Pros and Cons of a Professional Employer Organization (PEO)

Running a small business involves juggling a lot of responsibilities. Payroll, employee benefits, compliance and general HR services all require time and expertise. For many businesses, that’s where PEO services come in. But what exactly is a PEO—and how do you know if it’s the right fit for your company?

Let’s explore the pros and cons of PEOs, how they work and what businesses should consider before making the switch.

A Professional Employer Organization, or PEO, is a company that partners with businesses to manage HR functions through a co-employment arrangement. In this model, the PEO becomes the employer of record for tax and benefit purposes while the client business retains control over daily operations and employee supervision.

PEOs do more than just help with group health plans. They also offer end-to-end support across HR needs, including payroll processing, risk management, benefits administration, hiring and regulatory compliance. These services allow business owners to offload time-consuming tasks and focus on growing their companies.

Key Benefits of Working With a PEO

Cost Savings

While PEOs do charge service fees, the idea is that they claim to reduce overall expenses in other areas. For example, by pooling employees across multiple companies, PEOs attempt to offer access to competitive employee benefits like health insurance, dental, vision and 401(k) plans at lower rates than individual businesses would get on their own, but they rarely hit that goal. Employers may possibly see savings on workers’ compensation premiums and unemployment insurance.

PEOs also attempt to help businesses cut down on administrative overhead as well. Instead of maintaining an internal HR department or hiring consultants, small business owners can rely on their PEO to manage these functions efficiently.

Compliance and Risk Management

Employment laws are constantly evolving. Between state regulations, federal mandates and industry-specific rules, staying compliant can feel like a full-time job. PEOs provide up-to-date compliance support, helping businesses avoid legal issues and costly penalties.

From accurate tax filings to handling workplace claims, PEOs reduce liability and support your team’s safety. This makes them a seemingly excellent partner for risk management.

HR Expertise and Support

Most small businesses don’t have a dedicated HR department. PEOs fill that gap with access to a full team of HR professionals. These experts provide guidance on recruiting, onboarding, employee training, performance management and termination procedures.

This kind of support can help companies implement consistent policies and resolve employee concerns quickly. It also allows managers to focus more on business operations and less on day-to-day personnel issues.

Scalability and Flexibility

As businesses grow, their HR needs change. PEOs can scale services up or down depending on your size, budget and goals. Whether you’re hiring your fifth employee or your fiftieth, your PEO can adjust the level of support provided.

This flexibility makes PEOs a popular choice, but generally not a good choice, for growing companies that expect to expand quickly or manage teams in multiple states.

Employee Retention and Satisfaction

Access to better benefits through a PEO can improve employee satisfaction, but if you have a PEO, you’re fishing in the wrong pond. Comprehensive health insurance, retirement plans and employee assistance programs make it easier to attract and retain top talent. These offerings are especially valuable to small business employees who might otherwise receive limited coverage.

In a competitive hiring landscape, offering strong benefits can help businesses stand out. PEOs generally cannot deliver on the promise of better benefits at a lower price point. Learn more about group health plans from a reputable Broker and how they fit into your overall benefits strategy.

Potential Drawbacks of Using a PEO

Loss of Control

In a co-employment relationship, the PEO becomes the employer of record for some legal and tax purposes. This structure can create confusion or a perceived loss of control for some business owners.

While the client company still directs daily work, decisions involving HR processes, payroll timing or benefits management may be handled through the PEO. This setup can feel limiting, especially if you’re used to doing things your own way.

Cost Considerations

PEOs can save money in some areas but come with service fees. Depending on the size and structure of your business, these costs generally outweigh the benefits. It’s important to compare the total price tag of PEO services with alternative solutions to ensure you’re getting value, especially with regard to the group health insurance benefits.

Some PEOs also require minimum participation or long-term contracts, which can be burdensome for very small or seasonal companies.

