The Good and Bad of Professional Employer Organizations

A small business in a typical American city is doing well enough to run into some of the problems associated with growth and expansion. Among them is onboarding new administrative employees. The business owner is thinking about signing on with a professional employer organization (PEO) to handle staffing needs. Should he go that route?

PEOs are a relatively new phenomenon. They didn’t start showing up until the late 1960s and, even then, the PEO model got off to a rather slow start. The whole idea behind it is what is known as ’employee leasing’, something that did not really catch on until the early 21st century.

Employee leasing is essentially a co-employment agreement between an employer and a PEO. The PEO hires the employer’s staff, becoming the employer of record for taxation, health insurance benefits, etc. The PEO hire then turns around and continue doing the same work they did for their former employer.

There are both good and bad aspects to this sort of employment arrangement. BenefitMall, a nationwide payroll and benefits administration firm, recommends that companies make an effort to fully understand the PEO model before embracing it. A company just looking to alleviate the pressures of payroll would be better off outsourcing payroll rather than pursuing a PEO contract.

Employee Leasing’s Good Aspects

Leasing employees from a PEO certainly looks attractive on numerous levels. For starters, you have access to as many administrative employees as you need without actually having to hire them yourself. This means you also do not have to worry about running payroll, providing workers’ comp insurance, offering benefits, and so forth. You also do not have to handle training and recruiting. The PEO handles all of that on its end.

For small business owners, this means having access to employees who come to the office ready to go from day one. That can be pretty attractive now that the improving economy is leading employers to take risks on new hires they would otherwise have ignored three or four years ago.

Embracing the PEO model also allows small businesses to focus more on the big picture rather than the little details. This is primarily because PEOs tend to specialize in the kinds of employees they provide. Small businesses can focus more on the big picture as they do not have to worry about all the details that go into such specialized workers.

Employee Leasing’s Bad Aspects

Employee leasing is not all sunshine and roses. Some companies get involved with the PEO only to find they still want maximum control over salary and benefits. They lose that control in the PEO arrangement. Nowhere is this more evident than health insurance. Losing control over health insurance benefits can increase costs significantly.

Another disadvantage of employee leasing is its expensive price tag. A small business cannot outsource employment and expect to do so cheaply. Simply put, you pay for the convenience of leasing employees without worries of payroll, benefits, etc.

Lastly, small businesses always have to be concerned about the IRS. Some of the federal rules governing how PEO arrangements work can be applied in multiple ways. This may leave a company already on the edge just one PEO arrangement away from violating federal law. Companies have to be extremely careful about employee leasing so as to not run afoul of the Fair Labor Standards Act (FLSA).

PEOs are still not as popular as temp agencies in the U.S. But they do have something to offer; something that growing numbers of businesses are availing themselves of. Is a PEO right for your business? That’s up to you.

About Robin Jackson