Disadvantages of Professional Employer Organizations

A commonly asked question we receive from small business owners asks if there are disadvantages to creating a relationship with a PEO. We have decided that this would be a great article to put together; to dispel some of the myths concerning PEO disadvantages. Many of these perceptions, while understandable, are not backed up by any facts. 

First, let us review the common PEO services, followed by the ‘disadvantages’ of professional employer organizations. Today,
PEOs provide small businesses access to expertise in human resources, payroll, tax management, benefit administration and HR compliance management. In addition, PEOs transfer risk away from the small business by providing assistance in putting together and administering best practices in employment, employment policies and procedures. Some of the methods they use are seemingly simple, yet they are vital to ensure compliance such as developing employee handbooks, providing a risk assessment or procedures concerning employment policies. Some PEO companies will also provide access to recruitment, background screening, and discounted drug testing services, all of which lower the level of risk on your small business. Also, as the shared employer of record, PEOs will take on the burden of handling or fighting unemployment claims and workers' comp payments. 

The advantages of using professional employer organizations are not specific to one industry, which is why long term growth projections are expected to continue even during an economic downturn such as the one that started in 2009. Simply put, more business owners are considering using PEOs in their HR departments, knowing that these work related issues take up too much time and take them away from their core business. So after our quick review, what are the apparent PEO disadvantages, and why do we believe them to be myths? 

The PEO Disadvantage Myth List

Myth #1 – “I will lose control over my employees.”

Today, this couldn’t be further from the truth. The PEO client services agreement is executed between both you and the professional employer organization. The determination of the rights of you as the employer and the PEO as the co-employer are outlined for all to understand. If you find anything that does not appear correct, by all means, inquire about it. We also recommend a quick review by legal counsel. Losing control is a myth as PEOs today share the burden of employment, but you may hire, fire, and give raises without the PEO being involved. 

Myth #2 – “A PEO is actually a payroll provider with medical benefits.”

This concern has been voiced because the PEO is still relatively unknown in many of the 50 United States. Although small businesses in Florida, California and Texas are very familiar with the concept, the other 47 states are not so enlightened. Ultimately, the PEO does take care of payroll, but the sharing of risk and burden of employment are well beyond the definition of a payroll provider. 

Myth #3 – “A PEO will be confusing to my employees.”
This myth, like most others, can be handled with proper communication. In fact, the PEO will even provide assistance in outlining the many benefits the employees will now have available to them. Additionally, employees will be thankful that they have someone other than yourself to answer questions about typical employee benefits and other related issues. Now, can employees get confused? Yes, but with the proper planning, (not too much, mind you) you can reassure employees that you are still the boss, now providing them with more than the typical small business benefits you had prior to the PEO relationship. 

Myth #4 – “I still need to work with an insurance broker.”
This is an interesting myth, while there are a number of brokers that provide assistance in selecting a PEO, there are many PEO brokers that do not resell medical or other insurance. Therefore, this one is entirely up to you. If you have a great relationship with your broker, by all means, continue working with them. However, the PEO is a one stop shop for many services, and can more than make up for a broker that is not responsive to your needs. Remember, PEOs are not insurance companies and do not sell insurance, but simply provide you with medical and other benefits under the ‘employment umbrella’ as if you were a much larger organization. 

Myth #5 – “PEO’s are expensive.”

PEOs, as stated above, are not only payroll providers, but provide a full level of employment related services. While the cost of these additional services amounts to more than a payroll vendor, a simple review of the true costs of your time can be the difference in your decision. We believe there is a true ROI in working with a PEO and have provided a few thoughts as you review a PEO for your needs.
Examples of savings include: 

    - Retaining your best employees 
    - Saving time learning and understanding compliance issues 
    - Reducing administrative time on payroll and payroll tax compliance 
    - Less time (for you) finding medical and other benefits for employees 
    - Cost containment on the burden of medical costs 

So, we see that the disadvantages of professional employer organizations actually seem to be myths. We believe any small business with an employee base between 1 and 100 should consider a PEO as an option outside of typical
payroll outsourcing. You are provided with more services, less work and a better way to retain your employees – which means an easier time for you in leveraging your business for growth.

About the Author
Anthony Kelly is a frequent contributor to PEOcompare.com and has experience working for small businesses and employee leasing companies since 1997. He frequently writes about compliance, HRO, PEO insurance, and other issues affecting the small business owner.

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