Busting 8 Common PEO Myths & Misconceptions
Updated: October 5th, 2023
Countless organizations have long been dependent on Professional Employer Organizations (PEOs) to relieve them of the stress and burden of handling human resources management and benefit administration for their employees. However, many misconceptions and myths still linger that discourage business owners from investing in them when their businesses could greatly benefit from their services.
A full consultation with reputable PEOs can answer any question and remove any doubts you may have, but if you’re hesitant to contact one or are not sure which one you should contact, we've got a few tricks to find the right PEO for you after we debunk the most common misconceptions regarding them.
PEO Myths & Misconceptions
Here are the 8 most common myths that many small business owners and HR teams have about PEOs:
Myth 1: Working with a PEO means losing control of your business
PEOs work closely with you to develop hiring and firing criteria, providing guidance on best practices, but they don't take over your business. They assist with background checks and pre-employment screenings, ensuring compliance with employment laws. In the event of an employment claim, they help manage employee separations in a legally compliant manner. By partnering with them, you can maintain control of your business while leveraging the expertise and resources of a trusted HR partner.
Myth 2: Co-employment and Employee Leasing are the same
Co-employment with a PEO and Employee Leasing are not the same. Employee leasing is an agreement between a client company and a Staffing Agency to temporarily lease employees for a certain time period or project. On the other hand, when you work with a PEO under a co-employment agreement, they don’t lease you employees; they only help in the hiring process.
Myth 3: PEOs are only for large businesses
When it comes to partnering with a PEO, the size of your business doesn't matter. Their services cater to businesses of all sizes, offering customized solutions that meet specific needs. Whether you have 10 or 100 employees, they can provide scalable HR solutions, allowing small businesses to compete with larger companies. Some companies, such as ADP Totalsource, have the perk of working with just one employee. They also provide larger businesses with the help and support they need to grow or branch out.
Myth 4: PEOs are too expensive
A PEO usually costs a company 2% to 4% of all wages, or $500 to $1200 per employee per year. There are some that charge more, so you should look around to make sure the company you pick gives you good value for your money.
Compared to not working with them, PEOs can save your business up to 35% on HR costs. They do so by giving employees better perks, cutting down on administrative costs, and ensuring employees follow the rules better. They give small businesses' employees additional benefits, such as life and dental insurance. PEOs can help businesses improve their operations, cut down on some extra costs, and save them 27.2% per year in costs.
According to a study done by the National Association of Professional Employer Organizations (NAPEO) on the return on investment (ROI) of using a PEO, PEOs can save their clients 27.2% of their costs annually. This means that for every $1,000 spent on PEO services, the average client would save $1,272. This gives the client a net gain of $272 for every $1,000 spent.
Myth 5: PEOs are only for HR outsourcing
You can hire them for more than just HR tasks; they offer other services such as handling payments, managing benefits, managing risks, filing taxes, and helping with regulations. They also help navigate intricate compliance issues such as employment law, tax regulations, and healthcare reform. They will share legal liability if there was a mistake when dealing with the IRS.
Myth 6: PEOs are only for businesses in certain industries
You can work with a PEO in a lot of different fields, and they can help businesses in all industries, such as healthcare, aviation, finance, retail, real estate, construction, legal, and much more.
Myth 7: IRS certification is not important
IRS certification is crucial to PEO's reputation as it showcases compliance with industry standards and financial stability. Clients can have added assurance when partnering with an IRS-Certified PEO (CPEO), knowing they adhere to tax regulations and undergo thorough financial audits.
This certification also impacts the return on investment for PEO clients. It also gives CPEOs better access to employee retirement plans, which could mean better client benefits. In addition, IRS certification adds to the safety of correctly managing and reporting payroll taxes.
Myth 8: PEOs will replace my HR staff
Outsourcing HR functions to a PEO will not, by any means, cause staff cuts in your business. In fact, the PEO you decide to work with will connect your team with their own team of dedicated experts who will work closely with them to enhance their abilities and widen their knowledge.
Since most small to medium-sized businesses don't have a full-service HR department or an office manager, an HR generalist is usually assigned to perform most internal HR functions. New businesses might not be very familiar with laws and regulations regarding employment, so they could highly benefit from the expertise and knowledge the PEO team will provide.
The same goes for payroll administration and your accountants. If your business only has one person who processes payroll for the entire company, their chances of making calculation errors, tax misfiling, or late payments are high, which causes your business costly fines and dissatisfied employees. A PEO will work closely with your payroll-assigned person, extend their experience and expertise, and offer technological solutions to simplify all payroll processes.
Are all PEOs essentially the same?
This is one of the most dangerous myths about PEOs. As a business owner, you should look for the most reputable PEO that can transform your business and exceed your expectations. The most distinctive merit a PEO can have, other than IRS accreditation, is Employer Services Assurance Corporation (ESAC) accreditation.
ESAC accreditation is the gold standard in the industry and the badge of trust, as it demonstrates the PEO is financially stable, conducts ethical business, and adheres to operational standards and regulatory requirements.
With over 700 PEOs in the United States, less than 5% have earned their ESAC accreditation, proving that not all PEOs are the same or offer the same level of high-quality services and guidance.
How Do You Find the Right PEO for You?
It's important for your business to choose the right PEO. When considering a company, it's crucial to examine the services they provide, their adherence to regulations, and the benefits they offer their employees. These factors play a significant role in making an informed decision.
There are many tips and tricks to follow while you are considering a PEO company, such as:
- Assess industry accreditation and certifications
- Review their service offerings and pricing structure
- Evaluate their technological capabilities
- Check compliance with regulatory standards
- Assess the financial stability of a PEO
Do a full search, talk to people who have used them before, and make sure they're financially sound. If a PEO has a limited history, data security issues, or lacks an official IRS license, these are all warning signs that you should keep in mind. They will give you better service, know the local rules, and understand the job market in your area.
PEOs are valuable partners for businesses. They streamline HR and payroll processes, allowing companies to focus on their core activities. It's a misconception that PEOs replace your HR team or take control of hiring and firing decisions. Instead, they bring expertise and efficiency. IRS certification is vital for compliance and can boost your ROI. PEOs can also improve employee perception and contribute to business growth. When choosing a PEO, consider factors beyond size.
Understanding these truths about PEOs allows you to make informed decisions and benefit from this partnership. If you're still uncertain about which PEO company to work with, our PEO comparison pages can help you stack them against each other and find the one that's right for you.