Professional Employer Organizations (PEOs) are becoming increasingly popular for small business owners who want to compete with larger companies by offering various kinds of benefits without the administrative grunt work. Fit Small Business belongs to a PEO to provide employee benefits, so we have first hand experience on the pros and cons and process of joining a professional employer organization.
In this article, we will look at PEOs from soup to nuts, including:
- What is a PEO?
- When is it Beneficial to Use a PEO?
- What are the Drawbacks to Using a PEO?
- How Much Do PEOs Cost?
- What are My Alternative Solutions besides a PEO?
- How Do I Join a PEO?
- Where Can I Find a PEO?
Before we dive into the details on this topic, we also suggest you check out JustWorks. JustWorks is our top recommended PEO for small businesses, which we talk about in-depth here in this buyer’s guide.
What is a Professional Employer Organization?
A Professional Employer Organization, or PEO, is an outside company that handles your human resource (HR) needs. Typically, this includes payroll, employee onboarding and offboarding, benefits, workers compensation, and compliance with any state or federal employment laws. A PEO can also handle recruiting and training for you.
Many businesses are typically grouped together in a PEO, and the PEO has established partnerships with large insurance companies, so that its members benefit from the “power of numbers” and have access to a large array of benefits at reasonable prices.
PEOs differ from other HR outsourcing firms in that they become co-employers to your business. In other words, while you still manage and run your business, your workers have two employers: you and the PEO.
What does co-employment mean?
Co-employment is when both organizations (i.e. your business and the PEO) share legal responsibility for the employees. On day to day business decisions, such as marketing, you’ll have full control. However, anything that could raise HR-related legal issues, like payroll or compliance, is an area where the PEO will absolutely take no risks, and your company will need to comply with their best practices.
For example, a client of mine found after joining a PEO that they would need to get their payroll out of arrears because the PEO said it was not comfortable with it, nor was it a best practice. In order to join the PEO, the company had to fix this issue.
When is it Beneficial to Use A Professional Employer Organization?
Whether or not a PEO is right for your business depends mostly on these 3 factors:
Factor 1. Number of employees
In general, having more than 10 but fewer than 100 employees could mean a PEO makes sense for your business. The logic here is that if you don’t have many employees, you can probably handle HR tasks yourself without too much strain, or you can think of hiring an administrative assistant. On the other hand, if you have several employees, it’s probably more economical to outsource your HR functions to an organization like a PEO.
Go here to check out pricing and other details on three leading PEOs.
Factor 2. Do you want to offer a range of benefits?
PEOs usually offer a wide array of benefits, including health, dental, and vision insurance, 401K plans, life insurance, and more. These benefits are administered by the PEO, so much of the burden is lifted on your end.
This can be especially useful if you have your business in a place like New York City or Los Angeles, where providing benefits for a small business owner can be cost prohibitive. You can learn more about the options for providing benefits and how to compare costs in our full guide on how to provide benefits, but this is certainly an area where a PEO can be helpful.
Fit Small Business is part of a PEO for these very reasons. They handle a wide array of benefits that our employees enjoy–health insurance, payroll, compliance, and more–with a fairly reasonable price tag.
Factor 3. Are you in need of HR help?
A PEO can handle the HR administrative tasks like onboarding, offboarding, administering health benefits, payroll, and paid time off. This reduces the workload on your end and takes some liability off your shoulders – PEOs will keep you compliant with federal and state employment laws and handle things like workers compensation claims (and audits) as well.
Again, if you’re able to do these things yourself without too much trouble, you probably don’t need a PEO, but if you find yourself spending 5-10 hours a week or more on HR tasks like this, it could be worth it to hire a PEO.
What Are the Drawbacks of Using a Professional Employer Organization?
The main drawbacks of using a PEO include:
Drawback 1. Loss of control (to an extent).
When you join a PEO, you become co-employers. In order to hire or fire someone, or make any HR-related changes, you have to consult the PEO. This can be a good thing, since you’re essentially getting a partner who’s professionally trained and can stop you from making legal mistakes. But it can also slow you down and takes away full control over your business. As with any business partner, you want to make sure you have a good working relationship with the PEO and a high level of trust.
Drawback 2. Not free from all busywork.
A common complaint I hear from business owners is that they still have a lot of busywork even after hiring a PEO. Despite the PEO handling HR tasks, managers had to send in paperwork and serve as a link between employees and the PEO. The amount of work you wind up having to do, however, will depend greatly on the PEO you choose and the level of service you sign up for.
Drawback 3. Health benefits can be pricey.
The cost of offering health insurance benefits through a PEO depend largely on your location. If you join a PEO, you won’t be able to choose health insurance services that could save you money, like the government-run SHOP Exchange, since you will have to go with the PEO’s recommended insurance providers. You will also miss out on getting tax credits that you could get if you were to buy insurance through the SHOP Exchange. However, in many cases, the benefits available through the PEO are relatively inexpensive, which is why you need to do your own cost comparison.
How Much Do Professional Employer Organizations Cost?
Typically, PEOs charge a percentage of each employee’s salary or a flat fee per employee. The actual percentage depends mostly on the average compensation of your employees. If they are salaried workers, you’ll pay a lower percentage, like 2%. If they’re wage workers, you’ll pay closer to 6%.
