PEO Pros and Cons: Understanding PEO Advantages and Risks

A professional employer organization (PEO) can be a valuable partner in helping with HR, payroll, and tax compliance. PEOs offer businesses — especially small ones — a co-employment model where they handle key administrative tasks, allowing you to focus on growth.

But is a PEO right for every business? The short answer is no. Let’s talk about the pros, cons, and risks of a PEO to help you understand what partnering with one really means. We’ll share how Mosey can level up your corporate compliance and help you transition off a PEO if your business is at that stage.

What Is a PEO?

A PEO essentially serves as a co-employer. Your employees are “co-employed” by the PEO, which takes on responsibilities like payroll processing, tax filing, benefits management, and compliance.

It’s like having an outsourced HR team, instead of managing everything in-house, to a specialized partner. This can make a decent difference for businesses that don’t have the resources or bandwidth to tackle HR needs early on. However, as we will dive into later, there are significant shortcomings and drawbacks to PEOs you should also be aware of.

What Are the Pros of Partnering With a PEO?

Before jumping into a PEO partnership, it’s important to weigh the benefits and downsides. After all, what works for one company may not necessarily work for another.

Let’s explore the pros and cons of PEOs to help you determine if it’s a good fit.

Streamlined Payroll and Taxes

Managing payroll can be overwhelming, especially if you have employees in multiple states. PEOs can manage payroll for you by handling everything through their own accounts in PEO-reporting states. This includes registration, tax calculations, and filings for federal and state payroll taxes. It’s important to note that the PEO may not cover local payroll taxes. For businesses operating across various locations, this can save time and reduce headaches to utilize the PEO for payroll.

Access to High-Quality Benefits

Another major perk of working with a PEO is access to better employee benefits as a smaller organization. Because PEOs pool employees from many businesses, they can negotiate group rates for health insurance, retirement plans, and more.

This allows smaller businesses to offer perks that might otherwise be out of reach, improving employee retention and job satisfaction.

Expertise in Compliance

Employment laws can get convoluted and confusing fast. From wage and hour regulations to family leave policies, staying compliant can be a full-time job.

PEOs can fit a piece of the puzzle to provide some expertise in compliance. PEOs are not a full-service solution for compliance, however.

Reduced Risk

PEOs can also reduce your liability. For example, many PEOs provide workers’ compensation insurance and assist with safety training, reducing the chances of workplace accidents. They can also handle unemployment claims, further shielding your business from legal and financial risks if you don’t have the internal resources to manage these responsibilities in-house.

Time Savings

Outsourcing HR tasks to a PEO frees up your internal team to focus on strategic initiatives rather than getting bogged down in administrative details. Onboarding, payroll, benefits enrollment, and other HR tasks can be time-consuming, but with a PEO, these are handled for you.

Cost Efficiency

For smaller businesses, hiring a full-time HR team or handling everything in-house can be expensive. A PEO offers a cost-effective alternative in the early stages, providing HR services at a fraction of the cost of building your own department before you are ready to support that investment. Additionally, the group buying power of a PEO can result in significant savings on benefits and insurance.

What Are the Cons of Partnering With a PEO?

The decision to partner with a PEO requires that you cover all your bases. That means examining the cons of PEOs, as well.

Less Control Over HR Decisions

When you hand over certain HR functions to a PEO, you give up some control. For example, the PEO might have pre-selected vendors for benefits like health insurance and workers’ comp.

While these choices are often optimized for cost and coverage, they may not always align with your preferences. Business owners who prefer a hands-on role in every aspect of their company might find this frustrating.

It also can limit your ability to attract top talent if your benefits package is not competitive with other offers on the market. You don’t have the flexibility to change these decisions when on a PEO.

Disconnect With Employees

Another downside is that employees may feel disconnected from the company if they go through a third party for HR support. In some cases, employees might not even realize they’re in a co-employment arrangement, which can lead to confusion or frustration if they have issues with payroll, benefits, or compliance.

PEOs tend to offer limited support, for both your team as a customer and the employees. It can impact employee satisfaction and retention if not monitored.

Technology Incompatibility

PEOs often require businesses to use specific technology platforms for payroll, benefits management, and other HR tasks. If you’re already using a system that works well for your company, integrating with a PEO’s platform might cause disruptions or inefficiencies.

Not every PEO offers the same level of customization, so it’s essential to ensure that their technology aligns with your needs.

Costs Adding Up

While PEOs can save you money in the short run on things like benefits plans, they’re not without cost. Most PEOs charge a fee based on your total payroll or a flat per-employee rate. As your business grows, these fees can increase significantly, ultimately becoming unsustainable to continue using them. At around the 50 to 100 employee mark, it is more cost effective to leave a PEO and build the team with internal hires and other resources.

