The Pros and Cons of PEOs for Small Business

Running a small business is no easy task. Developing new product lines, launching fresh marketing campaigns, and forging relationships with vendors and suppliers is a full time job in itself. But of course none of that will mean too much if you’re not also working hard to service your clients and expand your customer base. It’s a lot to manage, and at times it can seem like you’re barely scratching the surface of your ‘to-do’ list. 

But that’s really just the tip of the iceberg. One of the most important parts of running a business is managing and looking after your employees. As a small business owner you don’t have the luxury of a dedicated HR department, so the responsibility falls to you. But there is a way to lighten the load. Partnering with a Professional Employer Organization, or PEO, allows you to provide the benefits and support your employees deserve while freeing you up to concentrate on scaling your active enterprise. 

What is a PEO? 

A Professional Employer Organization provides comprehensive HR services for small to medium-sized businesses. Partnering with a PEO allows you to outsource some of your most important employee management tasks, including: 

• Employee Payroll
• Tax Administration
• Employee Benefits Packages
• Workers Compensation Claims
• Government Regulatory Compliance
• Employee Recruiting and Training

What’s the Difference Between a PEO and a Payroll Provider? 

PEOs should not be confused with payroll providers. When you partner with a Professional Employer Organization your employees become co-employees of the PEO. This allows the PEO to provide a full raft of HR solutions for your business, and because your employees are now a part of a larger pool of workers the PEO is able to negotiate better rates on health insurance, workers compensation, and state unemployment fees. 

Payroll providers, on the other hand, simply process employee payroll and taxes for their clients. It is a simple, albeit valuable, service. But by their very nature payroll providers cannot deliver the full range of HR solutions you want to offer your employees.

So let’s look at some of the key benefits of partnering with a Professional Employer Organization. 

Simplify Your Payroll and Taxes  

Most small business owners rely on an outside accountant to handle their taxes. It’s a minor expense, and it more than pays for itself in the long run. That being said, why outsource your accounting needs when you can partner with a PEO who will handle everything from payroll and employee deductions to your yearly tax filings? 

When you contract with a PEO, your account manager will take over all of your payroll services. They’ll calculate each employee’s wages and deduct the necessary state and local taxes for the pay period, and as new employees are brought on board they will issue the correct tax forms during your onboarding process. Come tax time your account manager will handle your local, state and federal filings ensuring that your tax obligations are met in a time and accurate manner. 

Make Health Insurance More Affordable 

Healthcare has become an important issue for small businesses over the last few years. With unemployment rates at an all time low you need to offer more robust benefits packages as a way to attract and retain top of the line employees. You also need to be in compliance with the guidelines set down in the Affordable Care Act. This can be a challenge for smaller businesses operating on a limited budget. 

When you partner with a PEO you and your employees become part of a larger insurance buyer’s pool. Your PEO can leverage that buying power to negotiate with insurance providers so you can offer more extensive healthcare benefits to your employees at a more affordable cost. 

For example, according to a recent United Benefits Advisors study the average cost to an employer offering comprehensive healthcare coverage for their employees was $6400 per employee. Working with a PEO can cut that amount by more than 1/3, depending on the PEO and state regulations. That’s a considerable savings, and it can make offering a comprehensive benefits package much easier for small businesses working to a tight budget. 

Provide Retirement Benefits 

With the labor pool shrinking, small businesses are being forced to compete for the best and brightest employees. Offering a comprehensive benefits package is one of the best ways to recruit, and retain, the finest talent for your company. While health insurance tops the list of most desirable perks, it’s closely followed by retirement benefits. Employers who offer substantial retirement plans for their employees attract better candidates and have higher employee retention rates. 

Of course, choosing the right retirement plan is a big part of the equation and that’s where your PEO comes in. Your PEO account manager can help you find the ideal retirement plan for your business. They will be able to help you decide on a plan that fits in with your projected financial goals and growth, while maximizing the benefits available to current and future employees. 

Manage Workers’ Compensation and Unemployment Costs 

As a business owner you’re required to carry workers’ compensation insurance, and to pay compensation and unemployment costs. These costs differ by state and knowing what to pay and when can get complicated. If you’re not well versed in the requirements you can easily make a mistake and that can lead to costly fines down the line. 

When you partner with a PEO they will manage all of your compensation and unemployment costs according to local and state regulations. This ensures that your costs are properly paid and that your are protected from any potential legal or financial difficulties. 

Recruiting New Employees 

Finding and hiring new employees is one of the hidden costs of doing business, and it often gets lost in the shuffle. But posting to job recruitment boards, sorting through resumes, and conducting in depth interviews can cost you a bundle in time and money. PEOs help to streamline the process while saving their clients money. 

An experienced PEO will have access to the best recruiting networks, and will be able to screen incoming resumes in order to narrow the field of candidates. Once a short list is assembled you can take a more hands-on approach and conduct the final interviews. This not only saves you money it frees you up to concentrate on the nuts and bolts of running your business. 

Is There a Downside to Working with a PEO? 

While the benefits of partnering with a Professional Employer Organization are clear, there are potential pitfalls to be considered. Because you are entering into a business partnership you will be legally bound to your PEO. In most cases this is an advantage, and is how PEOs can provide such valuable services to small businesses. 

However, should your partnership hit a stumbling block it may be difficult to sever ties quickly and without any residual impact to your business. Before you partner with a Professional Employer Organization make sure the contract includes a clear and detailed severance clause. That way if the partnership fails both parties will be protected. 

PEOs Can Save Your Business Time and Money 

Contracting with a Professional Employer Organization allows you to outsource those tasks you don’t have the time or expertise to handle efficiently. Essentially, it’s like having a dedicated HR department without the overhead. That being said, it is important to choose your PEO partner wisely. Remember, they will be responsible for some very important aspects of your business and you want to be sure that you have entrusted them to safe hands. 

If you feel a PEO is the answer to your HR concerns take the time to research a number of different companies. Check out their history and interview their representatives as you would any other business partner. Once you feel you’ve found a PEO that can serve your needs, as well as the needs of your employees, you can work together to advance your business and take it to the next level.