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Should You Consider a PEO for Your Small Business?
Posted by Sylvia Lagerquist, CPA
Managing employees is one of the most critical challenges that small business owners face, and along with managing your team comes the task of administering their payroll, benefits and human resource requirements as well.
For many small businesses, any one of these issues alone can take up an enormous amount of time, energy and money. Just changing health insurance carriers can become a full-time job for weeks, and keeping track of employee enrollments in benefits, retirement plans and more is a yet another demanding task that must be done correctly.
Making mistakes in any of these areas can cause employee problems, financial headaches and, in some cases, legal consequences (especially if your company fails to properly withhold payroll taxes or contribute funds to the employee retirement plan).
Some companies outsource part of this work (for example, having ADP or PayChex manage their payroll services), but this begs the question: If we can outsource some of these tasks and responsibilities to trained professionals, why not outsource all of it? There is a way that many small and emerging companies (and some larger ones) achieve this goal, and it leads them to the world of PEOs.
What Is a PEO?
The term PEO stands for Professional Employer Organization, and refers to companies that provide a legally accepted bundle of services that some refer to as employee leasing or co-employment services.
The key distinction with PEOs is that instead of just providing outsourced services to support your workforce, the PEO actually becomes the ‘employer of record’ for your team (Note: this designation may vary by state).
Under the employee leasing or co-employment model, the PEO becomes responsible for payroll, employment taxes, benefits sponsoring and administration, HR administration and management of workers’ compensation and unemployment claims as well. Even though the PEO is the employer administratively speaking, both your company and the PEO have certain responsibilities.
The PEO’s primary role is to pay employees and handle all the administration of payroll and benefits. Your role is to manage your employees and make sure the information you provide to the PEO is accurate.
Advantages & Disadvantages of PEOs
There are many things to consider when you evaluate the PEO option for your business. Here are just a few:
1. Gaining Back Time, Reducing Stress — This is probably the #1 reason why small and emerging companies pursue the PEO option. You effectively hand over the challenges and confusion of a very complex field of work to trained professionals, thus freeing you up to focus on your business.
In addition, business owners routinely underestimate the amount of time and money it takes not only to administer and manage HR functions, but also to research best practices, review instructions, complete compliance checklists, pay service charges (such as 401K plan administration fees) and otherwise manage the day-to-day demands involved with performing HR functions properly.
2. Accessing Better Benefits — While the Affordable Care Act (ACA) has given small businesses access to a greater range of health insurance options, those plans often come with very limited provider networks and other challenges. With a PEO, your employees become covered by the insurance carrier and other benefits that the PEO has already negotiated with its partners. In many cases, you can gain better benefits for a small firm this way.
The benefits may also be direct or indirect, and can range from as access to retirement programs or dependent care coverage to short-term and long-term disability insurance or other options that a business of your size might not be able to access or afford otherwise.
3. Easier Scalability — If you keep these functions housed inside your company, then you’ll have to go through many key milestones as the business grows, especially when you need to go from part-time or shared responsibilities for HR over to hiring a full-time person and, later, building a team. With a PEO, scaling requires no changes — the same team can support a team of 10 or a team of 100.
1. It May Seem Very Expensive — When you add it all up, the PEO option can be pricey, especially for companies that are already facing tight markets, thin margins and difficult hiring and retention conditions. You’re adding a hefty fee on top of your existing costs, no matter how you look at it. In addition, you don’t get to negotiate with carriers to find a better deal on insurance next year – you may stuck with the PEO’s carrier including any increases that carrier passes on to you. This may vary by state, so make sure to learn how your state regulates insurance and how different PEOs approach the insurance process (some require you to join their pre-approved plans, while others will shop for new plans on your behalf).
2. Challenges with Change — Leaving a PEO is not easy, since your people are really the PEO’s employees and this means that your own business is not, technically, an employer during the time you are with a PEO. It’s hard enough to change from one PEO to another, but moving back from PEO to traditional self-administration can be excruciating. For example, underwriting small groups directly becomes challenging when your employees were not part of your own small group previously (since they were in a PEO).
3. Conflicts Can Be Costly — On the flowcharts and graphics, the line between your responsibility and that of the PEO seems pretty straightforward. Then again, nothing in life quite follows the flowchart. If payroll is late one cycle, is that the PEO’s fault for missing a deadline, or your fault for approving a cycle too slowly?
If a form is misinterpreted or an employee firing results in confusion over whether or not the company should protest their unemployment claim, will the PEO accept your interpretation of events or override your preference (since they are the employer of record)?
Clearly, knowing what could go wrong is essential to keeping things right. Choosing how to manage your human capital needs for today – and tomorrow – is clearly a complex and challenging decision, no matter what path you take.
The PEO option is compelling and has attracted an increasing number of employers nationwide. The risks of making errors in areas ranging from payroll to retirement accounts to insurance to compliance reporting suggests that the PEO option brings a lot of great potential benefits, but they must be carefully weighed between PEOs and between the PEO approach and traditional models.
Make sure to consult with your company’s CPA and other key advisors before making a decision, and consider all of the options and strategies as you look to select the best solution to meet your company’s growth needs.
Image Credit: usda (Flickr @ Creative Commons)
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