Is a PEO the Right Choice for Your Firm? How to Decide

As your business grows, managing human resources takes more time, becomes more complex, and adds more risk to your business. The solution many accounting and bookkeeping firms turn to is to outsource their HR function to a Professional Employer Organization (PEO). But is a PEO right for you?

Besides considering one for yourself, clients might ask your advice on whether to hire a PEO. Plenty of due diligence goes into the process of hiring one, but before you get that far, learning more about them and weighing the pros and cons can help in your decision.

What a PEO does

In the simplest terms, a PEO is an outside, full-service HR department you can use to eliminate the paperwork, compliance, and administrative tasks of managing employees so you can focus on the core services of your firm. The PEO establishes a client service agreement with you that allocates the sharing of certain employer responsibilities between the PEO and your company.

According to the Society for Human Resource Management (SHRM), PEOs typically act as the professional employer of their clients’ employees and report wages under the PEO’s FEIN, and the employee liability shifts to the PEO. However, some PEOs let you outsource certain HR functions but skip the co-employment portion of the agreement.

With around 487 PEOs in the U.S., according to the National Association of Professional Employer Organizations (NAPEO), you’ll have plenty to pick from and some choices to make in terms of the type of relationship and services you want. Some of the typical services they provide include:

HR compliance, recruiting, and training
Benefits administration
401k filings
Workers compensation management
Payroll
Employment taxes
Unemployment administration
FMLA administration

Advantages and disadvantages of using a PEO

The idea of handing off the paperwork, stress, and administrative headaches of HR appeals to many small businesses, but is it worth the investment? NAPEO offers a resounding “yes” -- the ROI of using a PEO is 27.3 percent, and, according to their research, businesses in a PEO arrangement grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business.

But a PEO isn’t right for every company. There’s more than a monetary investment involved here since HR services are so intertwined with the culture of your business. So careful consideration of the pros and cons is in order:

Advantages		Disadvantages
Co-employment reduces legal risks and costs from payroll fines, FMLA violations, etc.		Loss of control of essential processes and people
Economies of scale and negotiating power can lower benefit rates and help you offer more employee benefits		Potential security issues with the vendor’s system
Can help to lower your operational costs and reduce overhead		An outside company’s influence on your culture and potential resistance from employees
Eliminates workers' compensation administration time and offers expertise with tasks like policy selection and safety programs such as return-to-work programs		Lack of control and security over employee paperwork
Can help you attract and recruit top talent by being able to compete with the types of employee benefits offered by larger firms		Detaches your culture from portions of the recruiting and hiring process

Questions to ask yourself when considering a PEO

If you’re considering a PEO, start your search by looking inward and asking yourself which tasks you’ll want to hand off. Having some idea of which functions you want the PEO to perform will help you find the one that’s right for you.

Besides potential cost savings, you’re hiring a PEO to solve a problem, so start by compiling a list of any HR pain points with your current systems and processes. Some considerations to help with your list:

How many people are performing the HR functions now, is that what they were hired to do, and how would hiring a PEO change their job duties?
Have you run into HR compliance problems in the past or worried that you’re not keeping up with all of the state and federal regulatory changes?
Is your current benefits package outmatched by larger competitors, causing you to lose potential candidates and current employees?
Are you comfortable introducing a third party into your employer-employee relationship?
Do you feel you’re paying too much for health insurance and workers' compensation?

Choosing the right PEO

Once you have some idea of what your needs will be, you can start searching for the right PEO. NAPEO offers a PEO search tool to help you find members in your state. Be sure to ask for references and find out whether you’ll be able to meet the people who will be servicing your company. Some other considerations:

Are they IRS certified, and do they offer the services and support you want?
Are their financial statements independently audited?
Do they have a track record with companies of your size and industry?
What is the experience level of their internal staff? What is their employee turnover?
Does the PEO offer multiple carrier options for both health insurance and workers' compensation?
How are employee benefits tailored, and do they meet the needs of your employees?
Are the PEO’s payroll software and other technology easy to use and up to your quality standards? Will they let you test it before signing up?
Will the PEO proactively inform you of regulatory changes?
Does the geography of the PEO match your company’s needs (licensing requirements vary by state)?
Can the PEO adapt to your needs as your business grows?

Whether you’re thinking about a PEO for your firm or a client’s, keep in mind that hiring one touches the lives of employees, whether it’s their job duties or the benefits they rely on. With worker shortages at unprecedented levels, any decision that affects them can’t be taken lightly.