For small and medium-sized businesses, handling payroll, benefits, compliance, and other HR tasks can be a major hassle. Professional employer organizations (PEOs) promise to take these burdens off your plate, but do they really save you money in the long run? Here’s an in-depth look at how PEO services can impact your bottom line.
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How PEOs Work
PEOs serve as co-employers along with the client company. They manage HR functions like:
- Payroll
- Health insurance
- Workers’ comp
- Regulatory compliance
Employees are hired and managed day-to-day by the client company, while the PEO handles behind-the-scenes HR administration. This allows small businesses to compete with larger companies by gaining access to Fortune 500-level benefits and HR expertise. A PEO broker can help you find the right partner to work with.
The Potential Cost Savings
Shared Resources
One major way in which PEOs create cost savings is through pooled benefits, resources, and economies of scale. By combining employees from many client companies, PEOs can negotiate better health insurance rates, workers’ comp policies, and other benefits. They also optimize HR administration across their entire client base.
These shared resources are especially beneficial for small businesses with under 50 employees. Individual policies and plans for these companies can be very expensive.
Administrative Efficiencies
Spending less time on administrative tasks is another source of savings with PEOs. They efficiently handle payroll, compliance, reporting, onboarding, training, and other HR functions in-house. This allows client companies to focus on their core business activities rather than managing the “back office.”
PEOs Stay Current on Changing Regulations
Staying on top of employment law changes and regulatory compliance is a huge challenge for small business owners. PEO experts handle this legwork, ensuring clients follow all rules and regulations. This prevents costly litigation that can result from noncompliance.
Potential Drawbacks to Consider
Service Fees
While PEOs provide many valuable services, they come at a cost. PEOs typically charge a service fee that runs from 3 to 15% of payroll. There is also an additional per-employee-per-month fee. So PEOs may not be cost effective for very small businesses.
Loss of HR Customization
Since PEOs pool many clients together, it can be harder to get customized benefits packages or HR solutions. However, some PEOs offer different service tiers to provide more flexibility.
Compliance Liabilities
While PEOs handle compliance, the client company is still ultimately liable for any violations. So, it’s important to partner with a reputable PEO with a proven track record.
The Bottom Line
PEOs typically offer significant cost reductions for small and midsized businesses through economies of scale, administrative efficiencies, and compliance support. However, the service fees should be evaluated to ensure they will result in net savings based on your company’s specific HR needs and challenges.
When researching PEOs, be sure to request client references and calculate projected cost differences compared to handling HR in-house. It’s also important to understand the PEO’s service level agreements and what specific HR functions they will and will not handle for your organization.
Taking these steps will allow you to make an informed decision about whether a PEO partnership is the right financial move.