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The Pros and Cons of Using a PEO

Skye Schooley
Skye Schooley
Staff writer
business.com Staff
Updated Sep 20, 2022

Professional employer organizations can take administrative tasks such as payroll and workers' compensation off your plate.

Professional employer organizations (PEOs) provide invaluable services for small businesses throughout the country. According to the NAPEO, there are nearly 500 PEOs serving 173,000 businesses with roughly 4 million employees. These businesses have partnered with a PEO to solve one or more business pain points, like handling payroll and employee benefits, navigating workers’ compensation and other legalities, or recruiting new talent. Learn what a PEO can do for your business

What is a PEO?

If you’re interested in outsourcing HR services, you should understand what a PEO service is before deciding which direction to go in. A PEO is an organization that partners with a business through a co-employment model and acts as the official employer of the company’s employees. The PEO facilitates HR functions for the business, such as processing payroll and employment taxes, administering employee benefits, managing legal risk and compliance, creating policies and procedures, and offering training and development opportunities to employees. When you partner with a PEO, you often retain control over general management functions.

Editor’s note: Looking to partner with a PEO? Fill out the below questionnaire to have our vendor partners contact you with free information.

Pros of using a PEO

Choosing a PEO partnership has many advantages, such as HR process simplification and employment law compliance. A PEO can save your small business countless hours and stress by taking care of HR processes for you. Small and midsize businesses often benefit the most from partnering with a PEO.

It can help you recruit top talent.

Finding highly qualified people to fill crucial roles within a small business can be incredibly difficult. Many small business owners don’t have the time or expertise to reach a vast pool of applicants. In the past, they may have found themselves settling for whoever was available, even if they weren’t the best fit for their company.

Many of the best PEO services offer recruitment assistance that can dramatically increase the speed and efficacy of the recruitment process. Services may include writing and placing advertisements, interviewing applicants, and administering background checks. Experienced recruiters are adept at asking the right interview questions to analyze prospective employees in ways the average small business owner can’t. When factoring in the costs associated with finding and training an employee, this service is worth considering for companies that anticipate an increase in the employees they will need in the future.

Did you know?Did you know? Hiring the right employees is critical. A bad hire can cost your business 30% or more of the employee’s first-year earnings. That’s why creating a proper hiring process is vital.

It simplifies payroll.

Running payroll can be one of a PEO’s most attractive service offerings. Many small business owners spend inordinate amounts of time dealing with the various administrative tasks associated with running payroll, such as payment processing, payroll withholding, accounting, filing W-2s and garnishing wages. A PEO can accomplish all of this with virtually no hands-on involvement from the business owner, which frees up their time to improve the business in more tangible ways.

It provides access to competitive employee benefits.

Offering employee benefits is something that many small business owners feel is beyond the scope of their financial situation. While this may be true if you have negotiated benefits individually with insurance and retirement companies, partnering with a PEO exponentially increases your ability to offer attractive benefits to their employees. In addition, it relieves you of the tedious task of administering these benefits to their employees. The PEO will take over providing enrollment, negotiating benefits and handling COBRA events as they occur.

Small businesses must offer comprehensive benefits packages with fringe benefits in order to recruit and keep the best employees. Exceptional employees are difficult to find and cultivate. Providing incentives to remain with the business builds loyalty and improves the caliber of employees to choose from during the recruitment process.

It administers workers’ compensation.

Workers’ compensation claims can be time-consuming and costly. In addition to providing coverage, a PEO will direct the administrative tasks that occur if a claim is made. Claims include facilitating the company’s compliance with federal laws, associated paperwork, audits and certifications.

It helps you maintain legal compliance.

HR can be a nightmare for small business owners because of the complexity of various state and federal employment laws. Failing to keep up with the ever-changing tide of requirements can be costly. However, a PEO has an entire staff dedicated to legal compliance. This can be invaluable for small businesses with employees in various states, which is common in today’s world of telecommuting.

Wage equity and paid sick leave laws are other potential hotspots for small business owners. While these can be difficult enough for companies hiring locally, the complexity of managing a remote team may make it nearly impossible for a small company to remain current and in compliance without outside assistance.

