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How to Transition Beyond a PEO

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people working on office computerFor many start-ups and small business owners, choosing a Professional Employer Organization (PEO) to help with human resources functions may seem like a no-brainer. There’s no denying their popularity.

According to the National Association of Professional Employer Organizations, there are approximately 780-980 PEOs in operation in the U.S., providing service to 156,000-180,000 businesses.

What makes them so appealing? They can help over-stressed, under-staffed business owners by:

  • Giving them the ability to offer a competitive benefits platform to assist with attracting and retaining qualified talent
  • Eliminating the need to hire staff to prepare and administer payroll
  • Granting access to human resources services that they may not otherwise be able to afford (like recruitment, onboarding, training, etc.)
  • Providing workers’ compensation coverage and administration
  • Reducing liability

When a PEO enters into a co-employment relationship with a business, the PEO assumes all or most of the organization’s human capital management tasks. The PEO hires the client company’s employees, incorporating the business under their tax ID. Under this format, the business maintains control over their employees, but the PEO shares in risk and liability issues.

As a business grows and the number of employees rise, limitations of working a PEO can become evident:

  • The inability to customize a healthcare plan to meet employee’s needs
  • Loss of control of essential processes and people
  • Challenges when an outside company has impact on the culture
  • Frustration over having to deal with someone outside the company when issues arise

Are you the owner of a growing company who is contemplating leaving a PEO and bringing all HR functions in-house? Before pulling the trigger, consider the following:

Which option is more cost efficient?

Is the service your PEO provides so great that you would need to hire someone new to take on the responsibilities? If so, then you need to compare the costs of the PEO with the total compensation of hiring a new employee.

Within a PEO, costs are sometimes difficult to measure. Some charge a flat fee for packaged services, while others charge a la carte per service and employee. Ask for an itemized breakdown of all charges so you can accurately determine what you are paying per employee each month. Traditionally, administrative fees range from 2% – 11% of wages or in dollar amounts, or approximately $500 – $1,500 per employee per year.

Do you want to take a more strategic approach to HR?

As your number of employees increase, so does the need to have someone on-site to handle strategic HR projects, like wellness initiatives and the creation of an employee handbook. It’s best to have someone on-site that knows the nuances of your company, the culture and the employees, to tackle these responsibilities.

Do you have the right technology?

If you bring HR in-house you will need an HR management system to help with the administrative processes that the PEO provided. Consider investing in HCM technology to help you manage all aspects of your workforce through a web-based application.

A Human Resources Information System, or HRIS can streamline many HR processes like applicant tracking, performance management, attendance, compensation and benefits management, work force analyses, and scheduling. Other benefits include reporting capabilities to help with compliance and a paperless environment, since everything is automated.

Do you feel you are losing control?

A PEO acts as a business partner to the client company and therefore may make suggestions on how best to run the business. Many PEOs don’t have policies in place that are company specific and this can affect company culture, something you should not overlook. A company with good culture has happy employees, and happy employees are more productive.

When determining if it’s time to move beyond a PEO, be sure to do your homework. Take your time to decide whether the value of the PEO is worth the expense, and if bringing HR in house is really the best option for your thriving business.

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