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PROS AND CONS OF A PEO

PEOs: Pros and Cons & Everything You Wanted to Know

You have a great idea. You start a small company to make the idea a reality. It’s working. You’ve attracted investors so you have raised some capital. You’ve hired a few people so you’re moving forward. You can see the prize right there, right in front of you.

Now comes the hard part: onboarding new employees; payroll; human resources; in-house paperwork; notarized contracts; legal documents; liability; establishment of company policies; detailing rules; calculating paid time off; and all of the other basic steps of business operation.

Every moment spent on mundane back office work, is another moment kept from realizing your business dream.

A PEO is the solution.

 

What is a Professional Employer Organization

Professional Employment Organizations (PEO) take care of general office work so that innovators can focus on growth and effective revenue generation. The PEO operates hand-in-hand with management, but it removes burdensome tasks by handling the daily back office work like payroll, government compliance, and Human Resources, including health insurance, retirement, and workers’ compensation. As a co-employer, the PEO also absorbs a lot of responsibility and liability.

The PEO industry is already huge. There are hundreds of PEOs that are being used by thousands of companies employing around 3 million people in the United States and generating gross revenues of between $136 and $156 billion.1 Every PEO is slightly different just like every business is unique. Some PEOs do everything, including having a representative sitting in the office down the hall. Others offer specialized services.

Industry reports show that businesses that use PEOs grow 7 to 9 percent faster, have 10 to 14 percent lower employee turnover, and are 50 percent less likely to go out of business.2

 

Pros

Simply removing the mundane tasks of management is a significant step forward. You can focus on growth instead of paperwork.

Advantage No. 1: Organized Growth.

Young companies often grow faster than expected. Hiring a person dedicated to human resources is not always cost effective. Yet, nobody in the office has any background in employment law nor have they ever established a 401(k) plan or even a vacation policy. POEs fill this gap, at least until the company grows to the point where it would benefit from an on-site HR department.

Advantage No. 2: Outsourcing HR.

Established companies can reorganize and streamline operations by shedding their Human Resources department. It may be a radical move, but it would probably be significant cost savings.

Advantage No. 3: Less Paperwork, Fewer Errors.

You are an expert in your business. The PEO is the expert for its role. It is designed specifically to take care of back office operations and it has established a system to streamline the flow of paperwork, anticipate problems and questions, and, therefore, limit mistakes.

Advantage No. 4: Legal Protection.

Employees would officially be working for the PEO. That means that the PEO is responsible for the legal ramifications of employee problems. Employment liability insurance is in place in case a former employee, for example, sues for discrimination or wrongful termination.

Advantage No. 5: Savings.

PEOs use economies of scale to get deals on insurance. The most successful PEOs have a lot of employees working for several different companies; this provides access to group rates that would be unavailable to small and mid-sized companies. PEOs are constantly looking for better deals, too, and they are often willing to change from one insurance carrier to another.

Advantage No. 6: Due Diligence.

PEOs keep tabs on the general workings of the client company to make sure that nothing falls through the cracks, from important details like contract expiration dates and insurance renewal periods, to something as simple as birthdays and anniversary dates for employees.

Advantage No. 7: Legislative Oversight.

PEOs stay on top of the changing landscape of federal, state, and local regulations to provide timely and expert information about requisite changes. The Affordable Care Act is constantly in the news, OSHA, EEOC – should management spend time keeping track of all of the changes? PEOs even exert lobbying power in order to shape beneficial legislature.

Advantage No. 8: Experience.

PEOs have started and established many companies. They have seen it all. Fledgling companies benefit from this guidance to avoid the pitfalls that have stalled or finished lesser projects.

Advantage No. 9: Recruitment.

When a company is growing fast, adding the hiring process overburdens management. PEOs coordinate head-hunting for executives and scouring the workforce for employees so that company growth is not stunted. Client companies, of course, are able to influence any part of the process and are brought in to make the final decisions.

