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June 23, 2016 by
aliereadvisors
Professional Employer Organizations (PEOs) can offer great services and resources to many companies, but they’re not right for every situation. Deciding on whether to partner with a PEO, and then which PEO to partner with, is a huge decision – but one that could have huge benefits. If you are considering partnering with a PEO, consider the pros and cons.

Different PEOs can offer very different services, so some PEO companies may be able to customize their offerings to your company. Most PEOs provide payroll services, group insurance and benefits plans, worker’s compensation insurance and claims administration, and human resources services. They do this by co-employing their client company’s employees. Officially, the PEO is the employer of record: the employees’ paychecks come from the PEO, the PEO often pays state and federal employment taxes, and clients’ employees are grouped together into one pool for group insurance plans. The client company is still the worksite employer: the client guides their employees’ work and the day-to-day operations of the company. If the PEO and the client company part ways, the employees still keep their jobs with the client company.

Pros

Since PEOs have large employee pools (made up of all of their clients’ employees,) they can offer many of the perks that large corporations enjoy to much smaller companies. All of the perks will depend on the specific PEO and the package chosen, but these are typical advantages of working with a PEO.

Discounts on health insurance plans. PEOs have buying power, thanks to their large employee pools. This results in lower costs per employee than smaller companies could be eligible for, plus better plans with better benefits.
Discounts on workers’ compensation insurance. Again, there is power in numbers.
Improved cash flow. Many small businesses are forced to pay annual insurance premiums upfront. PEOs may only require payments with each pay period, so it improves cash flow.
Staying on the right side of the law. Labor laws are ever-changing, and PEOs are experts on them. In addition to avoiding the penalties associated with not following labor laws, PEOs can reduce the risk of an employment lawsuit. PEOs may assume some liability risks and they can help client companies to avoid many risks, reducing the chance of an employment lawsuit.
Convenient self-service portals. PEOs can offer very convenient time and labor and human resources portals so that employees can track their hours or make changes to their accounts.

Cons

The PEO has all the say in insurance and benefits plans. If the PEO decides to change plans, client companies will have very little say in the matter. If your company currently has a health insurance plan that you love, you may lose it when working with the PEO.
The PEO’s employee pool could have greater health risks. Depending on the PEO and their rate of growth, a PEO could take on a risky new group of employees, which could raise premiums. This could be an issue if a client company has a mostly young, mostly healthy staff, but depending on the size of the client company, the premiums may still be lower than a client company could get on their own.
At a certain number of employees, it is more expensive to work with a PEO than to have in-house staff. Many companies find that with over 50 employees, it becomes more cost-effective to have in-house staff (though they may still benefit from an Administration Services Organization [ASO] partnership.)
Lack of human connection. Some clients fear that working with a PEO will take away the human connection of having in-house human resources staff. A PEO can work with existing human resources staff so that there is still that human connection, plus there are many convenient ways to reach PEOs whenever the employees choose.
Finding a PEO that will meet your company’s needs can be tricky, but working with a PEO advisor or broker can make it easier. They can help you to evaluate the pros and cons of each PEO so that you can find the right match.

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