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Pros and Cons of Using a PEO Company

Many smaller companies opt to work with Professional Employer

Organizations (PEOs) to give employees access to health and retirement

benefits, provide them more human resource services and ensure timely

tax filing. While PEOs have some things in common with HR and payroll

software companies, there are key differences.

What’s the difference between a PEO and a payroll provider?

PEOs are co-employers, meaning that they share the employer’s

responsibilities. When a company enters into a contract with a PEO,

its employees become employees of the PEO. This allows the PEO to pool

the employees of many smaller companies together to get better rates on

health insurance, workers’ compensation and state unemployment. Many

also offer HR services, which allow the businesses to completely

outsource the HR management function. The PEOs will help to recruit and onboard new employees and administer programs to help increase employee retention rates. In addition, PEOs are typically

regulated on the state level.

Payroll providers, on the other hand, are not co-employers. While they

process payroll and file taxes on a client’s behalf, the client’s

employees do not become the provider’s employees. Many providers offer

HR software, but, unlike PEOs, the HR function remains in-house. The

key difference is that these tools help in-house employees become more

efficient. Also, most reputable payroll providers are endorsed by the

IRS.

pros and cons peo company

Pros of using a PEO company

The main reason many companies choose PEOs is to provide benefits to

their employees at a lower cost. However, it is important for the

company to consider whether working with a PEO will result in long-term

gains. The PEO is now in control of who else is in the same risk pool,

and can often feel pressure to add new clients (regardless of their

risk), which can result in increased rates and higher long-term costs.

Cons of using PEO companies

Some companies opt not to use a PEO because they want to remain in

control of benefit plans, carriers and risks. If their employees love

their current benefit carrier, but the PEO wants to move to a different

one, there isn’t much the company can do.

Many organizations also prefer to keep the human resources function

in-house, opting to invest in technology tools to increase the

efficiency of the team. Companies who are thinking of using a PEO for

HR services must ask:

  • Will the PEO make a commitment on the number of hours a week theywill provide HR support?
  • Would they come on-site for an emergency?
  • Will they provide a dedicated contact, or will your employees have tocommunicate with several different people?
  • Do they truly have the best interests of your employees at heart?
  • Will they be able to make impartial recommendations, knowing thatthey could be legally liable for their advice?

The answers to the above questions will determine whether outsourcing HR

is the best choice for your organization.

In addition to these challenges, some companies struggle with the

delineation of employer responsibilities between them and the PEO. If

the PEO makes a mistake when filing taxes, is the employer responsible?

Who would the IRS penalize? What are the employer’s options for

recourse?

The last disadvantage to working with a PEO is often the pricing

structure. PEOs frequently bundle services together and charge a flat

rate. Employers should be sure to ask about what services are included

in the bundle to ensure they are getting exactly what they need—no more

and no less.

What’s the right fit for your business?

Learn more about finding the right solution for your payroll and HR needs: check out our free Buyer’s Guide to HCM and Payroll Technology. If you have questions on specific challenges impacting your business, our team would love to help. Contact us today.

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