What you need to know when considering a PEO

If you’ve read much about Professional Employer Organizations (PEOs), you’ve probably heard them described as everything from the best to the worst decision a business could make. So where does the truth lie? Are PEOs valuable tools for small businesses, or are they a bundle of services that you don’t really need? In most cases, the answer doesn’t lie with the PEO, but within your own organization. Understanding your own needs, both present and future, will allow you to determine whether a PEO may be a valuable solution for your company. Below, I will explain how PEOs work, then describe a process by which you can evaluate the value a PEO could bring to your organization.

What is a Professional Employer Organization?

A PEO is an organization that provides outsourced services such as employee benefits, payroll, workers’ compensation, state and federal compliance, recruiting and more. In the right situation, a PEO can allow small businesses to cost effectively outsource human resource and other issues that come with being an employer. How does a PEO work? PEOs establish an employer relationship with employees and thus take on much of the responsibility of the employer. Working with a PEO creates a co-employment situation which assigns specific employer responsibilities to the PEO. In an ideal scenario, using a PEO can allow a business to offer more to their employees than they could on their own, while removing the large administrative burden of being an employer. Businesses that use PEOs may believe that the cost associated with the PEO relationship is more than offset by the benefits, including the ability to focus on the core activities of the business.

What are the benefits and potential drawbacks of using a PEO?

The benefits of a PEO are fairly well documented. Being an employer comes with significant cost and responsibility. PEOs can greatly simply the process of managing employees. In some circumstances, they can also provide significant savings or provide the ability to offer better benefit options to employees. Because PEOs manage thousands of employees, their purchasing power is significantly larger than that of a small business. PEOs provide access to experienced human resource professionals. They can also provide human resource manuals, policies and procedures that will keep you compliant with state and federal regulations.

Based on what we‘ve discussed, PEOs probably sound pretty great. But they aren’t necessarily right for every company. PEOs also come with significant costs. Will the benefits they provide to your organization outweigh these costs? That depends on your specific needs.

How can a company determine whether a PEO is right for them?

Ultimately, the decision to use a PEO should involve a cost versus benefit analysis. This analysis will be different for every business. Here are a few quick indicators that a PEO may help your organization.

1. First, you have to be a growing business. Growing businesses frequently hire new employees. The cost of hiring and integrating new employees can be a drain on an organization that could better allocate their management resources toward new opportunities.
2. You need human resource help. If your company has three people or more and you are growing, your human resource needs might justify a PEO.
3. Your company needs human resources consulting.
4. You need health insurance savings or alternatives. To need savings, you first need to determine whether you will offer health insurance. If the answer is yes, a PEO may help you provide better options for less.
5. You need purchasing power for employee benefits and more.

When is a PEO the wrong choice?

It is not uncommon for organizations that are simply looking for an outsourced payroll solution to get sold on the idea of using a PEO. PEOs are fairly expensive, and your needs are going to determine the ultimate value that you receive. For instance, a PEO is going to cost significantly more than outsourced payroll processing. If you aren’t growing and aren’t looking for the services and benefits provided by a PEO, a payroll processing solution alone may be best option. If your company isn’t growing rapidly, doesn’t need health insurance savings and isn’t looking for access to greater benefit options, a PEO may be an unnecessary burden that could reduce your bottom line.

As mentioned above, PEOs are a great solution for some companies, but they aren’t a great fit for all companies. Evaluating a PEO as a solution for your organization requires you to look at your current and future needs and perform a detailed cost versus benefit analysis. If you are experiencing stress caused by inefficiency in payroll processing or human resource management, call Presti & Naegele to discuss the solutions available to you. Together, we will find the right fit for your organization – turning stress into opportunity.