Your HR Pro

Why Small Business Owners Should Consider a PEO

Managing HR can be overwhelming for small business owners who often wear many hats. A PEO can be a strategic partner in simplifying HR functions, but it’s important to weigh the benefits and drawbacks before making a decision. This article will explore the pros and cons of partnering with a PEO, along with my own experiences working with them.

What is a PEO?

A Professional Employer Organization (PEO) is a service that allows small businesses to outsource HR functions, such as payroll, benefits administration, compliance, and workers’ compensation. PEOs co-employ your workers, sharing certain employer responsibilities while you maintain control over the day-to-day business operations.

Pros of Using a PEO

  1. Cost Savings on Benefits. PEOs often have access to more competitive rates for health insurance, retirement plans, and other employee benefits because they pool employees from many small companies to form a larger group. This can lead to significant savings on benefits costs.
  2. Compliance Assistance. Navigating labor laws and regulations can be complex, especially when they vary by state. PEOs help ensure compliance with federal, state, and local employment laws, reducing the risk of costly penalties.
  3. Reduced Administrative Burden. Outsourcing HR tasks such as payroll processing, tax filings, and benefits administration frees up time for small business owners to focus on core business activities and growth.
  4. Enhanced Employee Experience. PEOs can offer a broader range of benefits, such as employee assistance programs, health and wellness initiatives, and retirement planning resources, which can help attract and retain top talent.
  5. Access to HR Expertise. PEOs provide HR expertise and guidance, helping businesses develop better policies, handle employee relations issues, and implement best practices.

Cons of Using a PEO

  1. Cost Considerations. While PEOs can help save money on benefits, they do charge fees for their services, which may not be cost-effective for all businesses, especially very small ones with only a few employees.
  2. Loss of Control Over Some HR Functions. Business owners may feel they are giving up control over certain aspects of HR, as PEOs handle tasks like payroll processing and compliance monitoring.
  3. Potential for Misalignment with Company Culture. PEOs are external partners, so there could be a risk that their approach to HR does not fully align with the company culture or specific needs.
  4. Complexity of Ending the PEO Relationship. If you decide to end the PEO relationship, transitioning HR functions back in-house or to another provider can be a complex and time-consuming process.
  5. Co-Employment Risks. In a co-employment arrangement, both the business and the PEO share liability for certain employment-related issues. This may create complexities in handling legal disputes or employment claims.

My Experience with PEOs

My company was rapidly growing, and we had plans to hire dozens of employees in the coming year. The transition to the PEO was bumpy and there were a few things that got messed up. But the PEO resolved them eventually. It was confusing for employees too. There were several employees who received their W-2s and panicked because they didn’t come from our company and had the PEO’s name on them.

The biggest benefit is that my small company got to enjoy all the benefits of working for a large employer, including great rates on health insurance. I could wait to scale our HR function too. With the PEO covering many of our functions. We also had improved compliance and ease of employee access to their information.

Deciding whether a PEO is right for your business involves considering the unique needs of your company and weighing the pros and cons. For many small business owners, the time saved on HR administration and access to better benefits can outweigh the costs, but it’s important to evaluate if a PEO aligns with your business goals and culture.