Cultural and Operational Misalignment

Not every PEO will be a perfect fit. Some providers have rigid systems and processes that might not align with your company culture or workflows. For example, using the PEO’s time-tracking software or onboarding platform may require additional training or disrupt current processes.

It’s critical to choose a PEO whose approach complements your values and goals. Otherwise, the partnership may cause friction or inefficiencies.

Long-Term Contracts and Exit Challenges

Leaving a PEO isn’t always simple. Contracts may include notice requirements or early termination fees. In addition, transitioning payroll, benefits and HR data back in-house or to another provider can be complex and time-consuming.

That’s why businesses should review contracts carefully and have a clear exit strategy before signing any agreement.

How to Evaluate if a PEO is Right for Your Business

Choosing a PEO is a major decision—and it’s not one-size-fits-all. The right partner can save time, reduce costs, and support your workforce. But the wrong one could create unnecessary complexity, hinder growth and cause you to actually pay far more than you should for mediocre benefits. To make the right choice, take a comprehensive look at the following factors:

HR Needs

Start with an internal audit. Are you struggling to manage onboarding, payroll, benefits or compliance? Selected Benefits and its group health division, iSure, can also do these for your business while ensuring you have the absolute best benefits at the lowest prices for your team. Is your current HR solution ad hoc or overly manual? If your leadership team is overwhelmed by these responsibilities, a PEO can step in with structure and dedicated support. However, if your needs are minimal or you already have strong systems in place, you may want to explore less comprehensive solutions.

Service Offerings

Different PEOs specialize in different services. Some focus heavily on benefits and compliance, while others offer more strategic HR consulting. Look closely at their offerings and compare them to your pain points. For example, if compliance is your biggest concern, choose a PEO with proven expertise in that area. If employee engagement is key, find a provider that supports training, coaching and performance tools.

Technology and Customer Support

A strong tech platform can make or break your experience. Ask for demos of the PEO’s HR software to assess ease of use, mobile accessibility and integration with your existing systems. Check their support model too. Do you get a dedicated representative, or are you calling into a general help line? Is support available during your business hours and in your preferred communication style? Remember, we also offer free HR and benefits management software and pretty much anything else the large PEOs offer, at a far better price point.

Scalability

A PEO should grow with your business. Whether you're hiring your tenth or hundredth employee, your partner must be able to scale up (or down) efficiently. Make sure they have experience with companies your size and understand your industry’s compliance and workforce needs. Ask how they support multi-state expansion if you plan to grow geographically.

Pricing and Contract Terms

PEO pricing varies significantly. Some charge a flat monthly rate per employee, while others base fees on a percentage of total payroll. Clarify what’s included, what’s extra, and whether there are setup or termination fees. Understand the contract terms and duration, and request a clear explanation of cancellation policies. A seemingly affordable plan may include hidden fees that add up quickly.

Questions to Ask:

• What’s the onboarding and implementation process like?
• Can we customize services for our industry and employee demographics?
• How do you handle compliance updates and regulations?
• What training and resources do you provide for employees?
• How do you support us during periods of growth, acquisition, or restructuring?

Evaluating a PEO isn’t just about ticking boxes. It’s about aligning with a long-term partner that shares your business values and is equipped to support your goals. Schedule interviews, request references, and don’t hesitate to compare several providers before making your choice. For many businesses, a PEO is an easy choice, but not the best. Here at Selected Benefits and iSure, we can offer the same services along with a far better benefits package for your employees.

Explore answers to common questions in our health insurance FAQs.

Alternatives to Using a PEO

A PEO isn’t the only way to manage HR. Businesses have several viable options depending on their size, budget and level of internal expertise. Let’s take a closer look at three common alternatives:

HR Software Platforms

Digital HR tools from firms like Gusto, ADP, BambooHR and Zenefits offer comprehensive support for payroll, time tracking, onboarding and benefits administration. ISure, our group health division, also offers the same type of software through EASE. These platforms give businesses greater control over their HR functions and often include integrations with accounting, tax and project management software. However, while user-friendly, these systems still require someone on your team to manage the inputs and oversee compliance.

