Pros and Cons of the PEO

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Pros and Cons of the PEO

When you are running a small business, your time is literally divided between a multitude of tasks, leaving you strapped for time. Not only do you have to worry about branding, marketing and most likely selling, but you also must make sure that your business is running smoothly.

According to some experts, the small business owner may be spending between 20 to 40 percent of their time everyday working on payroll, benefits, or HR administration. To use their time more efficiently, many small business owners use aPEO (Professional Employer Organization) or Employee Leasing). But before you consider a PEO you should review what others perceive as potential Professional Employer Organization Disadvantages (and potential advantages!) to hiring a PEO Company.

1. The loss of independence
Even though you will still be running your small business and making day to day decisions, the PEO will become a co-employer of your company. As the small business owner, you may also become an employee of the PEO, meaning you will have to disclose your salary along with your total company payroll. However, it is important to make the distinction between telling your PEO how much you make and thinking that they control your salary. You simply have to disclose the salary in order for the PEO to correctly calculate payroll. Bottom line: PEOs do NOT have control over your salary.

If your employees are mostly family or friends, then it might be hard to let a large corporation have this sort of insight into your company. But consider the fact that PEOs are third-party organizations that are working towards helping your business become more efficient. They will also help ensure employee terminations have legal grounds and they can help objectively resolve disputes (which could be very useful in situations where personal and business matters are entangled). Plus, PEO Companies offer training alternatives if you feel that an employee needs an opportunity to grow. Bottomline, PEOs deal with HR responsibilities and risks saving you countless hours and many headaches but do not take away your independence.

2. The PEO is a company itself, constantly assessing the cost-benefit of your company.
If your company is becoming too much of a burden for the PEO, then the Professional Employment Organization could place you in a higher “risk category” than you originally had when first signing up, and may price their services higher. Because some PEOs are large companies and represent many small businesses, they will negotiate better premium packages (benefits, workers compensation) and in many cases, lower your overall costs. If your company has a good safety record and keeps claims to a small amount, then the amount of money you can save is increased. When you leave from a PEO relationship you may have to go to a private insurer or the state. Of course, if your company runs smoothly and safely, this is not a really a concern. Since PEOs help your small business run more efficiently, this is less of a disadvantage and more of motivation – everyone wants to earn the lower costs.

3. Cash flow and new costs associated with PEO
Because the PEO is a business as well and has to meet their own deadlines, they may request certain payments up front. This may mean a fundamental shift in your cash flow, because there will be consequences for being a week late with your payroll taxes. Fortunately, these transactions are not much different than working with an Outsource HR or Outsource Payroll Company especially when you consider how much time and money you are saving by investing in a PEO.

4. The costs
A PEO provides the chance for small businesses to bargain as if they were a bigger company, while still maintaining their small number of employees. This means that they can access lower rates and better benefits packages. But these benefits packages may not work with your business: the benefits may be too expensive, your employees may desire bigger paychecks rather than a luxury benefits package. These things should go into your decision-making process when choosing whether or not to hire a PEO. You should also remember that PEOs offer many options but that you do not have to choose all of them. You may want to use the PEO for specific parts such as Worker’s Comp but that does not mean you have to outsource Medical Benefits (depends on the PEO). By selecting only certain administrative tasks that you feel your business should outsource, you sometimes may lower the PEO rates, however we believe that the PEO saves you time to focus on your company and generate greater profits so outsource as much as possible!

When deciding whether or not to choose a PEO, it is important to understand the different Costs and Opportunities of putting your company’s HR in the hands of another organization (whether its a National PEO or Regional). But as premiums rise and insurance companies increase the costs to the small businesses, PEOs can be your way to beat your competition and make your business prosper. If you do decide to hire a PEO, make sure you review PEO Services here.

About the Author
Carolyn Sokol is a frequent contributor to PEOcompare.com and writes about issues that may affect small businesses such as workers comp. She is a founder of PEOcompare.com which helps small businesses find the Best PEO companies for their particular needs. Her background is in marketing and communications, employee education and training, development of policies and procedures and the ongoing delivery of outstanding service to customers.