Thanks to COVID-19, many small and growing companies are hesitant to add non-revenue generating headcount. However, as companies grow, they need to build out infrastructure, including human resources, to support that growth. After all, how will you recruit, retain and manage your workforce? But taking on additional headcount too early can siphon resources that could be deployed elsewhere. The solution? A relatively straightforward outsourcing alternative: the professional employer organization.
Why a PEO makes sense
Instead of outsourcing limited functions (such as payroll) to a third party, a PEO offers a full suite of services. PEOs are third party, outsourced, HR organizations and are normally the employer of record. The paychecks come from the PEO, based on what the company (or client, if you will) tells it to pay. The company deposits money with the PEO and the PEO cuts the checks (and, naturally, keeps the interest on the money earned between those two events). And, of course, the company pays the PEO a monthly fee for these services and more. Like what, you ask? A big draw is the ability to pool all its clients and offer a competitive benefits package to the employees, certainly better than anything a small company could get on its own. On top of that, the PEO ensures the company is compliant (HR-wise) with the various applicable federal, state, and local laws. The PEO will take care of workers comp coverage, ensure sick leave is calculated correctly based on an employee’s locale of work, and will even answer all the ad-hoc questions that the CFO or COO (who is usually responsible for HR in the absence of an HR director) may come up with.
What’s not to like? For starters, PEOs aren’t cheap — you are paying for peace of mind. Also, though PEOs may offer a broad menu of benefits offerings, one cannot stray beyond it; that’s the price you pay for being in a big group. And PEOs aren’t really going to play a role in the culture of the company. If HR normally is keeper of the culture, the burden would fall to others in the company. Finally, PEOs are sticky. Leaving a PEO takes great care to ensure no business disruptions.
Managing the PEO relationship
I am often asked to help a company find a PEO, evaluate a current PEO relationship (which I recommend auditing no more than every two years to ensure one is still reaping the financial rewards), or help extricate a company from an existing PEO relationship. The criteria to decide on which way to go are generally the same. I generally base the decision on cost/benefit analyses, with audits taking a more specific turn. For instance, consider the cost of the PEO vs staffing internally to provide the same level of service, if that’s necessary. In other words, you get a lot with the PEO, but do you need all of it? And if you are to piecemeal HR outsourcing with, for instance, payroll processing, you must factor that cost into your analysis. At the other end of the spectrum, the PEO handles employer handbook needs. Will you create your own, and what will it cost to do so (you can outsource those as well)? You will want to audit benefits coverage to see if you can do as well on pricing and selection on your own. And a common area of savings is in workers comp coverage, the cost of which is often based on a percentage of the payroll instead of the nuances of the specific business. Finally, there is the service itself. Clients will pay a premium for good service. After all, you are paying to remove an administrative burden. Is the service saving you time or, heaven forbid, causing you additional headaches? And don’t forget to take a look at contract renewal dates. Give yourself plenty of time to evaluate the renewal and, if necessary, plan for an eventual exit.
A consultant steeped in PEO experience can help you get to the bottom of these matters to ensure your firm has made the right decision today, with an eye to timely reevaluations in the future. As your business grows, make sure your HR structure, whether outsourced or not, matches your needs, budget and values.
Bryan Otte is founder and CEO of HRPlus Group, a human resource consultancy based in Washington DC.