Are the Benefits of Using a PEO Really Worth It?

What are the pros of using a PEO?

When deciding how best to manage your company’s HR processes, it’s essential to consider the pros of using a PEO and evaluate whether those benefits are the right fit for your business. Your PEO options will depend on your business’s size and goals. The best PEO services provide many HR-related services, such as payroll processing and payroll tax management, health insurance, workers’ compensation insurance and retirement savings plans.

Below are some of the top advantages of partnering with a PEO. 

1. A PEO can save you money.

The annual return on investment associated with cost savings alone is one of the most common factors that small business owners assess when deciding whether to use a PEO.

The National Association of Professional Employer Organizations (NAPEO) found the expected return on investment (ROI) for PEO clients, based on cost savings alone, is 27.3 percent per year. This estimate is based on the cost savings of businesses that entered into PEO co-employment agreements focused on five areas: 

1. HR personnel costs
2. Health benefits
3. Workers’ compensation
4. Unemployment insurance
5. Other PEO services, such as payroll and retirement plans 

An ROI of 27.3 percent means that for every $1,000 spent on PEO services, the average business owner would save roughly $1,273, resulting in a net benefit of $273 for every $1,000 spent.

2. A PEO can protect you from legal risks.

PEO partnerships offer several risk protections. For one thing, the IRS charges small businesses billions of dollars every year in payroll fines, but a good PEO service can protect your company in the event of tax errors. Reputable PEO services are insured for mistakes they might make in your accounting and payroll. If something is off, the PEO eats the cost rather than you. However, you should confirm that your chosen PEO has this guarantee before you commit to using the service. Otherwise, the consequences may be your responsibility.

Similarly, PEOs reduce your risk with HR compliance. Compliance failures can lead to fines and even lawsuits. The average lawsuit for Family Medical Leave Act violations is around $80,000, according to risk management company ESIS. That’s a steep price to pay. On top of such penalties, HR compliance issues can hurt employee retention and drive up turnover costs. But when HR work is outsourced properly, that insurance provides your business with a layer of protection. Since you are not responsible directly for any problems that arise, you are not on the line for their punishing costs.

Furthermore, PEOs insulate your company against certain risks by saving you time. The resources you aren’t putting into in-house HR services are free to be reallocated. That can empower you to improve margins and/or cash flow and both of those outcomes give you additional risk protection. The time working with a PEO saves is potentially more valuable than the direct spending you can cut for these services. This is why proper outsourcing is one of the best ways for a small or midsize business to improve its overall ROI.

3. A PEO can manage your workers’ compensation program.

Another benefit of using a PEO is that the PEO takes care of time-consuming tasks like vetting and purchasing workers’ compensation policies, according to Bryan Bowles, founder and CEO of Transactly. 

“Prior to utilizing a PEO, we had to manually sit through the annual audits, which consumed a significant amount of our accounting staff’s time,” Bowles told business.com. “In addition to the time savings, we’ve noticed a significant cost savings as compared to purchasing a policy directly.” 

PEOs have experience with workers’ comp programs, so they have policies in place for situations you may not have yet encountered at your business. One example of this is return-to-work programs that help employees transition from medical leave back to work through modified, low-risk or light-duty jobs. 

4. A PEO can improve your employees’ experience.

PEOs also add value to your business by providing a great employee experience. Since a PEO handles much of the grunt work of HR, it allows your internal HR team to focus on your company’s culture and employee engagement. 

Additionally, PEOs offer great employee benefits that typically wouldn’t be affordable for a small business, according to Samantha Reynolds, director of marketing and communications for Helpside. These include “not only traditional benefits like health, dental and vision insurance but also conveniences like online access to paycheck stubs, direct deposit and assistance with verifications of employment.” 

Employees of businesses that use PEOs are more likely to experience:

• Higher levels of employee engagement.
• Improved trust in their employers.
• More confidence in the business’s approach to company growth.
• Higher employee retention rates.

5. A PEO can help attract and recruit top talent.

Partnering with a PEO can enhance your recruiting efforts. The comprehensive employee benefits package you can offer through a PEO makes your business more attractive to potential hires. Whether your benefits package becomes a focal point of your recruitment process is up to you, but every improved benefit is an upgrade to the employee experience and job seekers notice these things when they compare workplaces.

