The Professional Employer Organization – The Good, Bad and The Alternative

Sometimes companies have trouble meeting their human resources needs, especially while also trying to increase profits. To assist in this area, many companies hire professional employer organizations (PEOs). If you hire a PEO, your employees are no longer fall under your tax ID number; they assumed to be employees of the PEO. You will also delegate  HR responsibilities to the PEO. Though the company officially hires its employees, the PEO handles payroll, benefits administration, workers’ compensation, medical insurance, and retirement accounts. Then, the company pays the PEO for its services (often a percentage of total salaries), along with an amount to cover the payroll for the employees.

PEO-provided Services

A typical PEO provides the following four primary services to its clients:

  • Human Resources Associate

    • PEO acts as an off-site HR department by offering training on sexual harassment, discrimination, Family Medical Leave Act (FMLA), and hiring and firing practices
    • Conducts background checks and pre-employment testing on potential employees
    • Recruits employees through advertising, resume screening, and interviewing
    • Provides customizable employee handbooks and position descriptions
    • Conducts performance reviews
    • Provides employee training for new positions
  • Employee Benefits Administration

    • PEO seeks out cost-effective benefits plans. By pooling all of its employees into one group (the vast array of companies hired by the PEO), the organization can spread its medical claims over a more extensive premium base. Furthermore, lowering the annual insurance rate increase, compared to smaller businesses.
    • PEOs typically offer the following employee benefits:
    • Payroll Administration

      • The PEO will take responsibility for the following:
        • Payroll
        • Employee taxes
        • Quarterly reports
        • Workers’ compensation insurance

 Premium audits

  • Claims management
  • Benefits procurement
  • Handling Risk Management
  • PEOs manage any workers’ compensation or unemployment claims that arise, typically at a lower claim cost (as compared to what a company could achieve on its own).

Advantages of Hiring a PEO

The following are the benefits of hiring a PEO:

  • Employers do not need to spend time and resources on HR tasks. Instead, they can focus on their core business and grow their bottom line.
  • PEOs can provide consistent administration for larger companies, and often improve technology resources.
  • Employers do not have to handle as many legal intricacies regarding HR tasks.
  • PEOs can negotiate better insurance coverage because of the volume of business that they cover.
  • Employers do not have to hire as many HR professionals in-house.
  • When the PEO company assumes its client’s payroll into its accounts, it also implies liability for clients’ employees because it is technically now the legal employer.
  • PEO assumes the liability of adhering to legal tax and workplace standards. The PEO will ensure that its clients are knowledgeable concerning relevant rules per local, state, and federal laws.

Disadvantages of Hiring a PEO

The following are the potential cons of hiring a PEO:

  • A company no longer has employees after hiring a PEO. The company essentially fires all of its employees, who are then rehired by the PEO.
  • By hiring a PEO, the company loses control and flexibility concerning compensation packages allotted to its employees. Though a company can decide how much to pay each of its employees, it has a limited say on the benefits plans offered.
  • Companies lose a bit of control over their workers since the PEO officially employs them.

Employees may be confused by who truly is their employer, the PEO, or the company that they report to each day. Sady, employees may not know who to turn to when they have concerns regarding their compensation, benefits, etc.

PEO alternative

Next Generation Payroll Offers An Alternative to Professional Employer Organizations

The PEO model does sound like a good bargain. Still, when you further dissect the advantages and disadvantages, you can see that the PEO option might now be the most fiscally responsible. Also, it may lead to some unexpected adverse effect(s) on your company culture. Using our approach to organizational management, we believe that outsourcing payroll, human capital management, and a company’s business insurance leads to the following:


1) More significant incentives for companies to transition away from an existing PEO platform.

2) Alternative solutions that allow a company to obtain PEO model advantages without assuming the disadvantages.

3) Lower insurance costs with the opportunity to have premiums refunded.

4) A complete risk management program that additionally protects the organization from consumers and vendors.


Hire A Part-Time Human Resource Consultant

If you are a startup to mid-sized companies, it often does not make good financial sense to have a human resource representative or an HR team on payroll. Hence, a la carte philosophy may be more fiscally responsible. You are paying for a service only when you need it,  as opposed to having a monthly line item on your expense sheets. Conversely, a PEO model charges you a monthly fee for their services regardless if you use or not. Usually, a small business only needs someone to step in occasionally and help with a few HR-related tasks like:


  • Keeping up to date with modifications in state and federal labor laws
  • Recruiting, interviewing, and onboarding talent
  • Pre-employment drug testing & random drug testing administration
  • Benefits enrollment & procurement
  • Remaining in compliance by implementing changes to the employee handbook and company policies

Focus on Creating a Culture, Productivity, and Profits

Be sure to focus your efforts on hiring to fit your company culture and build a workplace ecosystem rather than using an outside agency detached from your company vision. Creating continuity in the workforce results in the following benefits:


  • Increased productivity of staff; Producing more with a smaller, more efficient team.
  • Less training costs, less administrative costs
  • Reduce the need to allocate resources to the HR Department
  • Lower state unemployment insurance tax

Reduce Workers Compensation Insurance Cost

You don’t have to join a large group to get better rates on workers’ compensation insurance; you can simply be proactive about preventing injuries. In doing so, you can reduce the number of injuries and accidents in the workplace. Hence, a reduction in claims will help keep your premiums lower. Additionally, you may want to look up all of the factors which determine your worker’s compensation Insurance premium and make a plan to control what is within your power. Let us look at some tangible ways in which you can lower your worker’s compensation insurance costs:



Health Insurance Coverage That Allows Access to Specialists

The larger group does not necessarily mean better coverage and better premiums. Self-Funded Health Insurance is a great alternative that offers the opportunity to lower costs and get a refund on premiums. Unfortunately,  enrolling into a fully insured health insurance policy that is a one size fits all model may prove to be problematic. It may be a good practice to implement a health insurance policy that takes into consideration the employee’s desire to have in-network access to doctors and specialists familiar with their health history and are effective at treating or managing health concerns or preexisting conditions.


A Better Way to Minimize Your Business Risk

In addition to offering HR solutions at a discounted rate, we provide our clients with access to an attorney who is practicing business law. It is essential to govern the company’s relationships with its employees and protect the business from entities outside of the organization.


A genuine risk management service is going to help protect your company from both internal and external risk factors. Furthermore, if you are running a business, you must also do your due diligence and protect your company from vendors and consumers. Unfortunately,  a PEO model solely focuses on the “Employee,” potentially leaving you vulnerable to liabilities outside of your organization.


Custom Payroll Solutions – Not a one-sized fit all payroll platform


Last but not least,  we can talk about payroll. Many companies choose to do business with us because our software works intuitively with how you like to run your business. Integrate payroll processing, human resource management, timekeeping systems, and benefits enrollment all on the same platform if you need to run payroll at multiple locations, including various departments with varying levels of access, no problem. Rest assured, our payroll solutions fit your company’s desire to run an efficient business operation.


We believe our business model is a cost-effective alternative using a Professional Employer Organization. Allow us to help employers implement business solutions that provide lower insurance costs and reduced payroll expenses. Contact Next Generation Payroll to explore solutions that can take your business to the next level.


Next Generation Payroll

 11816 Inwood Rd #3013

Dallas, TX 75244



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