“One-Size-Fits-All” Solutions

PEOs are designed to serve multiple clients, so their processes and solutions are often standardized. This can be limiting if your business has unique HR needs or is looking for more flexibility in benefits, policies, or employee management. A PEO might not be the best fit if your company requires highly customized HR solutions.

As you grow, chances are your business needs will change. You’ll desire greater control over your own payroll and HR systems, you’ll want to offer more competitive packages to employees, and you’ll want to have a tighter grasp on compliance that the PEO does not handle. Most companies eventually leave their PEO, so these are all considerations to be aware of before deciding to work with one.

What Risks Should You Be Aware Of?

The PEO pros and cons tell only part of the story. We must also discuss the potential risk factors of working with a PEO.

Here’s what you need to know:

Shared Liability

In a co-employment model, the PEO takes on certain responsibilities, but you still share liability for compliance. If the PEO makes a mistake — from a missed tax filing to a labor law violation — you could still face penalties.

It’s vital to choose a PEO with a strong track record of compliance and to clearly understand how liability is divided in the co-employment relationship. Know where their service ends and what responsibilities still fall to you as the company.

Inconsistent Service Levels

Not all PEOs are created equal. Some may offer excellent service and support, while others may struggle to keep up with the demands of your business.

If the PEO doesn’t fully understand your industry or provide the level of service you expect, it can lead to frustration and inefficiencies. It’s crucial to vet potential PEOs thoroughly to make sure they align with your company.

Overdependence on the PEO

While a PEO can relieve many HR burdens, relying too heavily on an external provider can create challenges down the road. When you decide to end your partnership with the PEO or bring HR functions back in-house, the transition will be difficult and time-consuming.

Ensuring you have the right internal systems and processes in place before switching providers is a must to avoid disruptions. Download our guide to transitioning off a PEO to confidently enter this next phase.

Employee Concerns

Employees may have concerns about working with a PEO, especially if they’re used to having a direct line to in-house HR staff. Some employees might worry that their needs will be deprioritized or that they won’t receive the same level of support from a third-party provider.

Open communication about how the PEO partnership works and what employees can expect can help mitigate these concerns. Managing employee relations is still very much a responsibility of the company if you want to foster a strong culture and retain top talent.

Is a PEO Right for Your Business?

Deciding whether a PEO is a good fit depends on your company’s specific needs and goals. If you’re a small business without a dedicated HR department, a PEO can provide valuable support and offer access to better benefits.

On the other hand, if maintaining control over HR decisions is important to you, your business is growing rapidly, or your business has highly specific needs, a PEO might not be the best option.

Before partnering with a PEO, ask yourself these questions:

• Are you struggling to manage payroll compliance and employment regulations?
• Do you need access to more affordable, high-quality employee benefits?
• Are you looking to reduce the administrative burden on your internal team?
• Does your business have the resources to manage HR in-house?

Asking these questions will give you a solid baseline for whether a PEO is a good fit for your business. If you’ve decided to go with a PEO, it’s time to determine which one is right for you. Now, let’s discuss some specific considerations that can point you in the right direction.

What Are Other Key Considerations When Choosing a PEO?

If you decide a PEO is the right move, selecting the right provider is paramount. Here’s what to look for:

• Industry Expertise: Does the PEO understand the specific challenges and regulations that apply to your industry?
• Service Offerings: Make sure the PEO’s services align with your current and future needs, particularly as your business grows.
• Cost Structure: Arguably one of the biggest deciding factors is the cost of a PEO. Understand the cost structure and how this will affect your financial state as you grow.
• Track Record: Look for a PEO with a solid track record of compliance and client satisfaction.
• Customer Support: Strong customer support is essential, so ensure the PEO offers responsive and personalized service.

Each component plays an important role, so explore them well. Do your due diligence in the research process to find a PEO that complements your needs. It can help you make your final decision with confidence.

Let Mosey Keep You Compliant

Even when working with a PEO, compliance is not completely covered. Mosey organizes all your state and local compliance requirements, making it easier for you to stay on top of changing regulations and keep your business running smoothly.

Learn how we can elevate your business by scheduling a free consultation with Mosey today.

Read more from Mosey:

• FUTA Credit Reduction: What Is It and Credit Reduction States
• 15 Crucial HR Policies for Your Employee Handbook
• New Jersey Temporary Workers’ Bill of Rights: A Guide for Employers
• PEO Transition: How To Plan Your Exit Strategy (Checklist)
• Registered Agent for Multi-State Businesses: 6 Things To Consider
• State Mandated Retirement Plans: Legislation and Compliance (2024)