Professional Employer Organizations (PEOs): Are they an HR help, or HR hindrance?

Professional Employer Organizations (or PEOs) are starting to emerge as solution for businesses to have proper HR processes. But do they give away HR control, as some often suggest?

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Apr 9, 2024

In recent weeks, Professional Employer Organizations (PEOs) have been making the news again – particularly as a way of helping smaller businesses (who may not be large enough to justify having an HR team) offer a wider range of HR services.

For those who may not know the ins and outs of what a PEO is, in simple terms a a PEO manages various employee administration tasks on behalf of a business.

Under the terms of a typical employer-PEO relationship, both the business and the PEO share certain employer responsibilities.

The PEO typically processes payroll, withholds and pays payroll taxes, maintains workers’ compensation coverage, administers employee benefits and provides human resources guidance. This leaves the business owner time to manage regular business operations, like providing products and services to customers, and making decisions about which employees to hire or terminate.

For businesses seeking to free up their staff’s HR workloads to focus on important business challenges rather than compliance and paperwork, PEOs are a tempting solution.

As most HR practitioners will admit, good HR is not just about managing forms; it’s about driving business outcomes, from top-line revenue to controlling labor costs.

With on-going talent challenges, tight labor markets and expensive recruiting costs persisting PEOs are attractive because (in theory), they help navigate these obstacles by supporting HR at the back end, giving employees the bandwidth to think and act strategically.

Professional Employer Organizations (PEOs) claim to be able to play a transformative role in elevating company culture, attracting talent and supporting small- or mid-sized businesses’ (SMB) growth. Providers also claim PEOs can make HR more personal and easier to access for employees- and a boon for leaders.

But do PEOs really give HR heads control over their HR, or do they give up control to outside providers who may not know that organization as well as internal leaders?

Below Kristen Appleman, SVP of one such PEO provider, ADP Total Source, talks about the common worries that exist around PEOs, and why she feels they are misplaced:

Worry #1: “We’ll lose control if we outsource HR”

Reality: The PEO is an HR business partner

“PEOs act as HR guides and support systems; they don’t run the whole show. PEOs help businesses streamline administrative processes, get and stay in compliance with local, state and federal employment regulations, and minimize employer risk. Because PEOs work with thousands of companies, working with a PEO gives employers access to experts who understand situations that the employer may rarely encounter. They help employers take the proper steps to minimize risk and help handle HR tasks and issues the right way the first time. Business owners retain decision-making power in hiring, firing and compensation while gaining increased expertise in managing the complex aspects of HR compliance.”

Worry #2: “Our employee experience will suffer”

Reality: PEOs increase employee engagement by enhancing the benefits experience

“Contrary to the belief that outsourcing HR diminishes employee engagement, PEOs typically enhance it by providing a professional and sophisticated approach. They offer tools like mobile apps, high-quality benefits, and expert HR support, ultimately contributing to an improved employee experience and increased attraction and retention of talent. While the business, leadership, and management still drive the employee experience, a PEO can enhance certain aspects of that experience:

Enhanced benefits: A PEO can enable the company to offer higher quality benefits and/or more benefits choices than a small- or mid-sized employer typically can. If you could offer your staff the same quality benefits as a Fortune 500 company, how would that support your business and help you better recruit and retain employees?

Quick answers to employee queries: Many PEOs handle employee questions and issues across benefits, payroll and HR topics. This relieves an organization’s HR team or frontline managers from fielding these questions, which saves them time, but more importantly ensures employees a confidential experience when discussing personal topics. PEOs have trained professionals available by phone or chat to answer employee questions in a timely and efficient manner.

Sophisticated and easy self-service: PEOs can offer employers state-of-the-art mobile technology that enables employees to manage their PTO, review pay stubs, get W-2s, see schedules, enroll in benefits and more. Employees love the convenience and it reflects well on the employer.

Accurate payroll: Working with a PEO helps ensure payroll and taxes are correct the first time. This may seem a given but taking this burden off a business owner or HR professional is huge. Knowing that payroll will always be accurate and on-time frees up time and energy for the business and keeps your employees happy.”

Worry #3: “A PEO will replace our HR staff”

Reality: PEOs free up time for HR to focus on more strategic activities

“Small business employees who help with HR functions are often bogged down in everyday administrative and compliance tasks that take away from their other responsibilities. In partnership with a PEO, these important tasks are lifted off internal employees, allowing them to shift focus to more strategic, meaningful initiatives. PEOs also provide a built-in technology that keeps the employer in compliance and can cover all aspects of HR.

This could include areas like benefits administration, payroll, taxes, and workers compensation, but also more specialized services like hiring, onboarding, training, succession, performance, recruiting, and applicant tracking. Because all these function are integrated, the business has to manage only a single provider.

Since many PEOs also have highly experienced HR professionals on their staff it’s often may feel like having a built-in consultant who knows the employer’s business well and can provide a sounding board for internal HR.”

Worry #4: “PEOs cost more and are more than we need as a small company”

Reality: Each PEO is focused to meet the business’s needs

“Businesses and organizations just starting to learn about PEOs are often surprised how much is included using a PEO. In fact, PEOs are an “all-in-one” solution, which allows employers options for what features they need both today and as their business needs change – all available to them from the start. Employers can use it in different ways, with different functions and services to meet the needs of their workers. Given all the tools at their disposal, it’s up to the employer to utilize the parts that makes most sense for them.

When you calculate the real cost of doing HR in-house, it starts to add up. Payroll providers, benefits brokers, HR technology, workers compensation, legal costs and the time and effort of HR staff and frontline managers. On average, research shows businesses that use a PEO save $1,775 per year per employee.

When you factor in the benefits of built-in compliance, liability insurance (EPLI), risk mitigation plus strong employee support and more benefit choices – plus the lower turnover rates PEO clients regularly see – it’s understandable why 98 percent of small businesses in a PEO relationship would recommend it to a peer.

When you’re running a business, the unique interactions you have day-to-day with your employees are so important for retention and productivity. There are certain aspects of employment that especially matter to your staff like fair and transparent pay, organized and clear workplace policies, supportive benefits and how key life events, like marriages, births, loss, are handled in your workplace. These are the moments that matter and how you as an employer handle these moments can make all the difference. PEOs can help you elevate those experiences and your business.”

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