Additionally, the PEO can handle a chunk of the recruiting and hiring workload, making the process substantially more efficient. You’re also likely to retain good employees by having a more rewarding work environment and you’ll have more resources to go after top talent that can make the whole business run better. It’s a major win-win.

6. A PEO can bring peace of mind.

Outsourcing HR, when done right, gives business owners peace of mind. The risk management and efficient handling of administrative tasks let you rest assured that you are compliant with HR regulations and that the HR busywork of your company is in good hands. You aren’t losing out to burdensome HR or benefits management; you’re investing in employee satisfaction and you’re doing right by your company with HR experts by your side.

What are the cons of using a PEO?

It’s crucial to conduct extensive research before partnering with a PEO. Business owners need to understand they will be entering into a co-employment agreement with the PEO vendor, which means relinquishing some control over their businesses. 

Here are some of the disadvantages of working with a PEO that you should carefully consider before deciding to use one. 

1. You may experience delayed communication and conflict resolution.

A PEO provider doesn’t only manage HR for your company; they have many other clients to serve as well. Since there’s no exclusivity, your business may not receive the personal, in-depth attention it needs in a timely manner. This can cause communication or other actions to be more delayed than if you had an internal team managing your HR.

2. A PEO owns your payroll data.

Another potential con of partnering with a PEO is that it owns your loss run and payroll data, according to Jon Brodsky, CEO of YouNow and former CEO of Finder, who found this to be a deal-breaker when he was considering using a PEO at his previous company. 

“Because the PEO would own the data, we would have had to start from scratch when we were ready to get insurance and benefits on our own, which would have likely meant higher rates for us,” Brodsky said. “So, we decided to take the short-term pain of administering our own healthcare and receiving slightly less-than-favorable rates on our insurance to have the best long-term potential cost savings for Finder.”

3. You may be responsible if the PEO makes a mistake.

PEOs are responsible for administering payroll and filing payroll tax returns, which can be one of the most significant benefits of partnering with one, according to Tammy Dain, founder and CEO of Rabble. However, if anything is mishandled, the consequences may be yours to face.

“Since employees are considered co-employees of both the PEO and your business, the IRS still considers you liable if there are any errors in those filings,” Dain said. “Thus, it’s incredibly important that you have verified the PEO’s practices with regard to taxes. It is completely within your right to audit the payroll tax returns that the PEO has filed on behalf of your employees.” 

The IRS currently offers a voluntary certification program for PEOs, which ensures tax liabilities remain entirely with the PEO rather than your business. To reduce the risk of payroll mistakes, partner with a known leader in the payroll space or a certified PEO.  

4. You lose control over internal processes.

A PEO can administer nearly every aspect of your HR, saving you a lot of time and energy. However, it can also cost you some level of control. PEOs aren’t ideal for business owners who want complete control over their HR processes. One partial way around this is by partnering with a PEO provider that offers customizable packages rather than preconfigured service bundles. This allows you to maintain control over certain HR tasks and still receive assistance for others.

What does a PEO do?

A PEO is an outsourcing company that provides HR services for SMBs through co-employment agreements. These are some ways a partnership with a PEO simplifies your business’s HR duties: 

• It reduces the number of administrative and HR tasks your business must handle itself.
• It helps you adhere to federal regulations, reducing your compliance risk.
• It offers comprehensive benefits for all employees. 

By partnering with a PEO, small business owners can devote more time to their companies’ revenue-generating operations because they have more time to lead and focus on driving employee performance, according to Brian Michaud, president of ADP’s smart compliance solutions. 

“A PEO offers built-in protections and helps ensure holistic compliance, from payroll to HR (i.e., discrimination and harassment) to insurance,” said Michaud. “PEOs allow owners to focus on knowing and executing on their business, rather than needlessly worrying over potential fines and lawsuits that can come unexpectedly.” 

What are the advantages of in-house HR?

The most common alternative to partnering with a PEO is to hire HR people to work in-house. An internal HR department has its own pros and cons and, for some businesses, it may be the better option. 

