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!


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.


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.


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.