PEOs are great in theory, but in practice they may prove to be far less advantageous for both employer and employee. Here are the pros and cons of PEOs.
PEOs take the headache out of those HR related tasks like payroll and taxes. Companies, especially small to medium-sized, may benefit from outsourcing these areas and focusing instead on other aspects of running a business. In turn, however, employers and employees may suffer the consequences.
What does PEO stand for?
PEO stands for Professional employer organizations, and they act as a way for small companies to avoid paying large fees for benefits such as employee’s insurance. Essentially these organizations will hire employees, then “lease” them to small businesses. Therefore, PEOs are legally responsible for the employees, especially in terms of taxation.
In working with various small companies, PEOs are able to pool these employees together to qualify for better benefit rates. While PEOs take on the main responsibilities of a Human Resources department, most other decisions and management are left to the small business using the employees.
What is a PEO and how does it work?
PEO’s are a form of co-employment. They are not the same as a temp agency, but instead work with companies that hire full-time employees to manage the legalities and liabilities for those employees under the name of the PEO. PEOs have been around for over 30 years and provide services to around 170,000 small and mid-sized businesses, employing upwards of 3 million people.
To explain how they work, we’ll look at an example: our hypothetical small business is a bakery called Sweet. Sweet is a company made up of roughly 20 full-time employees. Due to the high premiums of ensuring such a small amount of employees it may be advantageous for this particular bakery to work with Janna’s PEO, which has access to far better insurance rates given the sheer number of people they ‘employ.’
Janna’s PEO thus hires all of Sweet’s employees and contracts them out to work for Sweet. The employees technically work for Janna’s PEO under the law. Janna’s PEO handles payroll, insurance, and other technicalities such as worker’s compensation. However, the employees work day-to-day at Sweet Bakery. While “Sweet Bakery” does not appear on their employees’ paychecks, ultimately Sweet is in charge of managing, training, and scheduling these workers.
Most PEOs charge per employee rather than one flat rate, so if your small business experiences rapid growth within a short amount of time, it could end up costing you more.
What are the drawbacks of a PEO?
While PEOs, in theory, give the majority of control back to the small business, the reality is that they are still responsible for your employees and the benefits they are receiving. Here are a few potential drawbacks of choosing to work with a PEO:
1. PEO’s have the final say
Let’s imagine that Sweet Bakery’s employees love the insurance plan they are on, but Janna’s PEO wants to change to another version starting next month. This new plan does not provide the same services that some of the Sweet employees have come to rely on. Ultimately, it is Janna’s PEO who decides what’s best, regardless of what the consequences may be for employees.
2. Effects on group cohesion
Another drawback is a lack of cohesion in company culture. The addition of a third party, especially a third party in charge of something as crucial and intimate as payroll and healthcare, may create a divide between the employees and the small businesses they’re serving. Putting these types of processes in the control of an outsider highly reduces the lack of direct employer to employee communication, which is never encouraging. This, in turn, may lead to a confusion of company culture or a complete lack of one in general.
3. Not cost effective in the long-term
While one of the most common reasons for using a PEO is cheaper rates for your employees, it may end up costing you more in the long run. Most PEOs charge per employee rather than one flat rate. This means that if your small business experiences rapid growth within a short amount of time, the amount that your business is paying could grow exponentially and outweigh the cost saving benefits of a PEO. While numbers vary depending on the business and specific PEO, if you are a small business with large projected growth you may want to reconsider outsourcing as the best option. It’s also important to note that the rates the PEOs offer are not fixed; this means that they could potentially entice you with low initial rates and then dramatically increase their prices once your business feels dependent on them.
While PEOs may be a great option for small businesses just starting out, in the long run, their benefits don’t always hold up against the potential costs. While outsourcing HR tasks can be a stress reducer, at the end of the day do you want important internal decisions guided by an external party? We recommend sticking with an internal HR partner who can help you with Payroll, HR, Advisory Services, and connect you with the best broker partners around!
Interested in learning more about an HR partner that can help you with these services? Schedule a demo today!