Should Your Small Business Work with a Professional Employer Organization?

By QuickBooks

3 min read

As your small business grows, you’ll need to hire more employees. And as your staff increases, time spent managing payroll and HR tasks increases too. This can take you away from the core tasks that made your company successful to begin with.

Professional employer organizations (PEOs) started forming in the early 1980s as an answer to this dilemma. PEOs essentially partner with small businesses like yours to “co-employ” workers. For a fee, PEOs handle human resources aspects at the company, leaving you free to handle operations, development, sales, and marketing. 

Although workers are legally employed by both the PEO and your company at the same time, the contract you establish with your PEO should state that you manage your employees’ daily tasks and responsibilities. That way, your employees won’t feel like they’re “serving two masters.”

Working with a PEO

PEOs generally prefer to work with companies with five or more employees, although some PEOs will accept companies with fewer than that. The average cost to work with a PEO is $500 to $1,500 per employee per year. Most PEOs contract their services on a monthly basis with a 12-month contract and charge by the employee, although some serving larger companies may charge a percent of the overall payroll amount. And, of course, costs vary according to the services you select for your business.

The Pros and Cons of Working with a PEO

Working with a PEO brings both benefits and drawbacks.

The benefits of working with a PEO include:

  • More time to focus on business: According to Entrepreneur, up to 40 percent of a business owner’s day is spent managing human resources issues. That’s time that could be better invested in product development, sales, and service.
  • Better benefits: PEOs can pool their clients’ employees to obtain better benefits at lower costs than small companies can get on their own. They may be able to secure better health insurance coverage and additional benefits, such as dental and vision insurance, that a small company cannot afford on its own. Other benefits, such as 401(k) plans, may also be available to small companies when they work with a PEO.
  • Up-to-date compliance knowledge: It’s difficult for small-business owners to stay abreast of the many changes to insurance, workers’ compensation, and employee law. Because PEOs focus solely on human resources administration, it’s their job to stay current on these topics and to ensure full compliance.
  • Better employees: Employing more qualified, engaged staff can help small businesses remain competitive. Better benefits packages available through a PEO can help you attract and keep talented people.

At the same time, there are some drawbacks to working with a PEO that small-business owners should consider.

  • Less personal service: Some business owners feel that having a PEO manage HR makes the business too impersonal. PEOs handle workers’ compensation claims, for example, and some employers complain they feel out of the loop, while employees feel they don’t get enough information on their claims from the PEO.
  • Unexpected changes: Because you do not have control over your insurance policies, the PEO can change coverage without warning. Coverage may improve but may also decline, depending on the PEO’s decisions.
  • Financial risks: Choosing a stable, established PEO is essential to mitigate your financial risk. Most PEO contracts stipulate that fees are paid in advance. If the PEO goes out of business, you run the risk of having to shell out payroll twice, since you’ve already deposited funds with the PEO and now you have to fund your payroll again. This is a rare worst-case scenario, according to Business News Daily, but it is worth noting.

Is a PEO Right for You?

If trading off control over your human resources administration to obtain up to 40 percent more time in your day to run your business sounds like a bargain, then working with a PEO may be the right decision for your company. To find a PEO, consult the National Association of Professional Employment Organizations for member companies. Other PEOs may be affiliated with payroll firms or independently owned and unaffiliated with NAPEO.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

100 Best Business Blogs You Need to be Reading (and Taking Lessons From)

There are many business blogs on the Internet. Some of the most…

Read more

Should You Seek Investment, Incur Debt or Bootstrap?

Choosing how to fund your small business is an important aspect of…

Read more

How to Pay Yourself When You’re Self-Employed

You made the leap. You’re a full-time freelancer. Each and every day…

Read more