Here are the top three PEOs we recommend and their pricing:
Professional Employer Organizations – Pricing
$69/employee per month with benefits
$49/employee per month if no benefits
$59/employee per month with benefits
$39/employee per month if no benefits
|Exact prices not provided, but it’s based on a percentage of employee’s salary. Cost varies depending on:|
1. # of employees
2. # of PEO services utilized
$155/employee per month
$140/employee per month
$135/employee per month
$125/employee per month
If you’re looking for a PEO that handles recruiting and training in addition to benefits, expect to pay a higher percentage. PEOs with more comprehensive services can charge up to 11 percent of payroll, which makes them a bit costly for the typical small business owner.
Additional Cost Considerations
Keep in mind that the fee charged by the PEO is not the only cost consideration. There is also the amount of money you could potentially save by going with a PEO versus offering benefits yourself or via the SHOP exchange. This varies a lot based on location, and you’ll need to do this cost comparison for yourself when you’re shopping around for a PEO. In some locations, a PEO will be the cheapest option. In others, it might be a middle of the road or expensive option.
Also keep in mind the peace of mind you will have knowing your business is compliant and up-to-date with HR laws and best practices. While you can’t put an actual price tag on this, knowing that your unemployment claims will be defended, your worker’s comp will always be current, and your payroll is always going to be run correctly, among other things, can help you to sleep at night! If you are in a high turnover industry or one that tends to have hire/fire issues, this can certainly save you money in unemployment costs, and potentially lawyer’s costs.
What are My Alternative Solutions Besides a Professional Employer Organization?
If you want to offer the benefits a PEO provides and have a service that can handle your HR needs, but without the condition of co-employment, you might be interested in one of the newer HR outsourced service providers.
You can customize these providers to be a part of your company and HR needs to the level you want. For example, perhaps you only want payroll and compliance services before offering benefits, so then you would only pay for payroll and compliance until you were ready. PEOs give you less flexibility.
However, you will most likely be giving up other advantages that a PEO provides. You will have to pay for each service piece separately, which can get costly. The below companies do not have the “power of numbers” like PEOs have and may charge higher fees for their services. In addition, you’ll be more accountable for risks. If you have a payroll problem, it’s going to all be on your shoulders. If the laws around, say, workers compensation, change, no one is going to be looking out for you and telling you how to comply with new requirements (like a PEO would).
Here are 3 alternatives to a PEO that offer similar services:
- Zenefits is a great alternative to using a PEO. Unlike a PEO, Zenefits does not become a co-employer for your business. They are a platform for managing and administering HR, including payroll, health insurance, time and vacation tracking, retirement plans, and much more in one place. They take a great deal of the hassle out of HR. You can use your existing service providers for benefits and other services, or they can connect you with different service providers. Get a Zenefits product demo.
- Gusto is also a great alternative to a PEO. Gusto does not become a co-employer of your employees either. They recently launched the roll out of a full HR solution (versus just payroll, which is what they initially offered). You can now get benefits, onboarding, and more in addition to their payroll and compliance services.
- BambooHR does payroll, compliance, PTO tracking, and has integrated recruiting and performance management software to its services. However, while you can link health insurance and other benefits like life insurance through BambooHR, you cannot purchase them directly on BambooHR.
How Do I Join a Professional Employer Organization?
The process of joining a PEO usually takes between 3 to 6 weeks. You have to go through an application process in which the PEO assesses the liability of your company. There are two main things they will look for:
- The financial and credit situation of your business.
- If you’ve had any workers comp claims in the past. If you work in a high risk environment, you’ll likely be charged a higher rate.
Because the PEO is becoming a co-employer, they’ll also need to know all the essential information about your employees. Expect to show them I9s and W4s for all your workers, as well as any other demographic and identifying information needed.
Once this is all provided, the PEO will make their decision. If you’re in serious talks, chances are you’ll be accepted. The PEO isn’t likely to string you along if they don’t think you’re qualified to join.
Where To Find A Professional Employer Organization
If you’re sold on joining a PEO there’s a few things you should keep in mind:
- You will want to see if the PEO is certified by the IRS or the Employer Services Assurance Corporation (ESAC).
- For one, you’ll want to find a PEO that specializes in your industry, especially if you are subject to industry-specific regulation, like OSHA safety policies.
- Make sure your PEO will cover the tasks you want to outsource, but not those you want to keep doing yourself.
- Keep your selection local. Especially if your PEO will be training employees, you’ll want them to have an office nearby.
You can also check out our PEOs Buyer’s Guide where we review three PEOs in detail and provide a table mentioning other PEOs as well. The National Association of PEOs (NAPEO) also has useful resources for choosing a PEO, as well as a search tool to find a PEO in your state.
The Bottom Line
A Professional Employer Organization like JustWorks can be a great option for a small business owner who is willing to pay for peace of mind, reliable HR services, and the ability to provide a wide range of benefits for their employees. However, you also have to be ready and willing to let the PEO into your business as a partner, since they will want access to your financials, your credit history, and your team’s information.