Outsourcing HR: The Pros and Cons of Using a PEO Service

Perhaps the greatest burden for small business starters lies in the area of business management. Our most talented veterinarians, bakers and plumbers are not likely to find their forte in the exacting demands of employee recruitment, training, payroll, taxation, workers’ compensation, benefits, company policies and the labyrinth of government regulatory compliance. What a headache!

Background

Professional employer organization (PEO) firms obtained popularity in the 1980s as a way to outsource the HR burden for small to medium sized businesses. PEOs operate by hiring a company’s employees in its stead. As the employer of record, a PEO becomes legally responsible for the hiring, firing, payment, insurance, taxation and regulation of all employees of the company.

According to the National Association of Professional Employer Organizations (NAPEO), approximately 700 PEOs were operating in the United States as of 2010, co-employing 2 to 3million workers in fields as diverse as accounting, technology, manufacturing and government agencies. Small businesses comprise the majority of PEO clientele.

Advantages

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The most immediate benefit of utilizing PEO services is saving time and staff. When tedious HR responsibilities are eliminated, managers are freer to focus on core competencies and grow their business. A second advantage is the access to higher caliber benefits packages. PEOs can offer Fortune 500 quality benefits that will attract more skilled workers. Another advantage is the lower cost of worker’s compensation insurance that PEOs are able to negotiate.

PEOs can also provide turnkey advanced HR services such as conducting professional candidate interviews and preparing employee handbooks and company policies. Fifthly, using a PEO reduces a company’s legal liabilities and obligations toward employees. The PEO conducts all statutory compliance training and manages all employee risk and safety issues.

Disadvantages

Despite the numerous merits, there are several reasons why a company may not want to outsource its HR management. First is the loss of control that any transfer of administrative power implies. For example, a company’s choice of benefits packages will be limited to those offered by the PEO. Also, the company’s power to hire and terminate workers may be limited by its PEOs policies.

A second drawback is excessive subjection to business statutes. Many governmental regulations designed for larger enterprises do not apply to smaller businesses. Nonetheless, a large PEO firm, being the legal employer of a company’s workers, will enforce all such regulations on its co-employer. A third disadvantage is the possibility of employee dissatisfaction. Suppose that all one’s employees are summarily terminated and rehired by an unfamiliar outside entity and forced to cooperate with it. This can understandably be a confusing and undesirable situation for many workers.

Saving time and staff, lower insurance costs, superior benefits packages, advanced HR services, and reduced liabilities render PEOs an attractive option to businesses that do not mind some loss of administrative control, increased regulation, and possible employee inconvenience. Entrepreneurs in diverse fields have found HR outsourcing a lifesaver for over 30 years, and it continues to merit the serious consideration of every business start-up.

Discuss This Article

Comments: 8

  • Not only is PEO a great option for small businesses, but it allows also for medium and even large companies to get additional HR support without adding to staff and gaining better and cheaper benefit options for its employees.

    Kristian Svindland
    Owner
    HROplus (www.hroplus.com)

  • PEO Expert says:

    One of the disadvantages mentioned is a limited choice in benefits. I disagree with this notion as most PEO’s offer as many as 6 different healthcare choices for its clients. Try managing that if you are a 25-person group. In addition, no PEO will ever tell a client company who it must hire or fire. It will, however, not allow a client company to hire an undocumented worker. So, if you are a business owner that is into that activity, then PEO is not for you.

  • This is a well-written article and the last sentence sums it all up as every service has it’s pros and cons – “Entrepreneurs in diverse fields have found HR outsourcing a lifesaver for over 30 years, and it continues to merit the serious consideration of every business start-up”.

    Mike Burgelin – President
    http://www.EmployeeLeasingQuotes.com

  • Pretty well written with just a couple areas that aren’t accurate, at least for some high end PEOs:
    1. Employees aren’t terminated by employer and “hired” by the PEO. No change in the employment agreement or offer letter. Transparent to employee.
    2. As someone noted, PEOs offer a much wider range of healthcare benefit options than a company can offer on their own. Our PEO offers 9 medical plans in each state, 7 dental, 4 vision, etc. etc.
    3. Using a PEO neither obligates an organization to regulations that wouldn’t otherwise apply to them, nor does it exempt them from any regulations that they would have in the absence of the PEO. Just shifts the administrative and risk to the PEO.

  • Jim Warner says:

    Nice one!! Although HR Outsourcing services save your time by creating an efficient Human Resources function which allows you to pursue the long term goals of your organization.

  • Grace says:

    Good Post!.HR Outsourcing and payroll services are very helpful in managing very critical assets of your organization.Now Professional Employer Organizations are not limited to staffing only but they are also dealing with issues like workers compensation,administrative services,training employees etc. They used to have experienced team of HRs Who know all FLSA,federal , state employment laws etc very well.

  • jamesmount says:

    Thank you for sharing the disadvantages of PEO service because to get any service one must be aware of its pros and cons and disadvantages are the factors, hardly shared by people.

  • Tyler says:

    What this article fails to mention is that you can get every benefit that a PEO offers through an independent insurance broker. As a broker myself, my team and I see tons of PEO clients ditching their PEO contracts to work with insurance experts. All those HR services and lower workers compensation rates that you think you’re saving on, are actually being collected on the back end via an amazing amount of built in fees. When you really break it down the differences in costs are marginal. When you factor that you’re giving up the experience modifier, and control over your most prized possession – your employees – most people we work with choose the later. My advice, consult with a local broker who understands your business, and see what they can offer – you’ll be surprised.

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