PEOs for Businesses: What Is a PEO? Should Your Business Use a PEO?

For small businesses that are having some challenges with human resources (HR) functions, a professional employer organization (PEO) may be a solution worth considering. PEOs act as outsourced HR teams. They can manage administrative tasks like:

• Benefits
• Payroll 
• Workers compensation
• Employee training

In some cases, a PEO can improve efficiency and make financial sense for small businesses. In others, you could save money handling these tasks in-house or by working with a more specialized partner, especially for group health insurance administration. 

In this guide, learn more about what a PEO is, pros and cons of PEOs to consider, and signs it may be time to exit a PEO and how to do so.

PEO Explained

What is a PEO, exactly? A PEO provides outsourced HR administrative support. Areas a PEO might manage include:

• Benefits administration and business insurance plans
• Tax compliance
• Government compliance
• Payroll administration
• COBRA insurance
• Safety programs and OSHA compliance
• Training and development courses
• Risk management services

PEOs may work with diverse companies across the country, technically providing support to thousands or more employees. For a business that doesn’t want to hire a full-time, dedicated HR or administrative team, the business can outsource tasks related to the above categories to a PEO. 

PEOs can draw on their vast resources and compliance expertise to ensure small businesses stay compliant with local, state and federal regulations. They can also free up small business owners to work on the tasks they want to focus on. 

Pros of a PEO

PEOs may provide benefits to some small business owners. Typically, a PEO makes the most sense for owners of multi-state businesses with fewer than 25 employees, who want to offer very rich benefits for their staff. 

Some benefits of PEOs include:

• Multiple tasks handled in one place: PEOs can manage a variety of HR tasks on behalf of the business, including 401(k), benefits and more. Instead of having to source multiple vendors, a business can work with a single PEO to get things done.
• Compliance: PEOs are experts in nuanced compliance regulations. This makes it easier for small businesses in multiple states to gain the peace of mind they’re operating lawfully wherever they do business.
• Potential cost savings: In certain scenarios, a small business may be able to save money using a PEO. For example, instead of hiring in-house HR staff members that require an annual salary plus benefits and overhead, a PEO eliminates those costs.

PEOs are simple to roll out, and they’re scalable. While they may provide some benefits, small business owners should also be aware of when a PEO might not be the best solution.

Cons of a PEO

There are tons of PEO providers, and choosing the wrong one could result in significant expenses for a business, as well as potential problems. Some PEO disadvantages to consider include:

• Investment: Often with PEOs, up-front costs and fees aren’t always transparent. A business owner may sign a contract with a PEO only to be surprised by fees later on. Plus, for some business tasks, like administering group health insurance, it’s actually much more expensive to use a PEO compared to working with a specialist like a health insurance broker. Business owners should weigh costs compared to what they need to choose the best solution.
• Exit challenges: Small business owners should keep in mind that if they do one day want to exit a PEO, it can be challenging to do so with incurring significant fees and/ or loss of staff insurance accumulations E.G. if a portion of some employee’s deductible has been satisfied, that may not translate to your new insurer.
• Lack of customization: Because PEOs work with different businesses, small business owners may find that customization options are lacking. It may be more beneficial to work with a vendor that can offer personalization based on the unique needs of a business, rather than a PEO that offer generalized services for all clients.
• Communication issues: Another potential PEO downside is that it may be difficult to get quick answers to questions and clarity for any issues a business may have. Since PEOs are working with multiple clients, a small business owner may find service and response times are slower than what they need. 

For small business owners who are looking for a true partner, PEOs may not offer the personalized service they need. Plus, PEOs can be more expensive than other options and can be difficult to leave on smooth terms. For these reasons, small business owners should carefully consider all options before signing up with a PEO.

How to Choose a PEO

When you’re comparing the multitude of PEO vendors out there trying to sell you services, follow these steps to improve the likelihood of a successful partnership.

1. Assess your needs. Understand your specific HR needs, including payroll processing, benefits administration, compliance management and any other services you require. Make a list of must-have services versus those that are nice to have.
2. Research potential PEOs. Look up PEO providers online, and/or ask colleagues for recommendations. Create a list of ones that offer what you’re looking for. Contact those for a free consultation.
3. Evaluate your financial stability. As you consider the costs, look at your financial projections to ensure you’ll be able to pay for PEO services during the contract length you’re considering. 
4. Consider technology and integration. If you’re already using specific software and systems, enquire to see if the PEOs you’re interested in can integrate with your existing business tools.
5. Review compliance expertise. Make sure the PEOs you’re interested in are experts in compliance for the locations you’re currently operating in, and any areas you’re interested in expanding into.
6. Assess employee benefits. Look for PEOs that offer the employee benefits you’re interested in providing to your workers, like business health insurance and dental insurance.
7. Understand service level agreements (SLAs). Have a lawyer review any potential SLAs and answer any questions you have, so you’re completely clear about what each partnership would entail.
8. Compare costs. Understand the true costs of the PEO and the value each one can bring to your business. Compare the potential return on investment you can expect with each PEO.
9. Seek references and recommendations. Ask potential PEO partners for similar clients they have that you can talk to for references and recommendations.
10. Negotiate contract terms. If you’re interested in a PEO but need to adjust the contract, negotiate to get closer to the deal you’re interested in.
11. Trust your instincts. As a small business owner, you’ve honed strong business instincts that have helped you open and run your business. If your gut is pointing you one way or driving you away from a PEO, investigate further to come to a decision you’re confident in.

You can also utilize professional networks like LinkedIn to ask your colleagues for recommendations for PEOs. Take your time with researching, since, as mentioned, PEO contracts can be difficult to exit and may result in extra costs when the fit’s not right.

When to Exit a PEO

As companies grow, they’ll typically pay more in PEO administration fees. While the scalability of a PEO can be a benefit, it can also result in exorbitant costs that outweigh the benefits.

There are other reasons you may want to exit a PEO. You may find that communication is lacking, or the PEO isn’t living up to the results they promised in the consideration phase.

When you determine it’s time to end a PEO partnership, the first step for how to exit a PEO is to review the contract terms, including exit terms. Notify the PEO, and work with a lawyer for help when needed.

To ensure your employees retain the benefits they’re used to, contact new health insurance benefits brokers for a seamless transition. You’ll want to ensure compliance continues to be met, so work with new partners who are compliance experts where you operate. 

Want to Exit a PEO? Contact AZ Health Insurance Brokers

The team members at AZ Health Insurance Brokers are experts in helping small businesses exit PEOs. We assist small business owners with guidance, recommendations and strategies to create a solution that has similar functionality to a PEO, without the expensive costs.

If you’re interested in offering small business health insurance, life insurance and/or other types of benefit to employees, contact AZ Health Insurance Brokers for a free consultation. Contact us online, call 602.617.4107 or email quotes@azhealthinsurancebrokers.com for more information.