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Pros Vs. Cons of Professional Employer Organizations (PEOs)

Posted on January 17, 2015
Amy GulatiWritten by Amy Gulati | Email author

As most business leaders know, the more employees you have, the more your business must comply with various employment laws.  Title VII kicks in at 15 employees, COBRA requires 20 employees, FMLA coverage starts with 50 employees, and the Equal Pay Act covers all employers.  Healthcare reform has added an additional layer of compliance and has also increased costs for many employers.

For many companies, Professional Employer Organizations (PEOs) seem like the ideal solution as they assume much of the legal risk of employment through a direct payrolling arrangement where employees are paid and receive benefits through the PEO.  In addition to payroll and benefits administration, PEOs offer varying types of other management services such as training and education, compliance support, etc.  For many companies, PEOs seem like a cost effective and low-risk alternative to growing your business through direct hiring. However, it’s important to understand the pros and cons of this model for your business.

Employer Vs. PEO Who’s Accountable for Risks?

For starters, you must be aware that transitioning employees off of your company’s payroll to a PEO does not absolve you of all of the responsibilities and risks of acting as an employer.  If you continue to direct the work of your employees, as is almost certainly the case, you would still be considered a co-employer for the purposes of most laws.  This means that an employee could still make legal claims against your company for anything from workers’ compensation to sexual harassment.  Mitigating the risk involved with non-employees is a complicated issue and usually based on situational factors so it’s critical to understand that PEOs are not a silver bullet to solving this problem.  It’s also important to note that PEOs are not governed by any consistent state or federal regulations.  Some states have passed laws that regulate their activity and establish licensing requirements, it’s important to note that the requirements vary.  For example, you probably assume your PEO carries workers’ compensation insurance, however if they’re incorporated in a state that doesn’t regulate this aspect of PEO operations, you might be surprised to find out that they don’t carry it all.  It’s vital that you read the fine print in any contract you sign with a PEO to ensure they’re accountable for all aspects of employment.

The Impact of a PEO on Your Corporate Culture

Another consideration with a PEO arrangement is the impact that it can have on corporate culture.  Study after study has confirmed the importance of mission and culture in retaining and motivating employees; moving them to another company’s payroll fundamentally undermines the ability to build culture.  The HR function can, and should, act as the steward of your company’s culture. Calling a telephone number has a completely different feel than in-person attention.

PEO Alternatives

As an alternative to PEOs, many organizations opt for HR Management Outsourcing or engage with HRMOs in addition to their PEO service to send a clear message to employees that you are investing in their wellbeing.  You gain seasoned HR subject matter experts to help you address issues like compliance, while also implementing best practices to increase engagement and productivity through a personalized approach.  These expert HR consultants can also help your company come up with creative solutions to some of the common pain points that motivate companies to look at PEOs.  For example, Helios frequently works with our broker partners, The Meltzer Group, to help our clients design benefits that meet the company’s need for cost effective plans while still offering quality coverage to employees.  Outsourcing the HR department through HRMOs, gives you access to a team of HR professionals who can both support employees and partner with managers.  By contrast, most PEOs are set up merely as administrative personnel functions and lack the ability to truly support your business.  This places an undue burden on managers who are left to assume a lot of day to day HR management activity, without the knowledge to effectively handle these situations.

While every business case is different, here are some other pros and cons to PEOs to consider when making your decision. Additionally, the Small Business Efficiency Act (SBEA) passed last month is expected to make it easier for employers who have PEOs to end their contracts mid-year without having to restart contributions for wage-based payroll taxes should you decide you’d like to look at a PEO alternative as you grow and scale your organization.

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