Should You Be Using a PEO?

As a small business owner, do you ever feel like you’re running nonstop on the HR hamster wheel? Are you winging it for everything HR-related—from keeping up with payroll to supporting your employees’ mental health needs to implementing new training programs? Have you wondered how to spend less time on HR demands and more time running your business?

If you answered yes to any of these questions, it might be time to engage with a professional employer organization (PEO) and let them handle some—or all—of your HR needs.

As a bonus, using PEO services could help your business to stay afloat—or even expand. According to the National Association of Professional Employer Organizations (NAPEO), “Small businesses that use PEOs grow 7–9% faster, have 10–14% lower employee turnover, and are 50% less likely to go out of business.”

What Is a PEO?

A PEO is a company that offers a suite of HR services to other businesses via a co-employment model. Your small business contracts with a PEO to have them handle some, or all, of your HR-related tasks.

A key point of using a PEO is entering into a co-employment model. According to NAPEO, co-employment is “…contractual allocation and sharing of employer responsibilities between the PEO and the client pursuant to a client service agreement (CSA).” In other words, a contract between your company and the PEO outlines who has responsibility for each HR-related aspect of your co-employees. Usually, the PEO will handle some, or all, of the HR administration tasks while you handle the operational tasks for employees. 

The PEO could be viewed as the stepparent in the co-employment relationship: you bring employees into the relationship, and they’re still your employees if you terminate the PEO contract. The PEO isn’t a staffing agency that leases its employees to you for a specific project.

Co-employment permits the PEO to operate as a “larger” company and thus diffuses the overhead costs associated with HR administrative tasks across its many clients. Similarly, via the co-employment model, a PEO may have access to affordable benefits packages that your 20-employee company couldn’t even dream of purchasing.

Should Your Business Use a PEO?

How do you know when your business should consider using a PEO? The answer involves time, expertise, and—of course—budgets.

Is your time or money better spent somewhere other than dealing with administrative tasks like payroll and calculating tax liabilities? If so, consider taking a look at what a PEO offers.

Are your employees asking for a better benefits package, including comprehensive mental health coverage? Are you unable to hire top talent because you don’t offer a 401k plan? Then it may be time to engage with a PEO that can offer your co-employees these desired benefits.

Depending upon what your contract stipulates, the PEO may even reduce the amount of time you spend addressing employee well-being. HR professionals report spending 28% of their time handling issues caused by bad managers. Most small business owners can’t spare that much of their day to address personnel issues.

A PEO can also help increase employee retention by implementing HR best practices. On average, it costs a business 33% of an employee’s annual salary to replace them, so reducing employee turnover has real dollar signs attached to it.

Sure, you’ll have to spend money to engage with a PEO. But, generally, it’ll cost you less per employee to have a PEO handle HR tasks versus doing it yourself. A NAPEO white paper says that “…a conservative estimate of the expected ROI for PEO clients—based on cost savings alone—is 27.2% per year.” 

The PEO spreads its overhead HR-related costs across its many clients, thus providing the service at a lower cost than you can reach internally. It’s similar to using an external accountant to handle your year-end taxes—someone else bears the burden and expense of keeping up with all the regulations, compliance, and technology challenges.

A PEO could also potentially help with pandemic-related compliance and regulations.

McBassi & Company reported that PEOs helped their clients secure PPP loans at nearly twice the rate of small businesses overall (65.9% for PEO clients versus 30.1% for all small businesses) and that PEO clients were “72% more likely to have received PPP funding in Round 1.” Any small business owner that attempted to navigate the PPP chaos on their own can imagine how having a PEO or other ally on your side could set you up for future success.

Source: “How PEO Clients Fared in the First Months of the COVID-19 Pandemic: A Comparative Analysis,” McBassi & Company

If you’re reopening your business, have you considered the legal and compliance issues related to your returning employees? Can you just put those employees back on your work schedule, or do you have to rehire and re-onboard them formally? A PEO may be poised to guide co-employees through this maze, including redoing I-9 documentation if needed.

Will your business mandate the coronavirus vaccine for employees? If so, a PEO might be able to help navigate that process, including tracking employee vaccine records and handling medical or religious accommodation requests.

Choosing a PEO

Like any vendor relationship, selecting a PEO requires time and effort to ensure it’s the right one for your business.

Here are a few elements to consider:

• Does the PEO provide the services you need at a price point that meets your budget?
• What PEOs do peers in your business networks recommend?
• There’s no sense in replacing your shaky compliance knowledge with a PEO that isn’t fully legitimate. Does the PEO have the right to provide services in your state? Are they IRS certified, and do they utilize an external certification process like audits by an external CPA?
• Allocate time to select the right PEO for your business. Plan on comparison shopping, checking references, and reviewing the services contract with a fine-tooth comb.
• Don’t forget to schedule a block of time for implementation.

A PEO isn’t for everyone—your business may be better off hiring an internal HR specialist or using contract labor. But as a smart business owner, you know how to be efficient and let experts handle tasks like your online bookkeeping. Letting a PEO handle some or all of your HR needs may help you to cut costs while giving you more time to focus on growing your business.