It can offer legal assistance.

One of the most overlooked perks of working with a PEO is the assistance you can receive in the event of a lawsuit. Many PEOs share the liability associated with specific employment-related lawsuits, such as for wrongful termination. They also have teams of experts to help you remain compliant with state and federal laws relating to discrimination and harassment. While this is not a replacement for legal counsel or various forms of general liability insurance or professional liability insurance, it’s an essential tool in preventing issues that could lead to costly litigation.

Cons of using a PEO

Although PEOs offer many benefits, they aren’t always the right HR solution for everyone. There are a few potential disadvantages of using a PEO that can make an employer better suited to hiring an internal HR professional or partnering with a top HR outsourcing company.

You give up some control over payroll and benefits.

Though PEOs can make payroll and benefits administration easier, you relinquish some control over these functions, resulting in possible adverse effects. For example, if an employee has an issue with payroll or a workers’ compensation claim, it is not something you can solve internally with a PEO. When your HR department is no longer in control of payroll and benefits, resolving issues may become more difficult.

Additionally, you may be limited as to which employee benefits you can choose from. This may seem counterintuitive, since PEOs often provide small businesses with better benefits than they might otherwise have access to. Still, you are only able to choose from the benefits they offer instead of shopping around.

You may face employee resistance and delayed claims.

In a similar vein as the payroll issues, taking the control away from your HR department may cause delays with claims. Additionally, you might meet resistance from employees who are reluctant to share personal information with a third-party company, which can lower the security of your employees’ paperwork.

You lose some control over hiring decisions.

A PEO certainly can help with recruiting new employees. However, it can also be more difficult for you to control essential staffing processes within the company as well as manage these new employees. Using a PEO may also result in the loss of knowledge within the company and make it more difficult for normal processes to take place as employees begin to rely more and more heavily on the PEO to keep the company functioning.

You may see an impact on company culture.

Another potential disadvantage to using a PEO is the possible impact it can have on your company culture. A PEO representative won’t know the ins and outs of your company culture the same way an internal HR manager would, which can cause your company culture to diminish or change. When company culture decreases, employees can become less engaged or satisfied, reducing overall productivity.

TipTip: If maintaining your company culture is important to you, consider hiring an internal employee to nurture your company culture, and rely on a PEO only for technical functions like payroll and legal compliance.

Top PEO services

To choose the best PEO service, understand your expectations. When you know which of the available services are the most important to your business, it is easier to narrow down the field of possibilities and move forward.

If you have identified which features you need in a PEO, check out our reviews of these top-rated PEOs to find the best fit for your organization:

  • Oasis: If you are a startup or small business looking to partner with a PEO for the first time, read our review of Oasis. The company only requires a minimum of five employees, and they offer comprehensive services like Fortune 500-level benefits, payroll processing, HR policy development and employee e-learning courses. If you need assistance, they offer support via a payroll account manager and HR generalist.
  • TriNet: Any organization looking for an industry-specific PEO may want to read our TriNet review. The company specializes in serving a variety of industries such as education, finance, manufacturing, e-commerce and life sciences. You can benefit from their HR expertise, risk mitigation, benefit options, payroll services and technology platform. They also offer industry-first expert support teams.
  • Rippling PEO: Small businesses that want to transition between HR outsourcing services and a PEO platform should consider Rippling PEO. When we reviewed Rippling, we noticed that users could partner with Rippling PEO for full-service assistance with their HR processes, and then transition their workforce data to a stand-alone Rippling workforce platform if they want to scale away from the co-employment model. The scalable platform is customizable as well.
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Skye Schooley
Skye Schooley
business.com Staff
Skye Schooley is a staff writer at business.com and Business News Daily, where she has written more than 200 articles on B2B-focused topics including human resources operations, management leadership, and business technology. In addition to researching and analyzing products that help business owners launch and grow their business, Skye writes on topics aimed at building better professional culture, like protecting employee privacy, managing human capital, improving communication, and fostering workplace diversity and culture.