Using PEOs

Professional Employer Organization Pros and Cons

Is using a PEO a smart move for your business? This article provides a good introduction to PEOs and the advantages and disadvantages of using PEOs to hire workers.

Meeting your company's human resource needs can be an overwhelming task. In addition to administrating your business' payroll and benefits package, small business owners are also expected to remain current on the ever-changing complexities of payroll tax withholdings, workers' compensation insurance, health insurance plans, and other benefits.

Some entrepreneurs have opted to meet their human resource demands by enlisting the services of a PEO, or Professional Employer Organization. The primary reason PEO's exist is to provide employee-related services for owners of small to medium businesses. This can be a valuable service for business owners, especially for the owners of small businesses who struggle to find the time to adequately cover their companies' human resource needs.

Instead of employing people directly, you and your employee become legal employees of the PEO. You retain all the functions an employer in terms of hiring employees, setting wages, etc. However the PEO handles everything else including payroll, benefits administration, workers' compensation, health insurance, and retirement accounts. All you have to do is write lump sum checks to the PEO covering all your payroll expenses and an additional fee for the PEO itself.

PEO's might be a smart move for your business. Then again, they might not. Here's a quick rundown of the advantages and disadvantages of PEO's so you can make an informed decision:


The advantages of PEO's are somewhat obvious. You no longer have to deal with human resources issues directly. That means you can say goodbye to the days of maintaining payroll records, negotiating health insurance plans, and mediating workers' compensation claims. This frees up time for you and your office staff to concentrate on growing your company - which is why you became a small business owner in the first place.

Another advantage of PEO's is their size. Often, PEO's are able to negotiate better deals for health insurance and other benefits because of the volume of business they offer. There size also leads to economies of scale in human resource staffing. Your savings comes in the money you save by not having to staff human resources in-house.


There are also some disadvantages with PEO's that you need to know about. Most importantly, you need to realize that legally your company no longer has any employees (including you). When you transition to a PEO your company legally terminates all of your employees, who are then rehired by the PEO.

Sure, you retain all of the same employee decision-making power you had before, but paychecks will now be issued under the name of the PEO. Furthermore, your employees may need to identify the PEO as their employer on their tax returns and when they apply for loans. This may seem like a technicality, but unless your employees understand this ahead of time it can create no small amount of concern for your staff.

By signing with a PEO, you also lose a certain amount of flexibility in the compensation package your employee's receive. Again, you decide how much your employees will be paid. However, your options regarding health insurance and other benefits may be extremely limited.

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  • Mike Burgelin posted on 4/25/2010
    Mike Burgelin
    While agree there are many pros and cons regarding using PEOs (as with most services), under the disadvantages you state a few things that are inaccurate. First, there are PEO providers that will allow you to run the payroll off your account. In this scenario the client signs a signature page that the PEO will then imprint on the checks. The PEO provides the check stock and still performs all the normal services. The benefit to the client is cash flow, as the PEO simply deducts the business's labor burden portion - instead of the full payroll and labor costs before the client even receives checks. The disadvantage is check reconciliation which the client would have to perform and is one of the benefits of using a PEO. Also, you mention benefits that may be restricted. Actually, with almost every PEO, the client can continue to have their own benefit plan(s) before or after using the services of a PEO and the PEO will actually handle all the deductions in a pre-tax benefit. Mike Burgelin

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