Here are some potential advantages of in-house HR:

• It gives you control over your HR policies: Employing your own internal HR team offers you more control over your workplace policies and protocols. In-house HR employees can provide fast execution when new decisions are made, such as policy and compliance changes. As your business evolves, your HR team will be agile enough to modify policies in tandem.
• It can help maintain your company culture: An in-house HR team is dedicated to your business and your business alone and you can hand-select HR professionals who will understand and act in the best interest of your company. Unlike a PEO vendor, these individuals will operate within your company culture and can help cultivate employee experiences and policies that align with it.
• It can improve your employees’ experience: In-house HR leaders will work face-to-face with employees for training, development, culture events and conflict resolution, improving team members’ overall experience with the company. Internal HR staff can also help by providing in-person assistance with recruiting, interviewing and training new employees. 

What are the disadvantages of in-house HR?

HR departments are costly to run and the additional salaries of an entire department can be a burden to small businesses. If your business has grown at a manageable rate and needs little HR assistance, hiring and maintaining an internal HR team may be unnecessary. 

Here are three disadvantages of in-house HR:

• It’s time-consuming: Managing HR duties in-house takes up time and manpower that many small businesses can’t afford.
• It may cost more than a PEO over the long term: While hiring someone to manage standard payroll services or HR internally may seem affordable initially, you must account for long-term sustainability. Employing knowledgeable and experienced HR workers to ensure labor law compliance, administer benefits and draft company policies and procedures can cost business owners more out of pocket than they would like.
• It’s not easy to attract top talent: Finding quality employees may be difficult, especially for small businesses. Top candidates usually seek valuable benefits, such as high-quality medical and dental insurance and a 401(k)-plan match, that small businesses can’t always offer without the help of a PEO. 

Are the benefits of using a PEO worth it?

By partnering with a PEO, businesses receive access to experienced HR experts and a wide range of support that may otherwise be out of reach for small companies. Alternatively, keeping HR services in-house can boost employee satisfaction through face-to-face interactions, which can strengthen the bond between the employee and employer.

That said, a PEO partnership is best suited for SMBs that want hands-on HR support for many HR functions, legal compliance assistance and comprehensive yet affordable employee benefits. They must also be OK with the co-employment model that comes with a PEO.

Meanwhile, a PEO partnership may not be worth it for very large organizations, companies that only need help with one or two HR functions or businesses that want to maintain complete control over all of their HR processes.   

Consider the size and needs of your business when making the final decision between using a PEO and keeping HR work in-house.

What are the best PEO providers?

If you’ve decided a PEO is the right HR solution for your company, the next step is finding the ideal provider. Here are some of the top PEO vendors on the market:

• TriNet: In addition to facilitating essential HR functions for SMBs, TriNet offers industry-specific HR support for a wide variety of sectors. This means you can connect with an expert in your field for any specific or niche HR questions you may have. Check out our review of TriNet to learn more about this PEO vendor.
• Deel: If you’re looking for a global PEO, Deel is a great option. This vendor provides HR functions and compliance assistance in more than 100 countries, giving localized support based on where your business and employees are located. Read our review of Deel for everything to know about this PEO provider.
• Rippling: As one of the most customizable options we reviewed, Rippling is a powerhouse PEO. You can modify its platform to automate several HR functions, and you can transition from a PEO setup to using its standalone workforce platform if needed. Dive deeper into the benefits of Rippling with our full Rippling review.
• Insperity: Insperity covers all the HR functions you could need, such as payroll, benefits administration and compliance assistance. If talent development is a priority, it offers thousands of online courses and books for your staff. Our Insperity review goes into more detail about the pros and cons of this PEO service.
• Justworks: This PEO company delivers essential HR management with transparent pricing. It provides a highly intuitive HR platform that you can access from any device. It’s easy to use, so your employees will have no problem using it to manage their self-service HR needs as well. Read our Justworks review to learn more.

These are just a few of the best PEOs available. They each have upsides and downsides, so evaluate vendors carefully to determine which is best for your business. Be sure to also consult our guide to choosing the best PEO.

Skye Schooley contributed to this article. Source interviews were conducted for a previous version of this article.