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What is a PEO, Anyway? A Closer Look at HR Outsourcing

4 min read

Companies are like evolving organisms.  And like all living entities, expansions and changes come with growing pains.  When HR-related tasks become too difficult, what’s the best way to advance? What is a PEO and is it a good option for your company?

HR teams often simultaneously juggle organizational tasks with team building and employee support. This leaves many business owners looking for a way to alleviate the workload of their HR staff.  The Professional Employer Organization (PEO) industry claims that its services are perfect for rapidly growing companies.

But, what are some of the potential pitfalls to these services?  Do the risks outweigh the benefits?

This article will help those wishing to learn about PEOs and determine the best solution for their growing team.

What is a PEO?

A PEO or Professional Employer Organization is a third-party HR service provider.  In a nutshell, a PEO outsources the responsibilities that are normally handled by an HR department to unseen external entities.

In other words, Professional Employer Organizations take control of the decisions and actions that are normally allotted to human resources.  They find and hire new talent, determine the compensation, and manage payroll.

Generally, PEO’s do the following

PEOs work as “co-employers” with companies, and are “co-liable” for the workforce. The IRS defines Professional Employer Organizations as statutory employers.  PEOs use their tax identification numbers (EIN) for the processes of hiring, paying, and withholding taxes.  This means that employees are technically regarded as working for the PEO service.

Many companies choose to contract a PEO for financial reasons or to ensure compliance with HR-related labor laws. But, are they really a cost-effective solution?

How much Does a PEO Cost?

Employers are often blindsided by the unpredictable pricetag of PEOs.  Typically, they do not charge an unchanging fixed amount for their services.  Here are some common pricing models that businesses should consider before handing over their HR responsibilities.

  • Per employee- Some professional employer organizations charge a monthly rate per employee.  These payment plans are normally accompanied by an additional base fee.
  • Percentage of payroll + extra- Under this agreement, the PEO takes a percentage of a summed amount.  This amount includes payroll, worker’s compensation, employer practice liability insurance, and taxes.  A payment plan of this type can be challenging for businesses.  Since it is not a consistent number, it is not easy to plan for in the budget.

In addition to the base expenses, professional employer organizations normally charge for extra services and processing fees.  Be aware that PEOs are notorious for hidden charges.  Do not fall prey to these additional costs!

  • Administrative fees
  • Set up fees
  • Fees for extra features

Before agreeing to a payment plan, it is important to ask providers to provide a written account of all obligated charges.  It’s important to get a complete picture of all of the fees and expenses before an agreement is made.

PEO Benefits: Do they Outweigh the Risk?

Companies that don’t have HR management software to help them organize might look to PEOs as effective replacements.  Here are some of the reasons why companies might solicit PEO services.

  • Anonymity- Some employers consider anonymity to be a strength for things like promotion and hiring.  If there isn’t a face associated with the process, perhaps there is less resentment amongst not promoted employees.
  • Less paperwork- Companies without automated HR processes are usually reliant on HR staff to complete a wide range of tasks.  These may include creating employee payslips, managing taxes, and employee contracts.  Basically, they can complete busy work with accuracy and efficiency.
  • Legal Solutions- It can help you to comply with payroll tax laws and other legal considerations.  This can be an advantage for companies that are expanding and unfamiliar with a country’s employment laws. However, employers should take note that PEOs are considered only partially liable for tax-related legal errors.

Disadvantages of Using a PEO

Before moving forward, it’s important to see the potential pitfalls.  PEO’s aren’t right for everyone! There is no reason to contract a service that does not work to your advantage.  To avoid unwanted surprises, consider these possibilities before surrendering HR responsibilities to a PEO.

  • People matter- When it comes to welcoming new staff and team building, there is no replacement for a visible HR team.  The responsibilities of human resources cannot be simplified and separated from the psychological and emotional support of employees.  A good HR team cannot be replaced with an anonymous and physically absent organization.
  • Reduced control-  Company leaders and HR managers know that talent is the most important asset to their growing business.  Therefore, consideration of the consequences is necessary before committing to a service that takes control of the hiring process.
  • Lack of transparency- When there is a physical person present, it is much easier to see their actions and understand their processes. With a PEO, HR processes are a distant and removed mystery.  The missing responsibilities also mean a lack of visibility.

Is a PEO Right for My Company?

After looking at the pros and cons of PEOs, make a list of your company’s priorities.  Ask yourself the following questions

What is the Current Situation of my Company?

The efficacy and worth of PEOs change depending on the legal challenges that HR confronts.  Companies that are getting started in new countries may need to quickly familiarize themselves with laws and regulations.  PEO’s can help them to have a good understanding of the legal framework in this new setting.

On the other hand, companies that are dealing with legal challenges might try HR software to help manage documentsHR compliance checklists can also provide direction when hiring foreign employees.

Am I Truly Saving Time and Money?

Many rapidly growing companies may think that professional employer organizations will cut the expense of hiring full-time HR employees.

To properly answer this question, it is important to look at your organization’s big and long-term picture.  PEOs might indeed be able to efficiently complete specific tasks, but will the outsourced hiring process ultimately lead to increased turnover?

Employee happiness and satisfaction should be given the weight and value of money.   The team is the greatest asset of any organization and human resources act as a support system for that team.

PEO Alternatives: HR Software

With every critical business decision, is important to know all of your options.

Instead of jumping into an agreement with a PEO service provider, try automated HR Software.

HR software can lighten the load of HR by automating organizational tasks like scheduling and time off.

Employers who do not like the idea of a third party making hiring decisions might benefit from an applicant tracking system.

Human resources can focus on bringing the human touch to their business while allowing software to do the busywork.  Rather than eliminating people from the equation, companies can focus on what matters the most.

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