Pros and Cons of PEOs for SMBs

My current firm does not partner with PEOs but two of the companies I formerly worked for as a CFO or COO used PEOs.

Pros:

  1. PEOs provide access to a broad range of HR knowledge that many small businesses would not be able to afford otherwise. This includes legal requirements, employee onboarding processes, and the forms associated with all of these.
  2. PEOs typically provide a civil defense and employment liability insurance in case a former employee sues the company for discrimination, wrongful termination, or mis-classification (i.e., independent contractor vs. employee, exempt vs. non-exempt). Most small businesses neglect to purchase this type of insurance on their own. A former company I worked for and its owner were sued for discrimination and the PEO stepped in handled the situation well.
  3. Perhaps the biggest benefit is that PEOs enable small businesses to offer healthcare and retirement benefits to its employees that could be prohibitively expensive as a stand-alone small employer. Offering benefits helps recruit and retain employees who may otherwise overlook the business.

Cons

  1. Some PEOs have poor customer service. They focus more on  increasing the number of small business customers than they do on serving existing customers. Therefore, it is very important that small business owners ask to speak to two or three small business customers as references. If we had done this (before I arrived at the company!), we would have not chosen the poorly responsive PEO we had.
  2. If a small business has government or large corporate contracts that reference the employees, the owner will need to send a letter of explanation regarding how a PEO works. Officially, the PEO “hires” the company’s employees and rents them back to the small business. If a small business forgets to inform and explain the existence of  the PEO relationship as soon as it switches to a PEO, confusion may arise and the government or corporate customer may cease honoring the contract due to breach of contract. Government and corporate entities understand the PEO concept but the business must explain in advance to prevent confusion.
  3. PEOs may switch health care providers on an annual basis. If a small business’ employees have a preference and their preferred health care provider no longer contracts with the PEO, the employees could become upset. The best way to manage this is to obtain a detailed explanation behind the switch from the PEO and pass this information on to employees.