Considering the Value and Limitations of a PEO


Scaling up any business means a lot of changes to how things are done over the years. One of those changes may involve bringing a PEO on board to assist in the management of essential tasks.

A company that begins with little more than some exciting ideas and some hustle can quickly become one that is swimming in a sea of paperwork. Of course, that paperwork for new hires, payroll, HR etc must be done. But does it have to take up the time of the team members or founders who have already proven they can drive revenue and grow the company? Well, no. It can easily be argued that the founders and those team members’ time is better spent working “on” their business, not “in” it.

This is where a PEO comes in.

What is a PEO?

PEO stands for Professional Employer Organization. A PEO can be a single individual, but it is more commonly an entire company hired by a small business to help them fulfill essential tasks. This company will take over large-scale projects that have been hindering growth simply because they are so time-consuming. Let us take a look at a few of the other things that a PEO may be tasked with doing.


HR Tasks- There are plenty of HR tasks that can be handled by a PEO. Instead of having in-house people to do things like onboarding, employee verification, drug testing, training, and more, why not use a PEO to get that done? They can do so at a fraction of the cost of an entire HR department, and they make it happen more efficiently than direct hires.


Employee Performance Management- Tracking employee performance matters for three major reasons. The first is to provide appropriate recognition of those employees who have done excellent work for the company. The second is to identify those who are not pulling their weight for the company and take appropriate action. The final reason is to look for those who may deserve some elevation to a higher position within the company. All of those can be accomplished by a PEO.


Taking on Employer Liability- The various tasks that a PEO takes on also contain an element of risk within them. For example, numerous small businesses are fined each year for making mistakes on their payroll obligations. It is the often the business owner’s responsibility to make sure that these types of things are handled appropriately, but it is easy to make a mistake. So, instead of continuing to expose oneself to these risks, it is sometimes best to transfer that liability on to a PEO.

We talk more about what a PEO is here.


Does a PEO Make Sense for You?

Now that you know about some jobs that a PEO can do for you, the question becomes if working with one makes sense for your business. What are the upsides to bringing on this type of outside help? Let’s consider two factors, employee engagement and turnover.

According to Gallup, only 34% of employees in the U.S. are “engaged” in their jobs—and 17% are “actively disengaged,” which often means they’re looking for other jobs.  Once one of these unengaged employees leaves, it costs businesses $15,000 on average to replace them.

This paints a clear picture that it is in a business’s best interest to engage employees so that they are not constantly flowing out the door. In fact, it is key to running a successful operation. This is true for all companies, but turnover it is particularly damaging small businesses that are just beginning to scale.

A competent PEO will improve your onboarding and training programs, as well as offer employees the kinds of benefits they care most about. Oftentimes this includes health insurance. It can be very difficult for small business owners to be able to afford to offer health insurance if they don’t have enough employees to qualify for a group plan. Through a PEO, small businesses with fewer employees are able to access these group programs and access more affordable options. This adds up to a happier workforce and a more productive and profitable business.

Keeping people working for you also means hiring some of the best people out there in the first place. Top-notch employees are attracted to a company that they can tell has put their best efforts in to keeping employees happy – and this means a clean, organized recruiting process and great benefits. Thus, a PEO can help you start with the very best talent and then keep them for the long run.


Drawbacks of a PEO

Nothing in life is perfect, and it is sensible to acknowledge the potential drawbacks of a PEO as well. While most of the drawbacks can arguably be dismissed as “nothing is perfect,” it’s still  important you understand what you are getting into if you are considering a PEO.


You Are Not Their Only Client- The business model for a PEO is to take on a variety of clients. They must do this to keep their individual price for each client as low as they possibly can. Their goal is to gather those clients in bulk and do good work for them at a fair price. This shouldn’t impact the way that they do business in any noticeable way, but you should understand that.

Before you choose a PEO, make sure you will have a designated representative and that they are readily and directly available should you need them.


They Do Not Take Complete Liability in All Circumstances- The buck is not completely passed to the PEO for every single incident that may come up in the course of what they do. They will take on considerable legal liability for things like incorrect tax payments or delayed payroll incidents, but you cannot expect to just relieve yourself completely of all legal responsibility to your employees and others. Have a discussion with the PEOs you are considering about what liability they will assume, and what they won’t.


Your Data is Being Managed by a Third Party – Finally, you must understand that some of your company’s most sensitive data goes into the hands of an outside source when you hire a PEO. They will acquire your payroll information and more in order to do their job effectively. As they are in the business of handling this type of data, they often have more advanced and comprehensive security systems than you’d find at your typical SMB.


The Verdict

A PEO can allow you to focus on handling the big picture items that will make your small business stand out and stop you from being swallowed up in the paperwork that comes with a growing business.

Want to know how much time/money you’re currently spending on admin tasks and what it may cost to have Avitus Group help out as a PEO? Check out our PEO Cost Calculator here.

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