Deciding whether to use a Professional Employer Organization (PEO) can be challenging for any business. Understanding the pros and cons of PEOs is essential for managing critical functions like HR, payroll, and employee health insurance. This balanced view of how PEOs work highlights their potential advantages and limitations.
PEOs can offer significant benefits to businesses by enhancing HR and employee benefits offerings, but there are also key risks and drawbacks to consider. Assessing whether a PEO is the right fit for your organization involves understanding its strengths and potential limitations.
Let’s explore the specific pros and cons of PEOs by exploring what they are and how they operate.
What is a PEO?
A Professional Employer Organization (PEO) is a company that partners with businesses to manage critical administrative tasks, particularly in HR and employee benefits. By entering into a co-employment arrangement, the PEO becomes the employer of record for tax and compliance purposes, handling payroll, benefits administration, and regulatory compliance on behalf of the business.
This arrangement allows businesses to outsource time-consuming tasks to HR, payroll, and employee benefits experts, helping them comply with labor laws and manage employee needs more efficiently. While the business retains complete control over daily operations, the PEO assumes responsibility for certain legal and administrative duties, easing the burden on business owners and management.
With a basic understanding of PEOs, let’s explore their specific benefits.
PEO Benefits
Partnering with a PEO can offer significant advantages to businesses, from cost savings to improved HR efficiency. Here are some PEO benefits:
Using a PEO Can Save You Money
PEOs leverage their buying power to negotiate affordable, comprehensive benefits packages typically reserved for large organizations. Businesses working with a PEO often gain access to health insurance and other benefits at a lower rate than they could secure. This cost efficiency can be especially valuable for companies seeking to provide competitive benefits without straining their budgets.
Improve Employee Benefits
One of the biggest advantages of partnering with a PEO is access to a wide range of employee benefits, including health insurance, retirement plans, and more. For companies with fewer than 25 employees, this can mean eligibility for tax credits covering up to 50% of premium costs—provided the business is enrolled in a Small Business Health Options Program (SHOP) plan. Access to these robust benefits helps businesses attract and retain top talent, giving them a competitive edge in the job market.
HR Expertise
PEOs provide access to seasoned HR professionals who ensure that best practices are followed in hiring, onboarding, and employee management. This HR expertise helps businesses navigate complex employment regulations, establish clear policies, and reduce potential risks. Companies can benefit from high-quality HR services without building an in-house team by outsourcing these functions to a PEO.
Risk Mitigation and Compliance
Staying compliant with employment laws is critical but often challenging. PEOs help businesses comply with federal, state, and local regulations, reducing the risk of fines, lawsuits, or penalties related to labor laws. With the PEO handling compliance, businesses can operate with peace of mind, knowing they adhere to all necessary regulations.
Allows Businesses to Focus on Core Business
When a PEO handles administrative tasks, companies can redirect their energy and resources toward core business functions, including product development, customer service, and innovation. By offloading these time-intensive tasks, businesses can focus on growth and efficiency rather than being bogged down by HR processes.
Scale Your Business
PEOs offer scalable HR solutions that grow with a business. As companies expand, their HR needs become more complex, often requiring additional resources to manage employee relations, payroll, and benefits administration. With a PEO, businesses can scale their operations smoothly, knowing their HR infrastructure can keep up with growth demands.
PEO Drawbacks
While PEOs can offer valuable support, businesses should consider some potential downsides before entering into a partnership. Here are some PEO drawbacks:
There May be a Loss of Control
By handing over administrative tasks to a PEO, business owners may feel a loss of control, especially regarding HR and employee management. While the PEO assumes responsibility for tasks like payroll and benefits administration, it may be challenging for business leaders to monitor these processes directly. This shift in control may not align with every company’s preferred management style.
PEOs Might Not Be Worth the Money
PEOs typically charge fees based on the number of employees, which means that as a business grows, so does the cost of the PEO services. The expense may outweigh the benefits for smaller organizations, especially if they don’t fully utilize the PEO’s offerings. For some companies, these costs can make a PEO partnership less cost-effective over time.
Potential for Service Quality Issues
The quality of service a PEO provides can vary depending on the provider. Not all PEOs offer the same HR expertise or customer support level, and the experience can differ widely across organizations. Businesses considering a PEO should carefully vet potential providers to ensure they will receive the quality of service needed to meet their expectations.
Less Access to Employee Data
Since the PEO manages certain administrative tasks, some business owners may need more immediate access to employee data, such as payroll and HR records. This data transfer can create a disconnect, making it harder to monitor specific HR metrics or address employee inquiries as swiftly as if they had direct control over the data.
Related: PEO vs Broker for Employee Health Insurance
How to Know if a PEO is Right For Your Company
Choosing whether to partner with a PEO is a significant decision that depends on your company’s unique needs and goals. Here are some considerations to help determine if a PEO is the right fit:
What to Consider Before Hiring a PEO
- Alignment with Company Culture: Does the PEO understand your business’s values and culture? Ensuring a good cultural fit is essential for a smooth partnership.
- Industry Experience and References: Ask for references from similar businesses, ideally within your industry. This can give insight into how well the PEO handles industry-specific needs and challenges.
- Track Record with Compliance and Employee Relations: Inquire about the PEO’s history with compliance and employee dispute resolution. A strong record in these areas shows the PEO’s capability in managing risk and maintaining employee satisfaction.
- Accreditation and Standards: Check if the PEO is accredited by the Employer Services Assurance Corporation (ESAC) or other reputable standards bodies. Accreditation is an added layer of assurance regarding service quality and ethical practices.
- Service Customization and Flexibility: Assess whether the PEO can tailor its offerings to your needs. Some PEOs offer customizable solutions, while others provide more standardized services.
Answering these questions can clarify whether a PEO partnership will effectively support your business objectives.
How PEOs Can Work Together with Take Command
Working with Take Command can further streamline and optimize employee health benefits for businesses that partner with a PEO. Take Command offers solutions that complement a PEO’s services, providing options that make health benefits more flexible, personalized, and cost-effective.
With Take Command’s Individual Coverage Health Reimbursement Arrangement (ICHRA) platform, businesses can reimburse employees for health insurance they choose. This approach allows employees to select plans that best fit their needs rather than being restricted to a one-size-fits-all group policy. By integrating Take Command’s ICHRA alongside a PEO, businesses can enjoy the administrative relief of a PEO while also offering customized health benefits through Take Command.
This combined approach allows businesses to maintain compliance, reduce administrative burden, and offer a compelling benefits package alternative to group insurance. For companies seeking flexibility in health benefits without sacrificing the structure a PEO provides, Take Command is an ideal complement.
Conclusion: Pros and Cons of PEOs
Deciding whether to partner with a PEO involves carefully weighing the pros and cons of using PEOs. For many organizations, the streamlined HR processes, cost-effective benefits packages, and compliance support that PEOs provide make them an attractive option. However, potential drawbacks, such as a possible loss of control over certain processes and added costs, also warrant consideration.
PEOs can offer valuable support in HR, benefits, and compliance, helping businesses operate efficiently and remain compliant with evolving regulations. However, the costs associated with PEO services and the potential shift in control over administrative functions can make it challenging to determine if a PEO aligns with your business goals.
If you’re looking for additional ways to enhance employee benefits, Take Command’s ICHRA platform can be a great complement to a PEO. It offers flexible, individualized health coverage options for your employees. Combining a PEO with Take Command’s solutions can help create a benefits strategy that’s both adaptable and competitive, positioning your business for growth and employee satisfaction.
