Foremost Pros and Cons in Using a PEO
Running Away from a PEO?
Professional Employment Organizations (PEOs) have gained a tremendous following in the past few years. They provide a multitude of services including payroll processing, employment tax collecting and reporting for both state and federal entities and the oversight of a variety of employment compliance issues. Some PEOs will provide and administer employee benefits packages as well. The prudent business owner should also examine the PEO disadvantages to his business as well as the upside to the relationship.
Advantages for Business Owners
Before we examine the potential pitfalls of retaining the services of a Professional Employer Organization, let us look at the benefits that they offer. First, PEOs relieve companies of an enormous paperwork burden by simply attending to all the details of payroll administration, withholding tax compliance and implementation of company employment policies.
Second, by conglomerating their individual clients, they obtain significant leverage and cost savings when purchasing health insurance. This allows successful PEOs to offer a range of options to their clients which in turn are provided to the clients’ employees.
Disadvantages to Business Owners
Business owners are used to being in control. Handing over the administration of such fundamental parts of their business is bound to cause them some trepidation. The PEO disadvantages for business owners can be significant and fall into five distinct categories.
Loss of Independence
There is no doubt that a PEO takes over some significant duties and responsibilities when hired by a small business. In return, the small business cedes some authority to the PEO. Nevertheless, it is in both party’s interest that the PEO perform these duties in a timely and responsible manner. The owner is still the owner, but is paid as an employee. This relationship, in no way, abrogates his ownership rights when it comes to financial oversight. It is, indeed, a relationship of convenience that benefits both parties.
Forfeiture of Management Control
It must be made clear that the PEO is not a co-owner of the business, but merely a co-employer who administers payroll and other employee administration functions; the small business is outsourcing its HR and other administrative tasks. The typical PEO does reserve to itself the ultimate right to hire and fire employees. Understandably, business owners are reluctant to delegate this responsibility as it is significantly different from delegating it to subordinate management personnel within the organization.
Insecurity
Small business owners who retain the services of a PEO do undertake some risk. They are trusting the PEO to diligently, thoroughly, and in a timely manner administer all their employee administrative tasks. Any discrepancies or failures to complete the mandated regulations will be the responsibility of the business owner, however there is talk of legislation to change this. Again, this is no different from having an in-house HR department with the exception that the PEO is probably far more experienced in dealing with these particular issues.
Credibility of the PEO
Ultimately, the business owner is responsible for the payment of withholding social security and unemployment taxes. Even if the PEO has collected these monies from the business owner, the failure to pay the taxes rests on the business owner. Prudence and timely oversight are the only remedies to this issue.
Cost
The final item in the list of PEO disadvantages is cost. Naturally, the PEO is in business to make money and will charge for its services. The prudent business person must weigh the cost of outsourcing against the amount it would take to sustain an in-house HR person or department. In most cases, a reputable PEO can provide more reliable services, better benefits and complete compliance at the same or reduced cost. Simply stated, for the average small business, PEO disadvantages are highly overstated.
