PEO Benefits: When, Where, and How They Work Best

For many smaller or growing businesses, managing HR functions can be a significant challenge. Professional Employer Organizations (PEOs) offer a solution by handling payroll, benefits, compliance, and other HR responsibilities through a co-employment arrangement. While PEOs provide valuable services that help businesses focus on growth, it’s important to understand both their advantages and limitations.

Today, we’re exploring the benefits PEOs offer, who they work best for, and when companies might consider alternatives as their needs change.

Key Takeaways

PEOs can provide small businesses access to better benefits packages, HR experts, and compliance support that would otherwise be financially out of reach.
While PEOs offer cost savings initially, growing businesses may eventually reach a point where the standardized approach and fee structure of a PEO becomes less beneficial.
Companies that outgrow their PEO relationship have alternatives to choose from, providing targeted compliance support without the constraints of co-employment.

Introduction to PEO Benefits

Running a business means juggling countless responsibilities. Between managing operations, driving growth, and developing strategy, HR duties can quickly become overwhelming. This is where PEOs enter the picture for many small and mid-sized businesses.

PEOs operate through a co-employment relationship with your company, where they take on specific employer-related HR responsibilities while you maintain control of your core business operations. They essentially function as a semi-outsourced human resources department, handling things like payroll processing and benefits administration.

For growing businesses with limited resources, PEOs can provide access to employee benefits packages that would otherwise be financially out of reach. By pooling multiple small businesses together, PEOs leverage collective bargaining power to secure competitive rates on health insurance and other benefits that companies might struggle to obtain on their own.

Key Benefits of Using a PEO

PEOs offer a range of services designed to reduce administrative burden and provide expertise in areas where many businesses lack specialized knowledge. Understanding these core benefits can help you determine if a PEO might be the right solution for your current business needs. Let’s examine the most significant advantages that drive companies to establish PEO relationships.

Employee Benefits Packages

Attracting and retaining talent often hinges on the company benefits you can offer. However, comprehensive benefits packages can be prohibitively expensive. PEOs address this challenge by giving smaller companies access to benefit options typically available only to larger organizations.

Through a PEO, employees can gain access to health, dental, and vision insurance at more competitive rates. Many PEOs also offer retirement plans, life insurance, disability coverage, and other supplemental benefits.

Note, however, that while these benefits are valuable, you’ll have limited control over which specific plans are offered. The PEO selects the carriers and plan options, which may or may not perfectly align with your company’s unique needs.

Payroll Management

Payroll errors can significantly damage employee trust and potentially lead to compliance issues. PEOs help mitigate these risks by managing the entire payroll process, from calculating wages to processing direct deposits and handling tax withholdings.

With automated payroll services and systems, PEOs ensure accurate and timely payment processing while managing year-end tax forms like W-2s. For businesses with employees in multiple states, this service can be particularly valuable, as the PEO navigates the complex web of state-specific payroll tax requirements.

But, once again, this payroll administration convenience comes with reduced visibility and control. Your company will need to adapt to the PEO’s payroll schedule and procedures rather than tailoring these processes to your specific preferences. Plus, some states will still require you to register for tax accounts and file outside of the PEO. This, of course, is one of the areas where a partner like Mosey can really shine, streamlining payroll processes without sacrificing that critical visibility and control.

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Workers’ Compensation

Workplace injuries can lead to costly claims and increased insurance premiums. PEOs typically provide workers’ compensation coverage through their own insurance programs, handling things from initial claims processing to return-to-work programs.

Many PEOs even employ safety specialists who understand industry-specific risks and can implement targeted prevention programs. This expertise can potentially reduce workplace accidents and associated costs over time, although it is not the norm to have specialists at your fingertips through a PEO.

As you probably guessed, the downside is that you’re bound to the PEO’s carrier and can only shop around for better rates or more tailored coverage as your business grows.

Legal and Compliance Support

Employment laws are increasingly complex and vary significantly by location. PEOs can offer limited guidance on compliance with federal, state, and local regulations, helping businesses navigate the legal landscape and avoid costly penalties.

When workplace issues arise, PEOs may provide support for internal investigations and help develop appropriate responses to complaints. Again, you’ll need to evaluate your PEO to see if this is something they offer. Expertise in areas like the Fair Labor Standards Act (FLSA), Americans with Disabilities Act (ADA), and Family and Medical Leave Act (FMLA) can be invaluable for businesses without dedicated legal resources.

It’s important to understand, though, that PEOs aren’t a comprehensive solution for all compliance needs. As your business grows more complex, you may still need specialized legal counsel for certain situations.

HR Support and Administration

Beyond administrative functions, PEOs can offer a subset of strategic HR support that can help optimize your workforce. Things outside of their typical area of coverage that you should consider are developing employee handbooks, creating onboarding processes, and providing training programs that enhance productivity.

Some PEOs also assist with recruitment by developing job descriptions, screening candidates, and conducting initial interviews. For growing businesses without dedicated personnel in human resources, these services can help streamline the hiring process and improve the quality of new hires.

Just remember, the standardized approaches used by PEOs may not always accommodate unique company cultures or industry-specific needs. As your business evolves, you might find yourself needing more customized solutions for human resources than your PEO can provide.

