Here’s the lowdown. There are some benefits to outsourcing your HR to a PEO (professional employer organization), and there are some costs. Those potential gains come at the expense of some benefits you enjoy by running your own HR.
Here’s a brief overview of those costs and benefits.
|Cost (up to $150 per employee per month)||Discounted employee benefits|
|Few options for benefits||Ensured legal compliance|
|Less control over HR||Liability sharing|
|Less transparency in HR||Saved time|
|Loss of employer tax benefits|
|Lack of visibility|
Let’s dive into the pros and cons of a PEO and whether or not you should leave.
What is a PEO
As mentioned, a PEO is a professional employer organization. They basically let you outsource the employee management side of your business.
Pros of a PEO
First, let’s give a nod to what a good PEO can bring to the table.
Discounted employee benefits: PEOs can offer good group rates for employee benefits because they “employ” thousands of people from many organizations.
Ensured legal compliance: With a PEO, you don’t have to worry about legal compliance in the HR department. They’ll take care of that for you.
Liability sharing: Because of your co-employer relationship, the PEO will take some legal liability should any employee issues arise.
Saved time: If you outsource your HR, then you don’t have to spend time or focus on HR.
Access to experts: PEOs employ a bunch of HR experts to run HR for all their customers. If any questions come up, you can ask them.
Keep in mind that not all of these benefits are mutually exclusive to PEOs. You can find good rates on benefits, stay legally compliant, save time, and enjoy expert assistance from other sources too. A PEO is just one option.
Cons of a PEO
As with every decision, there’s an opportunity cost in adopting a PEO. Here are some of the primary drawbacks to running your HR through a PEO.
PEOs are expensive and could easily cost your company four times as much as a good HR software solution.
PEOs are typically priced on a per-employee-per-month (PEPM) or percent of payroll model.
With some PEOs you could end up paying a hefty initial implementation fee, 1 – 15% of employee payroll each month or $100 PEPM, and a variety of service or administrative fees.
That will cost you a multiple of what you would pay for a good HR software. Many small companies prefer to have an operations person take on HR responsibilities with the help of technology.
2. Few options for benefits:
As mentioned earlier, PEOs can get you good deals on employee benefits because they employ so many people. The downside to this is that if you like a particular benefit provider that the PEO doesn’t do business with, you’re out of luck.
This will be more clear as we continue, but when you hire a PEO, you gain simplicity at the cost of autonomy and some control. If you’re a leader that values complete autonomy and total control over your organization, then a PEO is probably not for you.
3. Less control over HR
If you want the PEO to ensure legal compliance, you have to follow their rules. This means that you can’t make some HR decisions autonomously.
For example, often, your PEO will have to be involved in making hiring and termination decisions to ensure compliance. Compliance is very important, but it’s also something you can learn and implement yourself.
4. Less transparency in HR:
Your PEO may have your best interests at heart, but they can’t know your people like an in-house team can. Communication between the PEO and employees can’t be as fluid, and HR transparency will have to settle for translucency.
5. Loss of employer tax benefits:
The co-employer relationship with a PEO is an interesting thing. Here’s how it works.
The PEO hires your people to work for you and your company. This makes the PEO the employer as far as the IRS is concerned, so the PEO submits your employees’ tax documents. This means that you don’t have to worry about those taxes, but you don’t get employer tax benefits either.
6. Immediate help:
PEOs employ great HR pros to take your case and do your HR, but they also serve many other companies as well. There is an inherent difference between the attention of an in-house professional and that of an outsourced provider.
7. Lack of visibility:
The PEO is responsible for storing company HR documents and making sure employees sign them. This takes some work off your plate, but it limits your access to those documents.
For example, in order to know if an employee has signed all of their documents, you’d have to go through the PEO. If you needed to get ahold of an important document, you’d have to go through the PEO.
This process is slow, and needlessly complicated compared to document storage in a software solution like Eddy. Modern solutions allow business owners to have easy access and bank-level security for their important documents and signatures.
8. Employee experience:
Poor onboarding experiences are responsible for a huge amount of turnover. According to the Harvard Business Review, up to 20% of staff turnover occurs within the first 45 days of employment. They blame that on onboarding.
If you’re using a PEO, the onboarding experience is dominated by the PEO. Because of the co-employment setup, when you hire somebody, they onboard with the PEO. This could definitely be confusing for your new hire.
Because these first experiences are often out of your control, you can’t necessarily ensure that they are great. Those first experiences on the job can be the difference between enthusiasm and engagement, and confusion or dissatisfaction.
If the costs of a PEO sound like something you’d rather not deal with, don’t worry! There are great alternatives for small and medium-sized businesses to run HR.
One of those alternatives is to hire an in-house HR professional. It’s harder to find great rates on employee benefits, but you’ll get the full attention of a dedicated HR pro with all of the associated benefits.
Another option is to buy a good HR software solution. HR Tech has come a long way in the last few years and can provide a lot of the benefits of a PEO without the costs.
They can give guidelines on legal compliance, help you manage time tracking, employee onboarding, time-off, payroll, and more. They’re much less expensive than any PEO, and they can be finely customized to fit your needs.
Hiring a PEO is a reasonable option for some companies. There are some undeniable benefits, but there are also undeniable costs. Take a look at what you truly value as a company and see if it’s time you brought your HR in-house and divorced your PEO.