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The Pros and Cons of Retaining a PEO

A woman is sitting at a desk with a pile of papers and a cell phone.

​Hiring a professional employer organization, or PEO, has become a very popular option for small businesses that need help managing the wide range of administrative details involved in overseeing a workforce. Many departments of one (DOOs) are especially reliant on PEO help as they juggle daily responsibilities. But as seasoned HR pros know well, PEOs aren't for everyone

"They're great in a lot of ways, and that's how we can have a department of one," said Jessica Page, an HR generalist at Calsoft Systems in Torrance, Calif., and the only HR professional at her company.

Ruth Sokol, SHRM-CP, agrees. "Being a department of one, I value their partnership as they give me guidance on all things HR, from personnel issues to compliance, benefits and taxes," she said. Sokol is HR manager at Harmony Healthcare IT in South Bend, Ind.

PEOs typically handle such chores as payroll and benefits administration, though they also offer employee training services and pitch in on performance management and talent acquisition efforts. Perhaps most important, they keep up with regulatory changes at all levels, which helps ensure compliance, reduce HR's workload, and minimize the worry of both HR practitioners and business owners.

But working with a PEO isn't right for every company. PEOs operate under the concept of "co-employment," in which the PEO and its customer share the responsibilities of being an employer. By becoming the "employer of record," the PEO can directly manage payroll, issue W‑2s, and collect and pay employment taxes. However, some companies—and their workers—aren't comfortable with the idea of introducing a third party into all areas of the employee-employer relationship.

For example, Hannah Williams, HR manager for Cipriano Systems in Warrington, Pa., was disappointed when a PEO took over the vetting of job applicants when she worked at a previous employer. "It seems emotionally cold and socially distant," she said. "I believe the recruitment process and interview should be a warm welcome to your company, and the more you outsource this aspect of HR, the more of this warmth you lose."

Easing HR's Pain

That's just one of the issues to consider when deciding whether a PEO is right for your company. A good way to start, said Page, is by looking at the pain points created by your current systems and processes. After compiling a list, "I would try to see if the PEO really would solve the problems," she said. "If the answer is yes, I think it's fine to go ahead with it."

Mitigating compliance risk is one of big reasons smaller employers consider PEOs in the first place, according to David Cotie, sales director at Group Health Solutions in New York City.

That's why it's important to be sure the PEOs you consider not only are up-to-date on regulations, but also will proactively inform you of regulatory changes, observed Page. "If I didn't have a PEO, I don't know how easily I'd be alerted to all the changing regulations that might affect my company," she said.

Payroll by itself presents a number of issues that can trip up an HR generalist, said Cotie. So does benefits administration.

"I'm talking basic stuff, like ERISA [Employee Retirement Income Security Act] 125," he said. "I can't tell you how many employers over the years I've seen pretax deduct their employees' benefit contributions. Then you ask them what they're doing for Section 125 compliance, and they look at you with a blank stare." PEOs, he said, "will make sure you're compliant with something even as basic as Section 125."

By keeping on top of such details, PEOs also help DOOs be more productive, practitioners say. They provide "much greater flexibility to complete other tasks," said Williams. Despite her misgivings about the PEO's reviewing candidate credentials, she said, "we were able to spend much more time interviewing candidates instead of spending time contacting references, verifying credentials and other necessary yet menial tasks." 

Sokol said, "Working with a PEO gives me the opportunity to focus on strategic HR activities, which I think benefits our employees more than anything. Knowing that we have a dedicated team that's willing to work with us through any HR troubles that may arise is reassuring," she added. "It's not all falling onto one [person's] or two people's shoulders within our organization."  

However, hiring a PEO won't necessarily solve all your challenges. Like any other vendor, PEOs require time to manage, and challenges can arise in areas like communications and customer support. They are separate companies with their own operational and workforce issues, so their internal dynamics can impact yours.

For example, Page said, her PEO experienced high turnover recently. After working with one HR specialist for three years, she's now having to build a new relationship from scratch. She's also had to navigate several changes in payroll and training specialists. Such a lack of continuity, she said, "is a little disappointing."   

Research, Research, Research

DOOs advise researching how PEOs work and which one you might hire. Begin that research at home, Williams recommends. "Listen to your employees and take their thoughts into consideration," she advised. "Bringing in a PEO may change their job duties a great deal or alter the way they work with your business. It may change their benefits package, and they may rely on that part of the job as a reason to stay." In a job market with more openings than candidates, she said, "a PEO can be the final push an employee needs to leave."

Because Calsoft is an IT company, Page believes its employees would be disappointed if they had to work with tools that weren't up to snuff. Another area she focused on in her research was health care and the types of choices she'd be able to offer, as well as how the PEO might improve the company's benefits package.

Issues can arise in day-to-day work, as well. Occasionally, Sokol said, PEOs can be a communication bottleneck, holding up information that she could have delivered immediately. She also noted that because the PEO is the official administrator of her company's insurance plans, she can't reach out to carriers directly.

"A PEO isn't a one-size-fits-all for every organization," said Sokol. "I can't stress enough: Do your research before making a move." What one company values in a PEO may not be important to another, she said.

In Cotie's experience, most employers that end up unhappy with a PEO either "didn't go into it for the right reasons or didn't understand what it was they were purchasing." Some companies simply regard the PEO as a way to save money, he said.

However, he continued, "PEOs aren't just purchasing benefits. They're a total business management solution." Often, relationships don't work out because the customer wasn't clear about its expectations or didn't understand the PEO approach in the first place.

"Moving out of a PEO can be very difficult, because now you have to replace a lot of services that were bundled under one umbrella and replace them all individually," said Cotie. "That can get complicated."


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