There comes a time for every growing business when things must evolve.
You recognize that what got you here, will not take your company to the next level.
What will it take to reach your strategic goals?
Research shows that professional employer organization (PEO) clients grow faster, have lower rates of employee turnover, and have higher rates of business survival than other comparable small businesses.1
What is a PEO?
First off, we want to explain how a PEO helps companies. Organizations outsource their HR functions to our team of HR professionals, many of whom hold credentials and licenses in their specialties. The idea behind a PEO is you manage daily operations while leveraging our HR expertise. No more getting pulled into HR, working with a PEO allows you to focus on revenue generating initiatives. Your employees will have assigned specialists for benefits, HR guidance, payroll and taxes and more. If you have internal HR employees, they can focus on more strategic initiatives like career development and corporate culture.
There are also PEO’s certified by the IRS, called CPEOs (Certified Professional Employer Organizations). As a CPEO, MidwestHR provides protection against any tax liability because we are solely responsible for payroll taxes and penalties. Also, if a company switches to us mid-year, the taxes paid will be transferred to our FEIN and the wage base restart problem is eliminated.
MidwestHR believes successful partnerships are built on transparency and that includes sharing the pros and cons of working with us. While we believe the pros outweigh any cons, we want your organization to have all the facts it needs to make the best decision and choose the right PEO.
Why would a company use a PEO instead of hiring an HR professional?
It’s challenging to find a professional who knows all aspects of HR. Companies require someone who understands the impact of legislative changes, manages benefits, payroll administration and HR issues, while also hiring new team members, supporting performance management goals and building the company culture. That doesn’t even include responding to unexpected things like developing new policies during a pandemic. They might spend countless hours researching a resolution or seeking clarity without fully understanding the ramifications. For example, losing an unemployment claim negatively impacts your state unemployment tax rate (SUTA) for three years. When administrative tasks eclipse strategic HR goals, that’s when partnering with a PEO should be considered. Since PEOs have many clients, the expense is a fraction of what it costs to hire each individual expert. On average, it costs between 2 – 4% of payroll for companies to access an entire team of HR experts. It can provide a fundamental shift in how you operate. No more worrying when someone from your HR team is out sick or gives notice, we have a team waiting to help.
Pros and cons of using a Professional Employer Organization
Next, let’s delve into different HR responsibilities to understand the advantages and disadvantages of working with a PEO.
Business owners want to provide quality health insurance coverage and voluntary benefits that are valued, while controlling costs.
Pro: PEOs have relationships negotiating power with leading carriers. That can translate to more competitive rates and better employee benefits options. They manage onboarding, open enrollment and renewal, plus educate employees about everything included and answers ongoing questions. This saves your team time plus reinforces that the full value of the benefits package.
Con: Some PEOs only offer one carrier option, limit your ability to customize and can change carriers without notice. This can be very frustrating for employees who depend on medical specialists who are then out of network. There are PEOs that offer multiple carrier options, if that’s a priority.
An important aspect of HR is developing policies, procedures and support to keep employees aligned, engaged and growing. From onboarding to termination, legal guidelines must be followed to remain compliant.
Pro: PEOs help employers develop an employee guidebook reflective of their mission. Leveraging best practices, it explains company policies regarding paid time off, benefits, disciplinary procedures and all local, state and federal employment laws. They also provide training that fulfills legal obligations and establishes that harassment and discrimination are not tolerated. You get unlimited access to guidance when dealing with difficult issues or questions.
Con: When companies have pressing HR concerns, they want answers fast from someone who understands their organization. With some PEOs, you don’t have a dedicated team causing you to lose valuable time explaining the issues. It’s important to ask if you’ll have assigned resources and the PEOs employee turnover rate.
Payroll and Taxes
Prompt, accurate payroll and tax administration is a critical HR responsibility. During the pandemic, flexible work arrangements have greatly impacted its complexity.
Pro: The PEO will make sure deductions and withholdings are properly calculated, reported and remitted to the right government agency according to schedule. That includes employees who work from a different state. With a digital payroll process, manual administration is eliminated and your team saves time with electronic confirmations and approvals.
Con: The PEO is responsible for administering payroll and paying federal employment taxes. If they don’t pay them, you are liable because the IRS is not bound by your agreement with the PEO. This is where working with a CPEO becomes critical because they are solely responsible for payroll taxes and penalties.
When partnering with a PEO, the employer enters into a co-employment arrangement that divides up responsibilities and liabilities.
Pro: Your company remains “employer of record” with decision-making authority over daily operations, workforce management and business strategies while the PEO assumes risk for administrative HR liabilities. Your employees are incorporated under the PEO’s tax FEIN.
Con: Relinquish some control within your organization. You no longer stop by someone’s desk to figure something out; you must contact your PEO. Be sure to ask about turnaround time expectations. As previously discussed, there’s also liability if a PEO doesn’t pay taxes (unless you partner with a CPEO, like MidwestHR).
Manual processes have been replaced by human resources information systems (HRIS) to integrate HR functions across the employee lifecycle.
Pro: Depending on the PEO, you can access enterprise-level technology that streamlines HR. With HRIS, you can manage recruiting, onboarding, benefits, payroll and more from one dashboard. It improves efficiencies and shows employees you value their time. You gather more insights with flexible reporting. Many of these SaaS products are cost prohibitive for small companies and as a PEO client, you get access as part of the retainer (varies by PEO).
Con: PEOs hide costs in bundled packages. You may be charged for products or services you don’t want or need. Be sure to ask for itemized billing.
There are multiple HR responsibilities to ensure continuity when a company is dealing with fire, flood, pandemic or any other crisis. Until recently, this may have ranked as a lower priority for many businesses.
Pro: PEOs guide clients on OSHA and CDC recommendation to keep employees safe and ensure compliance. They also advise on staffing decisions (furlough vs. layoff vs. termination), oversee the unemployment compensation process and payroll changes. They also help adjust company policies to address new concerns and comply with applicable laws. These services save time and worry. During COVID-19, PEO clients were 119% more likely to receive PPP loans easing financial strain. If using their HRIS system, your employee data is secure even if physical computers are destroyed.
Con: Guidance only applies to HR related functions. This doesn’t replace a formal disaster recovery plan.
MidwestHR is a leading CPEO in Illinois (certified professional employer organization). Our clients rely on us to manage their HR functions including payroll and tax administration, benefits, workers’ compensation, risk management and more. We have spent years refining our offering to make our clients’ and their employees’ lives easier. With MidwestHR, you get a dedicated service team, multiple carrier options, HRIS access and a la carte pricing so you only pay for the services you want. We are dedicated to providing businesses with the right solution. Give us a call at 630-836-3000 to learn more.
1Bassi, Laurie and McMurrer, Dan. National Association of Professional Employer Organizations (NAPEO). The State of the PEO Industry 2016: Markets, Value, and Trends. Alexandria, VA: 2016. Print.