have on your company culture. Think about how your employees might feel knowing they have been “leased” to a PEO. Employee morale could take a major hit. Remember, happy employees are more productive employees.

2. Employee Benefits

Low Benefit Rates for PEO

Pro: Lower Benefit Rates

Because the PEO manages multiple small businesses, it has a larger pool of employees and benefits options than if an organization was shopping for health insurance on its own. Therefore, PEOs can negotiate lower group insurance costs and unemployment insurance rates.
Relinquishing Control of Liabilities

Con: Lower Quality of Benefits

While lower benefits rates for your company may seem enticing, you may be giving up the ability to customize a healthcare plan that meets your employees’ needs. Furthermore, PEOs can switch providers at any time, which can lead to fluctuating prices and unsatisfied employees.

3. Payroll and taxes

Outsourced Payroll Processing

Pro: Outsourced Payroll Processing

Some PEOs offer payroll processing services, which can help eliminate manual administrative processes that can bog down HR or payroll managers so they can be more productive. Just keep in mind that some PEOs only process the payroll. Meaning, you still have to prepare the hours and payroll to send to the PEO for processing.
Compliance Not Guaranteed with PEO

Con: Compliance Not Guaranteed

If a PEO fails to properly remit or file taxes on behalf of your company, this leaves your company vulnerable to fines or penalties for noncompliance. Most HCM providers offer payroll processing with tax compliance. This means the provider will calculate, file, and pay your taxes on your behalf. Furthermore, if the provider has a tax compliance guarantee, this means they will pay any fees or fines involved if an error ever occurs.

4. Price

The Possibility to Lower Overhead With PEO

Pro: The Possibility to Lower Overhead

Working with a PEO can potentially eliminate the need to hire more staff to handle tasks like payroll processing. This can help lower overhead, but it’s important to get a breakdown of all costs from PEO to ensure the option will truly save you money in the long run.
Higher Price Tag with PEO

Con: Higher Price Tag

Although often marketed as a more affordable option for small businesses, PEOs tend to be a more expensive solution as a business grows. Some PEOs charge a flat fee for packaged services, while others use an a la carte pricing model. There are typically administrative fees, which can range from 2% to 11% of wages, or $500-$1500 per employee per year.

5. Accessibility

Access to HR Services With PEO

Pro: Access to HR Services

Another appeal of PEOs is they can give businesses access to HR services they may not be able to afford, such as training, onboarding, and recruiting. This can be appealing to smaller companies looking for ways to attract and retain top talent.
No Access to Information with PEO

Con: No Access to Information

With a PEO, there is little employee access and visibility. CFOs, HR managers, and employees have little insight into their company data. Likewise, communication between those managers and employees is nonexistent. Instead, all communication and transactions have to go through the PEO, even if it is just a simple request that could easily be handled by your organization.

With this relationship, you must contact the third party, relay the message, and wait for them to fulfill the request. This “hands-off” approach actually makes things more complicated and time-consuming.

To PEO or Not to PEO

If you’re still undecided on whether a PEO is the right fit for your business, consider the following questions:

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Is your organization experiencing growth or will it in the near future?
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Do you prefer to have more control over your company and employee information?
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How do you plan to manage your liability and risk?
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Do you want the ability to customize your benefits plans to better fit your business?
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Do you prefer to have more control over your employee lifecycle for better retention?
As you can see, there is a lot to consider when determining if a PEO is right for your organization. The services you receive from a PEO are different from those of an HCM solution, so weigh your options appropriately with the needs of your company.

How APS can help

APS helps organizations of all sizes and industries with their payroll processing and tax compliance needs. With a unified platform and a team of tax compliance experts in your corner, we can help make payroll and tax errors a thing of the past.

Looking to make a mid-year switch to a new payroll provider? It’s easier than you think and APS can help you along every step of the way to ensure a successful transition. For the past four years, we have ranked as a High Performer, Best Customer Support, Ease of Use, Functionality, and Product Quality by G2 Crowd. We have also been ranked the #1 software company in Louisiana, a testament to the confidence our clients have in our work.

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