To PEO or Not to PEO, that is the Question

By Brian Haney • February 4, 2021

No, Hamlet wasn’t a human resources specialist, but he certainly can frame the common dilemma of keeping work in-house or outsourcing that many associations face. In today’s competitive workforce environment, for-profit and non-profit organizations alike are constantly looking for strategic advantages as well as cost savings to attract and retain the best talent. With many associations embracing the virtualization of the workforce, the idea of outsourcing as much as one reasonably can has certainly grown in appeal. Enter the PEO.

What is a PEO?

A PEO, or Professional Employer Organization, is a company that establishes a joint-employment relationship with an employer by leasing employees to that employer, thereby allowing the PEO to share and manage many employee-related responsibilities and liabilities. Functionally, this arrangement allows the employer to outsource many human resource tasks, such as employee benefits, compensation and payroll administration, workers’ compensation, and employment taxes to the PEO. The partnership of an association and a PEO is called co-employment.

How does a PEO work?

This model is all about buying power. PEOs take on multiple clients, allowing them to pool one company’s employees with another’s. PEOs provide a wide range of offerings that an association may not be able to afford on its own if they have a smaller employee count. PEOs are generally not geographically restricted nor limited in the number of employees they can accommodate.

How much does it cost to work with a PEO?

The cost for their services is usually a fee tied to payroll volume or a per-employee headcount. Because the association’s employees also become the PEO company employees, the association reports its wages under the PEO’s federal employer identification number (FEIN) and as a result, the employee liability shifts to the PEO.

Often, the main value driver is that associations may gain economies of scale along with shared liability and enhanced HR expertise and support. PEOs may be able to reduce insurance and benefit costs by transferring their buying power to the association.

Shared employee responsibilities

Unlike HR outsourcing firms, PEOs are contractually tied to your employees and share the legal responsibility for them. In other words, your employees have two employers – the association as their direct supervisor and the PEO for legally-compliant HR services, benefits, and payroll processing. For everyday association operations, such as marketing, member services, or general workflow, the association maintains full control. However, anything that could raise HR-related legal issues – such as safety, labor law compliance, or employee discrimination – is where a PEO can help standardize procedures. The National Association of Professional Employer Organizations is a good place to find resources for understanding and assessing PEOs.

Advantages PEOs can provide

PEOs generally offer the value of scale and infrastructure about which many smaller sized associations are concerned. Additionally, for associations that lack HR expertise or systems capabilities, are concerned about wearing too many hats, or lack the time and resources to focus on transactional HR functions, a PEO’s capacity may be a much-needed benefit, freeing the association up to concentrate on mission and membership. Generally, the value a PEO provides covers the following areas:

  • Diversity of benefits options and administration support;
  • Payroll and unemployment administration (COBRA);
  • Workers’ compensation facilitation and administration;
  • Compliance & HR assistance; and
  • Family and Medical Leave Act administration.

Drawbacks of working with a PEO

While providing many potential benefits, PEOs do have several disadvantages your association should examine before entering into an agreement:

You may feel a loss of control

In PEO arrangements, the co-employer has a stake in how the association manages employees and will need to be consulted about hiring, terminations, and HR changes. Additionally, while your association may find their benefits offerings sufficient, a PEO might not work with every provider your association wants to consider. PEOs work with national insurance providers but might not work with the ones that offer the most comprehensive networks in your region and that offer the most services for your employees. This can be a potential drawback that eliminates some plan varieties. Your association will also be beholden to their open enrollment timeline, which may or may not align to a calendar year basis, and you may have little control over pivoting if the benefits renewals come back higher than expected.

Not all HR work is eliminated

Your association will still need to manage employee schedules and performance feedback as well as serve as the onsite contact for your staff. You will also need to understand and carry out the PEO’s preferred on-boarding and termination procedures, much of which are dictated by the PEOs model and infrastructure. The reality is that hiring an HR Consultant does not eliminate HR responsibilities, nor does having a PEO.

Security and cyber considerations

Your association may lack sufficient control over employee data, paperwork processing and may also be subject to security issues with the vendor’s system. While cyber threats are always inherent in today’s environment, you will need to understand what extended threats exist under the PEO model so you can adopt the appropriate operations and information security procedures.

You will need to carefully classify employees for insurance purposes

It is also important to make sure your insurance carriers understand your risks, especially on your worker’s compensation and cyber policies. Make sure a PEO properly categorizes your association’s employees and that personnel and systems infrastructure are properly communicated. For example, some PEOs overgeneralize when categorizing professionals – especially if the PEO has accumulated thousands of employees under its umbrella. With the wrong employee categorization, your association (and the PEO) might pay either too much or not enough to go with the risk an employee faces in their role. Worker’s comp might seem straightforward to navigate, but it is still an insurance policy that is best handled by a trained insurance broker and not by a payroll provider. Communicate closely with a PEO about your employees’ job responsibilities and classifications to avoid misunderstandings that can impact policy pricing.

A PEO is not always the most cost-effective employment solution

Lastly, it’s always a good idea to compare a PEO’s offerings to what the association has available in the market at large. Do not assume that due to a smaller size you cannot facilitate cost-effective benefits independent of a PEO. The small business insurance market is surprisingly competitive and there are many brokers, benefits administration firms, and HR consultants with large capacities that can help you tailor a benefits package to your association. Really examine the PEO monthly fees for the package they offer, as you may be able to find an equally cost-effective alternative, if not some savings using independent payroll/benefits/HR providers.

Begin with culture

PEOs are not the silver bullet to solve all the employment ails your association may face. Carefully examine a proposed PEO partnership beyond the potential financial benefits to see if their model synergizes with your association’s ethos.

The co-employment dynamic is critically important to understand. Ask yourself: Does it align with your association’s mission and value proposition as well as your desired employee culture? Be careful not to let the allure of “easing HR and benefits burdens” override employee culture and morale, as some organizations have seen employees leave when moving to a PEO because the change made their work environment feel less personal.

Ultimately, your association should determine its primary employment value proposition and align its vendor and service providers accordingly. Like many vendor opportunities associations assess, be sure you see things with eyes wide open.

About The Author

Brian Haney, CLTC, CFS, CFBS, LACP is the founder and vice president of The Haney Company, an insurance and financial services firm serving associations and association leaders, in Silver Spring, Maryland.