Better Employee Satisfaction, Retention, and Experience

Access to better employee benefits packages through a PEO can positively impact employee satisfaction and retention, not to mention an improved employee experience. When workers feel their employer is invested in their well-being beyond just a paycheck, they’re more likely to remain loyal to the company.

To reiterate, key factors that contribute to improved employee satisfaction through a PEO include:

Access to comprehensive health insurance options that might otherwise be unavailable or unaffordable
Retirement planning opportunities like 401(k) programs with potential employer matching
Limited professional HR outsourcing and support for addressing workplace concerns or questions
Some structured onboarding and training programs that help employees feel valued

Many businesses using PEOs often experience lower turnover than national averages. For small to mid-sized businesses, where each employee represents a significant investment of time and resources, reduced turnover can translate to substantial cost savings and operational stability.

While these improvements are impressive, it’s worth noting that employee satisfaction depends on many factors beyond benefits alone. Company culture, growth opportunities, and work-life balance all play crucial roles that a PEO can’t necessarily address, so they’re not a substitute for diligence and effort toward cultural development.

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Cost Savings and ROI

One of the most compelling reasons businesses turn to PEOs is the potential financial advantage. While the service itself represents an expense, many companies find the cost is offset by various forms of savings and efficiency gains. Understanding the financial equation can help you evaluate whether a PEO makes economic sense for your specific situation.

Initially, PEO services might seem like an added expense. However, they can generate significant savings through economies of scale, particularly for smaller businesses.

PEOs eliminate the need for a fully staffed internal HR department and leverage their size to secure better rates on benefits and insurance. Their administrative efficiencies can also reduce costly errors in payroll processing and tax filings.

Some businesses report health insurance savings when working with a PEO. Others see reductions in workers’ compensation premiums thanks to better safety programs and claims management. That said, PEO pricing models—typically either a flat fee per employee or a percentage of total payroll—mean costs scale with your company. So, as your business grows, there comes a tipping point where handling these functions in-house becomes more cost-effective than continuing with a PEO.

Strategic Company Advantages

Beyond the immediate impact on operations and the employee experience, PEOs can deliver broader strategic advantages that impact a company’s overall market position and growth trajectory. These higher-level benefits often factor significantly into a business’s decision to partner with a PEO, especially for organizations with ambitious expansion goals.

Competitive Advantage

At the risk of sounding repetitive, for small businesses competing for talent against larger companies, PEOs level the playing field by providing access to better benefits packages. This essential, enhanced offering can be a crucial differentiator when recruiting top candidates who might otherwise gravitate toward larger organizations with more robust benefits.

Business Growth

Companies working with PEOs can experience faster growth rates compared to their competitors. By outsourcing time-consuming HR administrative tasks, business owners and managers can focus more energy on core operations and strategic initiatives that drive expansion.

Operational Efficiency

The streamlined HR processes offered by PEOs can significantly improve operational efficiency. Rather than juggling multiple vendors for payroll, benefits, workers’ compensation, and other HR functions, businesses can access all these services through a single provider.

This consolidation reduces administrative complexity and provides a more coherent overall HR strategy. For business owners accustomed to wearing many hats, the time saved on HR administration can be redirected to more productive activities.

PEO Drawbacks

Although we’ve included a few potential issues with PEOs so far, we want to be sure we paint a realistic picture. So, while PEOs offer numerous benefits, they’re not perfect solutions for every business at every stage of growth. As companies evolve, the limitations of the PEO model often become more apparent.

Some key drawbacks include:

Loss of control: PEOs make many decisions about benefits providers, payroll systems, and HR policies that you’ll need to work within regardless of your preferences.
Limited flexibility: PEOs typically offer standardized solutions that may not accommodate unique business needs or industry-specific requirements.
Escalating costs: As your business grows, PEO fees that are based on headcount or percentage of payroll will increase proportionally, potentially outpacing the value received.
Employee confusion: The co-employment model can sometimes create confusion among employees who receive communications and benefits information from the PEO rather than their actual employer.
Dependency challenges: Exiting a PEO relationship requires significant planning and effort, as you’ll need to replace all the services previously handled by the PEO.

For many growing companies, there comes a point when the benefits of a PEO no longer justify the costs and limitations. This typically occurs when businesses reach a size where bringing HR functions in-house becomes more cost-effective or when they require more customized solutions than the PEO can provide.

There’s a Better Way with Mosey

When your business outgrows its PEO relationship, transitioning to an alternative solution doesn’t have to be daunting. Mosey offers a comprehensive compliance platform that addresses one of the most challenging aspects of exiting a PEO: managing the complex web of state and local compliance requirements. In fact, we wrote an entire guide on that very topic.

Unlike a PEO’s one-size-fits-all approach, Mosey provides targeted support for employment and tax compliance while allowing you to maintain complete control over your HR functions. The platform automates manual compliance tasks, alerts you when requirements change, and serves as a unified source of truth for your multi-state operations.

Ready to explore life beyond a PEO? Schedule a demo today to see how Mosey can support your business’s evolution while ensuring you stay compliant every step of the way.

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