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The Pros and Cons of Using a PEO

business.com editorial staff
business.com editorial staff

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

  • PEOs have the potential to streamline the operation of any company.
  • PEOs have the potential to affect the internal structure of a company negatively .
  • Understanding PEOs fully is the only way to determine if it is going to work for your company or not.

A professional employer organization (PEO) provides invaluable services for small businesses throughout the country. According to NAPEO, there are approximately 900 PEOs serving more than 175,000 businesses with more than 3.5 million employees. These businesses have partnered with a PEO to solve one or more business pain points, like dealing with payroll and employee benefits, navigating workers' compensation and other legalities or recruiting new talent.

Payroll and other benefits

Payroll processing can be one of the most attractive offerings of a PEO. Many small business owners find themselves spending inordinate amounts of time dealing with the various administrative tasks associated with payroll, such as payment processing, accounting, filing W-2s and garnishing wages. All of this can be accomplished with virtually no hands-on involvement from the business owner, which frees up their time to improve the business in more tangible ways.

Offering benefits is something that many small business owners feel is beyond the scope of their financial situation. While this may be true if they were to negotiate benefits individually with insurance and retirement companies, partnering with a PEO exponentially increases their ability to offer attractive benefits to their employees. In addition, small business owners are relieved 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.

To recruit and keep the best employees, it's necessary for small businesses to offer more comprehensive benefits packages. Exceptional employees are difficult to find and cultivate. Providing incentives to remain with the business builds loyalty and improves the caliber of employees the owner can choose from during the recruitment process.

Though PEOs can make payroll easier, they do have the potential to diminish the value of your human resources department. In a typical work setting the HR department is responsible for the payroll, workers comp claims, and many other internal issues that occur within the company. If a PEO is used, the HR department is no longer in control of payroll and benefits, which may make resolving issues more difficult.

Workers' compensation and other legalities

Workers' compensation claims can be time-consuming and costly for small business owners. 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.

Because of the complexity of various state and federal employment laws, human resources can be a nightmare for small business owners. Failing to keep up with the ever-changing tide of requirements can be costly. However, a PEO has an entire staff dedicated to this. 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 difficulty in managing a remote team can make the process nearly impossible for a small company to remain current and in compliance without outside assistance.

One of the most overlooked perks of working with a PEO is the assistance a small business owner 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 small business owners ensure they 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 liability insurance, it's an important tool in the prevention of issues that could lead to costly litigation.

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

Recruiting new talent

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

Many of the top PEOs 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 questions to analyze prospective employees in ways the average small business owner can't. Considering the cost associated with finding and training an employee, this service is certainly worth considering for companies that are anticipating an increase in the employees they will need in the future.

A PEO certainly does have the ability to help with the recruitment of new employees. However, it can also make it difficult for the company to control essential processes within the company as well as work to manage these new employees. It 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 going and functioning.

For a business owner to choose the best PEO service, it is necessary to first understand exactly what their expectations should be. By knowing 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 in taking your business to the next level.

Image Credit: Africa Studio/Shutterstock
business.com editorial staff
business.com editorial staff
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