Author: Angela McDermott
Managing human resources, payroll, benefits and compliance is complex. Many organizations, especially small- to medium-sized businesses, partner with a professional employer organization (PEO) for support. A PEO company enters a co-employment relationship, handling critical administrative tasks like payroll, benefits and tax filings, allowing businesses to focus on operations.
Here's a look at the advantages and disadvantages of working with a PEO, and the considerations, should you choose to leave.
The pros of a PEO
For businesses seeking to streamline HR, partnering with a PEO offers notable benefits:
- Simplified administration: PEOs take on HR tasks like payroll, benefits enrollment and compliance, freeing up internal resources.
- Enhanced compliance: PEOs provide specialized experience to navigate complex and changing labor laws and regulations, reducing compliance risk.
- Access to better benefits: Leveraging their large client base, PEOs can often secure access to a wider range of employee benefits (like health insurance and retirement plans) at potentially more competitive rates than a smaller business could alone.
- HR expertise: Working with a PEO allows you to gain access to HR professionals for guidance on employee relations, policies and best practices.
- Workers compensation: PEOs typically manage workers comp insurance and claims.
The cons of using a PEO
While the benefits of a PEO are clear, there are also potential negatives of using a PEO that can become more significant as a business grows:
- Loss of control and flexibility: PEOs often use standardized systems and processes, limiting your control over specific HR functions or benefit plan designs.
- Lack of transparency: Many PEOs do not disclose the per-employee, per-month cost or the breakdown of where that money goes — employee benefits or fees, for example. This lack of transparency hinders clear cost analysis.
- Limited vendor choice: You're typically tied to the PEO-chosen providers for technology, benefits and other services, rather than being able to select vendors best suited for your specific needs.
- One-size-fits-all approach: As your company culture and specific HR needs evolve, a PEO's standardized approach may no longer align, feeling restrictive, compared to a tailored internal or independent solution.
When to consider leaving your PEO
As your organization grows (often around 50 employees or more), the potential downsides of a PEO — lack of customization, transparency concerns, feeling constrained by their systems — can outweigh the initial administrative simplicity. This is a common point where businesses evaluate transitioning away.
The transition: Risks and benefits of leaving your PEO
Leaving a professional employer organization allows you to gain greater control and customize HR solutions, directly addressing many of the downsides of using a PEO. However, the transition itself involves significant effort and potential challenges.
The potential benefits of leaving a PEO include:
- Transparency and cost control: Gain complete insight and control over HR costs, allowing for more informed budgeting and vendor selection.
- Flexibility and customization: Freedom to choose benefits plans, HR technology and policies that precisely fit your company's unique needs, culture and budget.
- Vendor selection: Ability to evaluate and select best-in-class vendors for each specific HR function (payroll, benefits admin, HRIS, etc.).
Conversely, exiting a PEO presents risks and drawbacks:
- Loss of convenience: You must now manage relationships with multiple vendors instead of a single PEO, requiring more internal coordination
- Transitional learning curve: Employees and internal teams will need to adapt to new systems and processes for payroll, benefits access, etc.
- Benefits procurement and cost: While you gain choice, your standalone organization may face higher costs for benefits initially compared to the PEO's pooled rates. Securing certain benefits independently — like health insurance, 401(k) plans, or workers compensation — may require more effort depending on your size.
Navigating the PEO exit process
Successfully leaving a PEO presents complex project requiring careful planning. A trusted third party can provide expertise and support during the PEO exit process, helping manage the transition and ensuring continuity of HR services until new vendors are in place.
Gallagher offers extensive experience helping organizations navigate the complexities of transitioning away from PEOs. Our team assists with every step — from evaluating alternatives and selecting new vendors to managing data migration and employee communication — minimizing disruption to your business.
Help for after your PEO exit
We assist you in identifying and implementing new HR and payroll systems, saving you significant administrative time. As you determine needs after your PEO exit, Gallagher can help. Our team can manage the day-to-day responsibilities of a new payroll system, perform a compliance audit, create employee handbooks and more. We work to find the right long-term solutions for your organization.
