Is a PEO Company Right For Your Small Business?

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A common business headache is figuring out how to get HR up and running efficiently, especially if you don’t have an in-house HR professional. Employee benefits, payroll, workman’s compensation, and all the associated paperwork can consume a great deal of time for small business owners who would rather be doing something “work related.”

For this reason, many small business owners turn to Professional Employer Organizations (PEOs) to take the headaches of HR, payroll, and benefits off their hands.

How Do PEOs Work?

PEO companies operate under a unique co-employment model, where your employees will legally appear on a PEO's books, but remain under your control. This model allows for PEOs to leverage major health plans with the best providers. It also means they can better handle HR problems or new payroll practices. PEOs can also provide workplace training, workers' compensation insurance, and various other types of benefits that would be hard for a small business to implement on their own.

As small business owners look to offset administrative tasks and offer better benefits to stay competitive, PEOs provide their help. Currently, PEO companies employ 3.7 million worksite employees and have annual wages of around $176 billion. These numbers are only expected to increase in the coming years, offering small businesses better benefit options and more HR resources.

What Types of Services Do PEO Companies Provide?

PEO companies provide a range of HR services, from simple tasks like payroll to more complex work like government contracting. As your small business grows, you’ll probably want to stay with the same PEO company for the sake of convenience, so when you decide to work with a PEO and you’re searching for the one that fits your needs, be sure to consider what your needs will be down the line as your business grows.

The best PEO companies offer a wide variety of services that you can add to your contract as your needs change, including:

  • Payroll & tax processing: State, federal, and local taxes
  • Health insurance: Medical, dental, and vision
  • Paperless onboarding: Automated forms and e-signature options
  • HR compliance: HR management and strategic HR consulting
  • Performance management: Employee reviews and performance feedback
  • Recruiting: Applicant tracking systems and job postings to find employees
  • Time & attendance: Overtime calculations
  • Employee self-service: Online portal, mobile-optimized website, or mobile app
  • Risk & safety compliance: Options for safety training and compliance audits
  • Government contracting: Support for federal contractors
  • Retirement plans: Multiple employer defined contribution plans 


PEO Company Pricing and Contracts

PEO companies offer two main forms of pricing: either a per-employee fee or a percentage of your total payroll. There are advantages and disadvantages to both types of pricing, and figuring out which one is right for you depends on your business, how many employees you have and the overall structure of the PEO plan.

PEO contract length and structure vary by company. Some PEOs offer long-term contracts only, while others don't require any contract at all. Cancellation policies also vary widely among companies and depend on which plan you enroll in. Generally, you need to provide a 30- to 60-days notice before canceling your service. Some companies allow you to leave at any time for any reason; others charge you a fee for leaving.

It's critical that you ask about the PEO's cancellation policy before you reach an agreement because you want the freedom and flexibility to cancel the service if need be.

Some other things to consider when researching which PEO company would be best for your small business include:

  • Additional fees: Ask the company upfront if there are any additional fees. Make sure you thoroughly review the material the sales team gives you to spot any fees associated with service. Also, keep in mind that the cost structure–whether per employee or as a percentage of income–does not include additional costs for healthcare and other benefit plans.
  • Employee minimums: Many PEO companies have an employee minimum; that is, they require a certain minimum number of employees–usually five or 10–in order to qualify for their service. Some companies also structure their services so a certain number of employees need to be enrolled in health benefits in order to qualify for service. Others have a minimum monthly salary requirement if your business is below a certain employee threshold.
  • Access to experts: Make sure the PEO you partner with provides you with a designated team of experts who can handle your HR, risk management, benefits, and payroll needs. The best companies have HR consultants who are certified by the Society for Human Resources Management (SHRM). SHRM certification ensures that your account coordinator is more than just a relationship manager.
  • Plan structure: One final thing to pay attention to is how the company structures its plans. Some PEOs offer a one-size-fits-all solution, so you'll receive all your features for the same monthly fee. Others offer services that you can add and remove to tailor the plan to your small business's needs. There are advantages and disadvantages to both. A one-size-fits-all solution means you can grow into all the features without changing the pay structure, while an a la carte option is more customized to your business.

PEO companies will charge you anywhere from $39 per employee monthly to several hundred dollars a month; it all depends on the number of employees and the number of services you’re contracting. Some popular PEO companies to consider for your small business are ADP TotalSource, Justworks, and XcelHR.

Bottom Line

If you decide that contracting with a PEO company isn’t right for you, there are some alternatives, like payroll software or services, HR software, HR apps, or hiring an HR manager. No matter which direction you ultimately go, do your due diligence before contracting with a PEO company.

Article Sources

  1. National Association of Professional Employer Organizations. "Industry Statistics," Accessed Oct. 4, 2019. 

  2. Internal Revenue Service. "Third Party Payer Arrangements — Professional Employer Organizations," Accessed Oct. 4, 2019. 

  3. Federal Register. "Definition of 'Employer' Under Section 3(5) of ERISA-Association Retirement Plans and Other Multiple-Employer Plans," Accessed Oct. 4, 2019. 

  4. G&A Partners. "How Much Does a PEO Cost?" Accessed Oct. 4, 2019. 

  5. Society for Human Resources Management, Accessed Oct. 4, 2019. 

  6. Justworks. "Pricing," Accessed Oct. 4, 2019.