Advantage No. 10: Onboarding.

Once the decisions have been made for new hires, the many steps of getting the new employee situated within the company starts: the paperwork, the rules, the introductions. Much of this must necessarily be done on the job site, but a lot can be done by a PEO.

Advantage No. 11: Training.

Those first few days when a new, wide-eyed employee is trying to figure out how things work do not help the company move forward. Allocating an established employee to serve as tour guide actually hampers the company. Many PEOs are set up to provide the basic training that new employees need in order to get them through the learning process quickly and efficiently.

Advantage No. 12: Attract and Retain Sought After Employees.

PEOs leverage their size to get the best possible insurance. There may be specific aspects that could be used as perks for higher level employees. Orthodontia, for example, is not often covered by basic insurance, but braces for little Timmy are very expensive. That coverage may mean the difference between getting an expert employee or losing his skillset to the competition’s better dental plan.

Advantage No. 13: Employee Manuals and Forms.

As a specific example, established PEOs have created many manuals to outline procedures and regulations for companies. New companies shouldn’t have to reinvent the wheel, when customizing existing manuals or forms is easier and faster.

 

Cons

Disadvantage No. 1: Loss of Control.

The person who runs the company makes the final decisions. Often that person also wants to make all of the decisions. A PEO solution is, by definition, the delegation of a significant portion of the daily operations of a company. Even though supreme authority is maintained by the client company, it is not always easy to relinquish the day-to-day control.

Disadvantage No. 2: Possible Insurance Alterations.

One of a PEO’s biggest strengths is also a weakness. PEOs leverage their size to get good deals on health insurance. That also means that they may switch carriers often. Should this be a problem, companies can handle their health insurance separately. Also, savings are passed on to the clients, but there may be extra fee that cut into it.

Disadvantage No. 3: Pricing Schemes.

PEOs use two basic business models: a flat fee and an itemized plan. Once a client has gone through the time and energy of partnering with a PEO, it may be difficult to adjust when business would justify change. The flat fee model, which can take up to 10 percent of salaries, may not make sense as salaries rise quickly because of your success. Paying for individual aspects of a PEO would be more predictable and not subject to salary fluctuations. Of course, often services are bundled, joining valuable and unimportant aspects together. 

Disadvantage No. 4: Reduced Personal Contact.

The fact of the matter is that many problems will not be resolved face to face. Information websites, automated emails, and phone calls are the more likely forms of communication. Response time will be longer than walking to the HR department to ask a question.

Disadvantage No. 5: Reduced HR Intangibles.

There is some value in having Human Resources on site. The department is often tasked with spreading holiday cheer, maintaining the company newsletter, and establishing relationships in the local community.

Disadvantage No. 6: No On-Site Crisis Help.

Times of crisis or chaos will, perhaps, be made more complicated. HR is where complaints – legal or otherwise – are officially lodged. Writing an email about sexual harassment is not the same as closing the office door and telling a real person about it.

 

How Small Businesses May Benefit from PEO

Professional Employment Organizations are not the traditional model for business and they have their faults, but there is a reason that hundreds of them prosper in the United States. PEOs are designed to effectively and efficiently maintain the daily work of a business, they have the experience and expertise for supporting the growth of the company, they take on liability, they keep tabs on the changing legislative environment, and they save money – all so that management can focus on innovation.

 

1 Bassi, Laurie & McMurrer, Dan (2015), “An Economic Analysis: The PEO Industry Footprint,” Retrieved from: http://napeo.azurewebsites.net/docs/default-source/white-papers/napeo-white-paper-3-sept-2015-final.pdf?sfvrsn=10

2 National Association of Professional Employer Organizations, “3 Ways Your Small Business Benefits From Using a PEO”, Retrieved from: http://www.napeo.org/docs/default-source/Member-Resources/infographicpeobenefitsnov2015.pdf?sfvrsn=2

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