A professional employer organization, or a PEO, is a type of human resources outsourcing. Also known as an employee leasing company, such an organization takes care of multifaceted human resources functions for various companies.
A PEO, however, is not a replacement for an HR team.
Usually, small and medium companies without a full-time HR department go into a contract with a PEO. Subsequently, the PEO takes care of all the HR and administrative tasks, such as benefits, tax, payroll, regulatory matters, etc., on behalf of the client companies.
What Does a PEO Look After?
A PEO looks after various HR and administrative functions on behalf of the companies they’re working with, some of which are:
Benefits and compensation;
Talent pooling and hiring;
Policy creation and legal compliance;
Benefits and administration management;
Payroll and taxes.
However, a PEO won’t be controlling your business and isn’t a permanent replacement for an HR team. They also won’t look after your company's sales and marketing operations and productions.
Which Companies Can Use a PEO?
Usually, small and medium companies use PEO to take care of their HR and administrative functions. However, sometimes corporations can use outsourced employees as well.
Some of the types of industries that can use a PEO are:
Services such as health, legal, engineering, technology, consultancy, businesses, and manufacturing;
Property and real estate companies;
Accounting and bookkeeping companies;
Plumbing and electrical companies;
Securities and brokerages.
Why Should a Business Use PEO?
PEOs have various advantages for small and medium companies who want to carry out their HR functions flawlessly and effectively. Following are some of the benefits of using a PEO.
1. Legal Matters
PEOs have well-versed employees on all the compliances and policies revolving around various companies and employments and can protect you from legal risks. They can expertly handle benefits, file taxes, and classify company employees correctly, ensuring that payrolls roll out correctly every time without requiring any adjustment later.
2. Employee Benefits and Compensation
PEOs have a wide range of ideas for competitive benefits and compensation packages up their sleeves, enough to attract good employees for their client companies. They can plan out and provide healthcare plans, insurance policies, work benefits, retirement planning solutions, commuting benefits, etc., all in affordable packages suitable for companies.
3. Good Use of Time and Money
PEOs save a lot of time and money for small and medium companies while also attracting and recruiting skilled people.
Since they work with a few clients at a time, PEOs can offer co-employment at a much more affordable package, compared to the company hiring full-time employees for every task, which can be expensive.
A PEO can also help companies build a good reputation among prospective candidates and present employees by creating engagement, improving trust, and designing effective programs for employee retention.
What are the Disadvantages of Using a PEO?
Although working with a PEO has benefits, it also has some drawbacks since a PEO isn’t a part of the internal teams(s) within a company.
1. Control Over Payroll Data
When a company works with a PEO, they need to give all the business data to that organization, including all the payroll data. If you plan to get insurance and benefits on your own, you’ll need to start everything from scratch, meaning you’ll need to bear greater costs and risks.
2. Loss of Control Over Internal Processes
Because you’ll need to hand over most of your company’s duties to the PEO you went into contract with, you’ll lose control over your internal processes. You won’t be able to control bonuses and employee compensation, and you may also be unable to improve compliance if you feel there’s a scope for improvement.
Besides, you’ll need to be satisfied with their packages and unable to make any flexible decisions unless the organization provides options for customization. This may bring some discrepancies sometimes, causing conflicts about matters such as getting a good retirement plan and medical insurance.
3. Delayed Communication
PEOs work with a few clients simultaneously, so you may face delayed communication when you need them the most. Due to this reason, essential functions can get delayed, and conflict resolution may not happen in time and effectively.
4. A PEO’s Mistake Won’t Be Their Responsibility
Because the PEO you’ve assigned is working with your business data, any mistake they make won’t be their responsibility. Instead, you’ll need to take care of any conflict or miscalculation in the books, which can be costly. You may also face investigations if your tax returns aren’t filed properly or if there are mistakes in calculations.