The Advantages and Disadvantages of Working with a Professional Employer Organization (PEO)

Handling human resources (HR) and compliance in-house can be complicated and time-consuming, particularly for small and medium-sized businesses (SMBs) with limited resources. The fact is that you may not have enough staff to handle onboarding, payroll processing, and benefits administration in-house. This is why many SMBs turn to a third-party HR solution, such as a Professional Employer Organization (PEO) to help them handle some of these tasks. 

A Professional Employer Organization (PEO) provides a variety of HR solutions for small and medium-sized businesses. Utilizing a PEO can allow businesses to outsource the management of employee benefits, payroll, and workers' compensation, freeing up resources that can be reallocated to help the business grow. However, like any business solution, working with a PEO has both advantages and disadvantages, and it is important that you consider whether this solution is right for your company. Keep reading as we take a look at the pros and cons of working with a PEO compared to offering the same services in-house.

FREE DOWNLOAD: Marijuana and the Workplace - What Warehouse and Logistics Operators Need to Know in 2023

The law on marijuana continues to evolve. For employers seeking to maintain a safe and drug-free workplace, cannabis legality has complicated everything. Download our free resource on this topic so you can begin applying the best practices immediately.

What Are The Advantages of Working with a PEO? 

A PEO can provide many benefits to your company by handling various HR-related services such as payroll processing, tax management, and benefits management. This can be particularly beneficial for small businesses with limited human resources experience/capabilities. A few of the advantages of partnering with a PEO include:

• Expertise in Compliance: Ever-evolving federal and state employment laws can make it complicated for businesses to stay in compliance. Fortunately, PEOs have the resources to stay on top of the latest laws and the expertise to help ensure that your company stays in compliance with all employment laws. 
• One-Stop Shopping: A PEO provides a one-stop shop that gives your company access to a wide range of HR services like payroll, workers' comp, health plans, and other HR benefits and services all in one place. This can then give SMBs access to a wide range of HR services that they may not have been able to afford if they handled HR solely in-house. 
• Time Savings: Learning about labor laws, filing paperwork, negotiating with benefits companies, and handling payroll services can be extremely time-consuming for small businesses with limited resources. By outsourcing HR tasks to a PEO, businesses can save time, allowing them to focus more resources on their core operations and continued business growth. 
• Access to Benefits: SMBs often have a hard time offering competitive benefits that can help them recruit and retain top talent. With a PEO, smaller companies have access to the buying power of a larger organization, which can help them afford better healthcare, retirement, and other benefits their employees desire. Working with a PEO can then significantly increase an SMB's standing in a competitive job market. 

What Are The Disadvantages of Working with a PEO?

Of course, while many SMBs find it advantageous to partner with a PEO, this service won't be the right option for every company. Before partnering with a PEO, it is important that you understand the potential disadvantages of doing so, including:

• Loss of Control: One of the biggest downsides of partnering with a PEO is that some business owners feel like this causes them to lose control over HR processes and decision-making, as they have handed over these services to a third-party company. Since you would be entering a partnership with the PEO, you would have to contact them if an issue arises before you could make a decision, which can be inefficient. A PEO may then not be a good fit for companies that want complete control over their HR processes.
• Costs: Another disadvantage of working with a PEO is the potential costs involved. Admin fees associated with PEOs can run high, and while they are often marketed as a more affordable option for small business owners, PEOs tend to be a more expensive option as a company grows. Ultimately, you will have to run the numbers to decide whether partnering with a PEO is a cost-effective solution for you, as your fee will be based on the number of employees you have and which services you want to use. 
• Contractual Obligations: Some PEO contracts have long-term commitments or challenging termination clauses that can make it difficult for businesses to end their partnership with their PEO. This makes it critical that you find out the length of the contract you are agreeing to before you decide whether or not to partner with a PEO, as you may be stuck working with them even if they turn out not to be a good fit for your company.  
• Potential Cultural Mismatch: There is always a risk that you could enter into a long-term contract with a PEO only to discover that they are not a good fit for your company's culture and operational standards. The fact is that a PEO's standardized HR practices might not align with your company's desired culture or specific business needs.  
• Data Privacy Concerns: Another potential con of working with a PEO is that this will mean handing over sensitive employee data to a third-party company so that they can manage your HR needs. For some businesses, this may raise concerns about data security and privacy for their employees. 

Before partnering with a PEO, it is important that you do your research and carefully consider whether this is the right fit for your company before committing to a PEO relationship. If you decide that a PEO is right for you, it is imperative that you review the contract thoroughly in order to ensure that you understand what you are agreeing to by partnering with a PEO. However, you should also consider that there are alternatives to working with a PEO that may be a better fit for your company. 

What Is An Administrative Services Organization (ASO)?

Many of the specific services and HR administrative support you need can be provided under an Administrative Services Organization (ASO) arrangement. An ASO provides similar services offered by PEOs; however, the ASO does not establish a co-employment relationship with your employees.

What Are The Advantages of Working With An Administrative Services Organization (ASO)?

With an ASO, your employees remain solely under your control. Meaning, the ASO will handle your company’s payroll and tax filings, but the paperwork is filed under your company’s EIN number. For many companies, this makes sense because it allows them to retain control without dealing with all of the messy details. This can be a simple and cost-effective model if you know exactly which services you wish to obtain. Alloy can help with ASO services.

What Is An Alternate Employer Organization (AEO)?

Finally, in Ohio, a category of HR services provider called an Alternate Employer Organization (AEO) has been created to help organizations that are not a good match for a PEO but would like to take advantage of some of the cost savings and simplified administration they offer clients.

Next Steps

Contact us to learn more about what an AEO is and the benefits it can provide or if procuring services under the ASO model makes sense for your business.

See how Alloy can help you
Get an absolutely free analysis of your company's workers' compensation program, including rates and claims.