Challenges with PEO for SMB’s
A professional employer organization (PEO) is a full-service human resource outsourcing company. While know two PEOs are quite alike, they typically address employee administrative tasks, tax administration, and benefits processes on behalf of the business. They act as the HR arm of the company, while maintaining independence by entering into a cohesive employment relationship. This organization will share those responsibilities and burdens usually handled by the in-house HR department. Some PEOs offer strategic advice and guidance for employers wishing to scale their business. And while it is true that PEOs can help alleviate responsibilities and burdens, they can add a ton of stress in other areas – like the bottom line.
PEOs will wipe the dust off your shirt with one hand while picking your pocket with the other.
A standard PEO seems to help in several areas:
Employee benefits - A PEO can save a company $100-$125 per employee for fixed benefits. On paper it seems like it’s a good move to transfer your business to PEOs. Benefits coverage is the number one factor people move to a PEO, because it’s the clearest way to cut costs. But they are also going to provide a much larger plan and a dizzying amount of coverage options for your employees.
Compensation and payroll administration – PEOs take on the burden and liability of distributing paychecks.
Workers' compensation – Worker’s comp on average should only be .08-1.5% of payroll for office workers. When companies allow PEOs to handle these cases, they often misclassify the employees. For example – in a coffeeshop, the back of house office worker would be on a different tier than the person working front of the house, making the coffee, etc. They’d have an increased likelihood of injury, and therefore the rates would be higher. By misclassifying these employees, PEOs are able to charge companies a lot more, because they’re being given high-cost comp insurance for positions extremely unlikely to ever file given their position. It appears that this is done on purpose. PEO’s manage and own all the insurances needed for your business, the practice increases cost your businesses cost and minimizes the insurance risk and exposure to the PEO.
Employment taxes – These are paid for on behalf of the PEO, and if you leave the PEO you’re out that business tax money in Jan. The client company reports its wages under the PEO's federal employer identification number (FEIN) But the question is – who is responsible for the employees? It limits your access to employee date covered under HIPPA policy, and also hamstrings your access if you leave the PEO.
The employee liability shifts to the PEO, which on the surface seems like a good thing. But it also limits your ability to contest lawsuits. HR professionals will be advised to protect the PEO before your business.
It’s important to consider the long-term impact of using a PEO. You have to weigh the short-term financial and workload benefits with the effects that take longer to reveal themselves. An outside company can influence the culture of your business that you spent years cultivating. Your own internal HR department will feel diminished and may not retain the same value.
And while offloading a lot of the burden and responsibility and cost of employee engagement and administration may seem like an easy decision, companies need to decide what their business will emphasize, and if some hidden headaches and side-effects and impact of culture will ultimately be worth it.