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Pros & Cons of a Professional Employer Organization

Working with a professional employer organization (PEO) is an important business decision. Read on for some pros and cons to consider.
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Owners and management of small and midsize companies often feel burdened by having to be an “expert” on all areas of running their business and taking care of the compliance and administrative duties associated with these roles. Professional employer organizations (PEO) have increasingly become a popular choice for businesses looking to outsource part of their administrative and support functions. PEOs offer integrated payroll, tax filing, benefits, training, workers’ compensation, workplace safety, and human resources guidance and administration while maintaining compliance with federal and state employment laws. 

Typically, the company (client employer) and the PEO enter into a “co-employment” arrangement—the client employer continues to have direct control over the day-to-day activities of its business and maintains the responsibility for hiring and managing the employees. The PEO becomes an additional employer of record for purposes of HR administration.

Working with a PEO is an important business decision. There are various pros and cons to consider as your organization evaluates what makes the most sense for your business operations.

Pros of a PEO:

  1. Lower cost of benefits and better employee benefits options including onboarding, open enrollment and renewal, staff education, and dedicated help lines. These savings are due to the purchasing power of the PEO’s size and scale.
  2. Time efficiencies gained from having the PEO absorb the time commitment associated with general HR tasks and consolidating several benefit providers.
  3. Access to benefit offerings not available to the organization on a standalone basis.
  4. Professional help developing HR policies and procedures leveraging best practices and providing mandatory trainings and guidance when dealing with sensitive HR issues or questions.
  5. Proper calculation of deductions and withholdings, and reporting and remitting to the appropriate government agency, including remittance for employees working in different states.
  6. Client employer still retains authority over daily operations, workforce management, and strategies. The PEO assumes risk for administrative HR liabilities.
  7. Access to enterprise-level technology for HRIS, flexible and customizable HR reporting, efficiencies from integrated onboarding, benefits, and payroll typically all within one dashboard.
  8. Guidance and preparedness for dealing with disaster/crises, staffing decisions, and OSHA and CDC recommendations to help keep employees safe and in compliance.

Cons of a PEO:

  1. Some PEOs don’t have a dedicated team for dealing with pressing HR concerns when a need arises requiring fast answers from someone knowledgeable of the organization.
  2. Limited number of benefit carriers, which could be a disadvantage for employers with staff depending on a medical specialist in certain networks.
  3. PEOs require underwriting approval for medical and workers’ compensation plans. Not all companies qualify due to factors such as prior claims, company size, type of work, etc.
  4. Client employer is unfamiliar and/or uncomfortable with the co-employment model and shift in liability (one shared EIN for payroll).
  5. Limited level of control over employee documentation and its security.
  6. Relinquishing some level of control within the organization and needing to adjust turnaround time expectations.
  7. Bundled PEO packages may include services not needed yet still incorporated in the bundle price. Billing may not be transparent in terms of having clear administrative fees and benefit rates outlined.
  8. Resistance from employees based on their perception of the PEO/employer relationship or prior poor experience with the PEO.

Not all PEOs are created equal and due diligence is required before considering working with one. You should always inquire:

  • How long has the PEO been in business?
  • How long on average do clients stay with them?
  • Are referrals from their current clients available?
  • What does the acceptance and onboarding process look like? 
  • What are their renewal rates for healthcare and administrative costs?
  • Are they a certified PEO (CPEO)?

If you are still undecided on whether a PEO is the right fit, you also should consider the projected growth of your organization in the future; need for control over your company, employee information, and the ability to customize your benefit plans; and preferences for managing your liability and risk. Since you will entrust the PEO with one of your organization’s most sensitive assets—your employees and their data—you want to gather as much information as possible to help you make the right choice.

For more information, contact Forvis Mazars or submit the Contact Us form below.

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