Many businesses have benefitted from the Great Reshuffle, but for others, it has placed an additional strain on human resources (HR) professionals. These professionals wear many hats from hiring, firing, payroll, benefits, time and attendance, among a host of other responsibilities. Some businesses have turned to Professional Employer Organizations (PEO) to meet their HR needs.
This article will explore the benefits and the drawbacks of outsourcing to a PEO.
What is a PEO
When an organization hires a PEO, the company then delegates many of the human resources functions to the PEO, and employees technically become employees of the PEO. Although the company will continue officially hiring its employees, the PEO handles payroll, benefits administration, workers’ compensation, medical insurance, and retirement accounts. In turn, the PEO is compensated for its services, usually based on a percentage of total salaries and an amount to cover the employee payroll.
Benefits of a PEO
One of the main reasons many startups or small businesses choose a PEO is because it offers a one-stop-shop for their HR needs. Outsourcing HR functions allows a company to focus on its primary business strategy. Plus, it may enable them to provide large company-style benefits, which is key to attracting new employees. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEOs provide to businesses across the country. For companies with remote employees in multiple states, it also provides the resources to navigate the varying state employment laws.
Challenges Implementing a PEO
Business owners should understand that when they choose to use a PEO they will be entering into a co-employment agreement, and by doing so they are relinquishing some control over their business. While the PEO takes on HR functions, they also have other companies they are responsible for, which may cause communication and conflict resolution delays. Because the PEO takes on many of the HR functions, there is a perception that they are also taking on liability for issues like HR, benefits errors, ERISA violations, etc. Yet, even when outsourcing HR to a PEO, the employer still bears ultimate responsibility if a libelous issue arises with an employee.
One of the main reasons companies choose a PEO is for cost savings. With smaller companies with less than twenty employees, it often works out that savings on benefits offset the fee for using a PEO. The cost savings diminish as a company grows and reaches a point where they have thirty or more employees. Companies should pay close attention to the PEO admin fee as it often grows more extensive than they realize.
Other challenges include
- Fluctuating cost
- Lack of billing transparency
- Non-customizable HR technology
- Limited access to data and analytics
- Lack of flexibility in products and providers
Alternatives to a PEO
For those where the cons outweigh the pros of a PEO, SmartSourcing HR functions is a great alternative. By using SmartSourcing, companies can keep their HR functions in-house and when they take advantage of the latest HR technologies, they also retain control of their data. Likewise, organizations can configure a system that fits their unique needs and sustain business growth. Businesses can utilize state-of-the-art systems to manage time, attendance, payroll, and other essential HR functions. Many companies offering these types of Human Capital Management (HCM) technology also have HR experts on hand. These HR experts can provide the knowledge of best practices and guide organizations so they can effectively address all aspects of HR for their organization. With innovative sourcing, companies can handle costs and data while taking advantage of customizable HR, payroll, and time-keeping solutions.
Learn more about CBIZ HR Outsourcing (SmartSourcing) Service.