If you’re like most human resources (HR) professionals, you wear multiple hats.
An HR professional's responsibilities can range from completing administrative tasks such as payroll, addressing performance issues and reviewing benefits costs to ensuring all financial filings are up to date and aligning with company stakeholders to support the organization. Although these tasks are commonly performed by the HR function, many HR professionals outsource administrative tasks as a way to free up time to focus their energy on becoming a strategic workforce advisor. Often, this is when PEOs come into play.
What is a PEO?
A Professional Employer Organization (PEO) is an outsourcing arrangement that handles payroll, hiring, on-boarding administration, benefits, workers compensation and can oversee a range of compliance tasks.
It is a co-employment solution that can reduce work and liability for small businesses by offering lower net costs to manage an employee population. When in a PEO agreement, the PEO will become the employer of record and will handle the tasks mentioned previously, while the employer retains responsibility for day-to-day operations and management of employees. Through this sharing of employer responsibilities, the employer can leverage economies of scale, typically afforded only to larger employer groups.
By consolidating insurance purchasing for multiple employer groups into one plan, PEOs can offer price advantages due to a “bulk” discount or funding arrangement. Another key function of a PEO is human resources management and ensuring compliance. Employees become W2 members of the PEO staff, who support the complexities and potential liabilities associated with people management and are responsible for remaining current with state and federal mandates and policies.
What Are the Pros and Cons of a PEO?
At a high level, here are a few pros and cons to consider as you explore a potential PEO relationship.
Some advantages include competitive employee benefits costs, administrative efficiency and the simplification of people management. Because PEOs center their employee benefits and workers compensation plans with single sources and pool the overall risk, they can put forward seemingly attractive pricing structures and plan designs that appear to offer significant financial savings to employers. Another key component of a PEO is the utilization of technology to administer payroll, new hire management and benefits all from one source. As more businesses today span across multiple states and even countries, the PEOs ability to manage state, federal and international documentation, leave and disability policies can offer much-needed alleviation meeting compliance obligations.
The pricing as presented in benefits cost savings shown initially, may not reflect an employer’s actual spend. Contracts or PEO agreements are typically set as a percentage of payroll and can fluctuate as the workforce changes. The cost for PEOs can range from 2%-6% of an employee’s salary depending on salaried versus waged workers.
Additionally, the agreement may not include additional costs for adjunct services, technology upgrades and additional liability coverage that is often required as time lapses. By entering into this co-employment arrangement, the engaged organization is no longer in full control of its human capital. Employees would receive W2s and other notifications from the PEO and if employees have questions, they are directed to an 800 number.
With regards to the benefits offerings, although the employer may receive more competitive rates for insurance, the plan designs are fixed and set by the PEO, meaning the employer has limited control over the plan. Simply put, the employer no longer has the ability to design plans or offerings that reflect the unique culture and specific needs of the workforce. Finally, if the employer decides it no longer wants to participate, it may be at a greater financial risk thanks to clawbacks built into the contract.
Considerations Before Entering Into a PEO
Before entering into a PEO there are many things an employer will want to consider throughout the sales process. First, it’s imperative to clearly identify the needs and objectives of the HR function. What is the PEO offering that is essential to business operations and are there other solutions that can alleviate that pain point?
Typically, HR support can be accomplished in three ways: hiring a resource internally, often a full-time person; contracting a part-time consultant; or fully outsource, which is often when a PEO would be considered. Should an employer determine that a PEO may be a viable option for the employee population, it is important to consider all aspects of how the PEO would work with existing (if applicable) HR department and understand the potential changes to the current employee benefits plan.
Many organizations have found that part-time HR support may be a better fit for their changing needs. Without the potential risks of a PEO, organizations can better reduce and mitigate issues by keeping employees under their umbrella, access valuable benefits data and ultimately manage benefits costs. Part-time or fractional HR support is offered by many organizations, granting access to sophisticated HR generalists and strategists. Often, the provider can offer experts that address a broad range of HR functions such as compensation, leadership development, integration and M&A support, to name a few.
Want to learn more about aligning with an HR Consulting Expert? Check out how OneDigital powers companies of all sizes to take HR management to the next level by visiting the HR Consulting page today.