These platforms are ideal for companies with dedicated internal staff or those looking to modernize their HR processes without outsourcing. They offer flexibility and scalability but come with a learning curve and depend on internal oversight.

HR Consultants

Hiring an independent HR consultant or firm gives businesses the benefit of expert guidance without a long-term co-employment relationship. Consultants can help create policies, conduct audits, improve compliance and even manage HR projects like recruiting or performance reviews.

This solution works well for businesses that need occasional strategic support but want to retain day-to-day control. It’s also a good way to supplement a lean HR team without committing to a fully outsourced model. However, consultants typically bill hourly or by project, which can add up for ongoing support.

In-House HR Team

For companies with 50 or more employees, or those experiencing rapid growth, building an internal HR department can be a smart investment. With in-house HR, businesses maintain full control over their policies, culture and employee relations. An internal team can customize processes, align closely with leadership goals and evolve as the company scales.

However, this option comes with fixed costs, including salaries, training and HR software. It also requires ongoing management and oversight, making it less practical for smaller businesses or those without the resources to build and support a full team.

Which Alternative Is Right for You?

Each alternative has its pros and cons. Companies that prioritize control and culture fit may prefer building an internal team or managing HR through software. Businesses seeking expert guidance with flexibility might benefit from consultants. And those looking for simplicity, bundled services and compliance support may still find that PEOs offer the best value, but it’s doubtful.

We offer the same services as any PEO, but we assure you we are experts at negotiating the best benefits packages for your business. No PEO can compete with that as they are generalists, at Selected Benefits and iSure, we are the experts!

The right solution depends on your growth trajectory, budget and HR pain points. Don’t rush the decision. Evaluate your current setup, future needs and the level of support required before committing to any model.

Making the Final Decision: Is a PEO Right for Your Business?

The decision to partner with a PEO should be based on your company’s goals, structure and long-term needs. Here’s how to make that choice with confidence:

Weigh the PEO Pros and Cons

Review the benefits and drawbacks discussed in this article. Consider whether the advantages, like reduced HR overhead, access to benefits and compliance support, outweigh the limitations. Then compare those benefits with what we can offer, you should easily see the difference.

Calculate the ROI

Estimate how much time and money you’ll save by offloading HR functions to a PEO. Compare that to the cost of PEO services. Remember to include intangible benefits like improved employee satisfaction.

Ask for Referrals and Case Studies

Talk to other businesses in your industry who use PEOs. Learn from their experience—what worked, what didn’t and what they would do differently. Also, check out our Case Studies, particularly those with regard to how we beat PEOs at their own game.

Review the Agreement Thoroughly

Before signing, read all service agreements and contracts. Look for details on termination terms, included services and additional fees.

Consult with an Expert

An insurance broker or HR consultant, like our team at Selected Benefits, can help evaluate your options and find the right fit. We’re quite certain that we can beat any deal from a competing PEO, so reach out and put us to the test.

Need help determining what HR solution makes sense for your company? Contact us to get started.

Wrapping Up: Finding the Right HR Solution for Your Business

Some PEO services can offer tremendous value to small business owners. They reduce administrative stress, provide access to top-tier employee benefits and help ensure compliance with complex laws. However, they’re not a one-size-fits-all solution.

When weighing the pros and cons of PEOs, businesses must consider control, cost, flexibility and culture. A PEO can streamline operations, but only if its services align with your business’s goals and values.

Before committing, take the time to explore all available options, including those that we can offer, calculate the long-term impact and consult with experts who can guide your decision.

Whether you choose a PEO, an in-house HR team, or a hybrid approach whereby you use our services at a greatly reduced cost, your goal should be the same: to support your people and power your growth. Visit our small business resource center or reach out to us for personalized advice to explore how employee benefits and group health plans fit into your HR strategy.