Topic Outsourcing HR / PEO

Top 7 PEO Misconceptions Answered​

Top 7 PEO Misconceptions Answered

Many small and mid-sized businesses have a fear of using a Professional Employer Organization (PEO). Some businesses may not see the full value, while others may not have a complete understanding of what a PEO provides. These misconceptions often prevent businesses from using a PEO.

Here are the top 7 PEO myths and misconceptions that many small business owners and HR teams have about PEOs. 

1. PEOs Replace Your HR Employees

This insidious myth is simply not true. PEOs were not designed to replace HR staff; PEOs complement the work your HR staff does.

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When HR focuses on the human aspect, you get more engaged, positive, and successful employees. Instead of having your HR team spend hours each week dealing with benefits administration, calculating payroll taxes, and learning the ins and outs of labor law compliance, they can focus on improving and strengthening the team you have. This not only helps retain your top talent, but it can also help you attract more high-level talent that ultimately contributes to helping your business grow even faster.

2. Partnering with a PEO Means a Loss of Control

PEOs relieve your in-house HR from dealing with administrative burdens, but that does not mean you lose control over your business. When you partner with a PEO, you will always retain control over hiring, firing, discipline, and other day-to-day decisions.

Your PEO becomes the “employer of record” which means they can file payroll taxes, make appropriate deductions, and issue annual W-2 forms to all employees. This administrative burden often weighs down business owner's and HR team's time. It is also ripe for mistakes. Using a PEO gives you the confidence that you need to know that your administrative tasks are handled in a correct and timely manner.

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When the PEO is the employer of record, you also gain access to its benefits plan. A strong benefits package is important to both existing employees and potential new hires. APEO partnership gives you access to benefit plans negotiated on behalf of thousands of employees by benefits experts. 

A PEO does not want to take control of your business — its goal is to complement your business. 

3. PEO is Another Name for Employee Leasing

Employee leasing is often construed as a service PEOs provide. Employee leasing places employees with a business to do a temporary job or a job for a short period of time. In this case, the employee leasing company has control over some day-to-day decisions regarding employees.

A PEO partnership is entirely different. PEOs take on the administrative burden of being the employer of record for your employees - the PEO is not leasing any employees to you. In this way, not only do mundane HR tasks get shifted to the PEO, but you also retain absolute control over your team, something that does not occur with employee leasing.

Some PEOs do provide staffing services. However, unlike employee leasing, day-to-day control remains with the business owner.

4. IRS Certification is Not Important

The Small Business Efficiency Act (SBEA) provides for certification criteria of PEOs. IRS certification does not mean the IRS endorses one PEO over another. It does mean that certain PEOs have met the standards set forth in the SBEA.

A certified PEO can provide you with certified proof of all quarterly tax payments, audits by a CPA, and access to tax credits for which your business might not have otherwise been eligible. Perhaps most importantly, wage base tax restarts are eliminated so as to prevent double taxation. At the end of the day, it is very important whether you go with a certified vs. non-certified PEO.

5. Employees Will Not Like Working with a PEO

Employees fear change. However, when employees see the advantages of working with a PEO, they will quickly jump on board. They will see better benefits at a lower cost than would otherwise be possible.

Because of this, businesses that partner with a PEO report more engaged employees. A great benefits package is not only welcome but helps retain top talent in your industry.

6. PEOs do Not have a Positive ROI

The average ROI for a PEO is 27.2%. And that’s just the average savings. The ROI for top-notch PEOs is even higher.

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These cost savings come largely from the reduced costs of benefits and workers comp. Your company's ability to provide employees with a high-quality benefits plan at a reduced cost is where many PEO clients see the biggest cost savings. Not only does that allow you to save money off the top, it also saves money in the long run by helping to reduce turnover. Replacing, hiring, and training new employees costs businesses several thousand dollars. You can avoid this by working with the right PEO.

7. PEOs do the Same Things as ASO's

An Administrative Services Organization (ASO) provides limited services to clients. An ASO would provide you with basic payroll services such as issuing payments. But an ASO cannot file payroll taxes on your behalf. 

With an ASO, you also do not gain access to any benefits options. A PEO can provide this value to your business and your team by giving you access to their existing benefits plan. This helps to reduce your overhead while providing your employees with access to a great healthcare package at a competitive price.

How to Find a Best-in-Class PEO

With more than 487 PEOs in the United States, it can be a headache to decipher which ones are the best in the business and which ones aren't worth your time. The key is to source through their references and consider asking for referrals from other companies before deciding.

Clients who are very happy with their PEOs will be more than willing to talk them up. On the other hand, they may will at least be able to tell you who to stay away from in the process!

With that being said, finding a PEO you can trust isn't impossible — it just takes time. In fact, if you do one or more of the following, you may find a best-in-class PEO that's right for you in no time:

  • Don't acknowledge non-certified PEOs
  • Check out case studies to see what the PEO has done for other businesses and how they go about their process. This will tell you a lot about what to expect (and can better determine if it's the right fit for you). 
  • Look for red flags in their pricing model — there should be no hidden fees, no issues with exiting, and complete transparency on what you pay versus what you get. 

In the meantime, use our 'Grade Your PEO' scorecard to narrow down your list of PEOs or double-check that the PEO you're considering is actually the best in class.

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Derek Carlstrom

Derek Carlstrom

Derek is the Vice President of Sales Growth. He is a proactive leader with refined business acumen and exemplary people skills. He has progressive experience in sales leadership with the skills to drive business growth, capitalize on new revenue potential, and execute proper territory maximization