By Wayne Smith, Trüpp.

3 things to consider before selecting a PEO

Professional Employer Organizations (PEO) are on the rise as an alternative HR solution for small to mid-sized businesses. Rather than simply providing an outsourced HR solution, PEOs go a step further and enter a co-employment relationship with their clients. This enables them to aggregate employees from several organizations and enjoy reduced rates for benefits, payroll, and other business services.

The centerpiece of the PEO solution is the co-employment relationship. From a legal perspective, the PEO becomes the employer of record and leases the employees back to the client. While this is recognized as a legal and safe arrangement, employers should be aware of the nature of a PEO relationship and these important considerations before entering into a contract with a PEO.

PEOs can be impersonal

The most common complaint leveled by organizations that choose a PEO solution centers around the loss of personalization. When contracting with a PEO, the employer surrenders their ability to select a preferred benefits provider or payroll company. Instead of choosing providers based on ease of use, newer technology, or unique plan offerings, the employer is limited to the programs offered by the PEO. For organizations that place a high value on accommodating their employee’s preferences and culture, this rigidity can be a drawback. Progressive companies, for example, may wish to enhance employee engagement by offering specialized benefits based on employee feedback. Employers in a highly competitive market may wish to increase efficiency by moving their administrative functions to cloud-based platforms. Other companies may simply desire a deeper level of HR expertise than what is provided by the PEO.

PEOs can become costly

While the financial benefits vary from company to company, many organizations find that the extra fees and overhead associated with a PEO stop making financial sense after they reach a certain number of employees. Once an organization’s census enables them to secure more robust rewards programs at rates comparable to those offered by the PEO, it may be more affordable to leave the PEO–a very complicated process.

A savvy employer will also carefully consider a potential PEOs claim history. Premiums may be cheaper for an organization on a stand-alone basis when compared with a PEO that has had an unusually high number of claims. This is not uncommon since employers with a disproportionate number of high-risk employees tend to save significantly with the PEO model.

PEOs offer limited HR support

It is important to look very carefully at how HR and administrative services are delivered by a PEO. Access to HR professionals is typically limited, and may only provide remote guidance and phone support. Employers commonly complain that they are required to do most of the associated paperwork and administrative tasks themselves. An increasing number of PEOs only provide online resource libraries, requiring employers to dig through complicated content to find what they need as HR issues arise and make decisions that are more suited to HR professionals. If in-person HR support is provided, the representative may not be integrated with a team of HR specialists, affecting the depth of service provided.

Let the buyer beware

PEOs are a cost-effective solution for some organizations; however, it is critical to enter the arrangement with eyes wide open. Once entangled in a PEO partnership, it is difficult and time-consuming to jump ship. An organization should carefully consider its management style, culture, in-house HR expertise and bandwidth, and future growth plans to determine whether a PEO is right for them. In today’s market, there are a number of convenient HR outsourcing options available, enabling savvy business leaders to choose from a wide range of service models and providers. A wise employer will carefully select an HR outsourcing solution that will provide the desired level of service, fit their unique business model, and accommodate projected growth.

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