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 with not much left.

According to some experts, the small business owner may spend between 20 to 40 percent of their time everyday working on payroll, benefits, or tasks related to HR administration. To use their time more efficiently, many small business owners are turning to Professional Employer Organizations. However, before you consider a PEO you should review what others perceive as potential
PEO disadvantages as well as 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 the co-employer of your staff. As the 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 personal information. 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 liability burden for the PEO, the Professional Employer Organization could move you to a higher “risk category” than  originally placed, making their price for 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 premiums.  If your company has a good safety record and keeps claims to a minimum, then the amount of money you can save is increased.
  • When you leave a PEO relationship  you may have to go through a private insurer or through the state. If your company runs smoothly and safely, this is not really a concern. Since PEOs help your small business run more efficiently, this is less of a disadvantage and more a motivation – everyone wants to earn the lower costs. 


3. Cash Flow and new Costs Associated with a PEO

  • Because the PEO is a business as well, and has to meet it's 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 payroll company, especially when you consider how much time and money you are saving by investing in a PEO.


4. The Needs vs 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. However these benefits packages may not work with your business: the benefits may be too expensive, or your Gen X 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 services but that doesn't mean you have to choose all of them. You may want to use the PEO for specific responsibilities such as Worker’s Comp but not for Medical Benefits. By selecting only certain administrative tasks that you feel your business will utilize, you may lower the PEO rates. We happen to believe that the PEO saves you time to focus on your company and generate greater profits so outsource as much as is affordable.

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 insurance premiums rise, PEOs can be your way to beat the competition and help your business prosper.

Copyright © 2011 by
All rights reserved.