There is a rule in business called the rule of 3 and 10. Every time your business increases in size by alternate multiples of 3 or 10, the amount of infrastructure needed to handle them undergoes a dramatic shift. A business with only three people needs less HR and payroll juggling than a group of 10, or 30, or 100, and so on.
Eventually, with enough workers, it becomes impossible for the original owners of the business to handle all of the paperwork and HR responsibilities. Outside help is needed. This can be a big stumbling block for a business that’s trying to grow. A new type of company has entered the marketplace to help small businesses overcome these problems.
What is a PEO?
A professional employer agency, or PEO, is a way for small businesses to outsource employee-related tasks. PEOs handle things like recruitment, payroll, taxes, initial training, firing, compensation, insurance, development, and much more. Employees work for both the PEO and the small business. PEO arrangements are sometimes called co-employment for this reason.
PEOs differ from temp agencies in that the worker is outsourced from the PEO company. The PEO company handles all tax paperwork for the worker and is the employer of record. In exchange for handling HR and tax requirements, the employer pays the PEO company a small percentage fee of whatever the worker is getting paid, along with the usual payroll taxes.
Layne Davlin, CEO of NetPEO, a PEO located in Georgia, describes the benefits like this: “Once a company gets to a certain size, the challenges of handling payroll, taxes, compensation, and other HR tasks can be too much without hiring a dedicated staff. A PEO service can often be significantly cheaper than hiring your own dedicated HR staff.”
When do you Need to Get PEO?
The short answer is whenever HR requirements start to get in the way of your day-to-day business operations. If figuring out insurance and 401(k) plans are becoming too much, a PEO can handle it for you. If figuring out employee taxes is a hassle, that’s another thing that a PEO will help you with.
It can also be more cost-effective to use a PEO for these things. Since a PEO has a larger number of employees in their pool, they can negotiate with benefit providers for better rates. Thus, your overall costs for providing benefits could be lower than doing it yourself.
PEOs can also be helpful in negotiating employee laws. Many small businesses run afoul of employee regulations that they never had to consider when they were smaller. Switching over to a PEO can keep you from having to pay penalties when you cross over hidden transition lines like the 50 employee rule for providing health insurance.
What are the Downsides?
The downside about hiring a PEO is that you lose control over things like the types of benefits you can offer to your employees. You might also lose flexibility over how you handle your HR. PEOs let you hire, fire, promote, and pay as you want, but you’ll have to cooperate with the PEO’s HR policies.
Also, delineating responsibilities between the PEO and the employer can be difficult for entrepreneurs who are used to having things completely under their control. You must be clear who is responsible for what. If the relationship sours, you could find your workers gone overnight.
But if you can keep good business relationships with your clients, there should be no reason why you can’t keep good relationships with your PEO. Discussing responsibilities before you sign the contract will go a long way in keeping a PEO relationship smooth.
Moving to a PEO arrangement shouldn’t be taken lightly, but there is a point in any business’ growth where HR staff needs to be hired to continue. Doing the research now to consider PEO options in your area could help you scale your business when you’re ready by just making a quick phone call.