As a business owner, you know that managing human resources effectively is critical for your company’s success. But it’s also complex, time-consuming, and steeped in specialized expertise. So you might be wondering: should I outsource HR to a Professional Employer Organization (PEO) or keep it in-house? Let’s take a look at the pros and cons of each option.
What Is a PEO?
A PEO is a company that provides HR services to small and mid-sized businesses. The PEO essentially becomes a co-employer along with you, managing key human resources responsibilities like payroll, benefits, compliance, recruiting, workers’ comp, and more.
Top PEOs leverage economies of scale to offer robust HR capabilities at a cost lower than hiring an in-house team. Although the PEO takes over HR functions, you maintain control over day-to-day operations. When you use a PEO, your employees are technically employed through the PEO while remaining at your worksite.
Pros of Using a PEO
Reduced HR Costs
Studies show that companies can save 7-18% on payroll and HR administration costs by using a PEO versus managing everything in-house. The savings come from the economies of scale PEOs provide.
Access to Superior Benefits
By pooling employees from multiple companies, PEOs can provide access to large-group health insurance, retirement plans, and other benefits typically only available to large corporations. Research shows PEO users get benefits at 10-30% lower costs and can offer richer benefit packages.
Relief from HR Burdens
PEOs lift the substantial administrative burden of managing payroll, taxes, compliance, onboarding, performance management, and other complex personnel responsibilities. This frees you up to focus on your core business.
Improved Compliance
A 2020 study by the National Association of Professional Employer Organizations (NAPEO) found that 93% of PEO clients reported improved HR compliance after partnering with a PEO. PEOs have dedicated teams to handle required HR compliance at federal, state, and local levels. This reduces compliance risk.
Increased Productivity
70% of PEO users report increased productivity linked to delegating their HR tasks to the PEO. This allows the company to focus on core business activities.
Increased Business Growth
A NAPEO study found over 50% of PEO customers attribute significant business growth to partnering with a PEO. By leveraging a PEO’s HR capabilities and expertise, companies are able to lean into efforts that drive growth.
Recruiting Assistance
Quality PEOs provide access to applicant tracking software, job boards, and recruiting support — services that can be costly for small HR teams. This expands your talent pool.
Cons of Using a PEO
Less Control
With a PEO as co-employer, you have less autonomy over some HR decisions related to policies, compensation, benefits, and termination. Control is shared.
Transition Challenges
Shifting human resources to a PEO can initially be confusing for employees and involve administrative challenges. It’s important to have a transition plan as the PEO takes over HR processes.
PEO Service Limitations
Some PEOs have limited capabilities for workforce analytics or talent development. Larger PEOs tend to offer more robust services and technology.
Cost
PEO pricing models can be complex, involving options such as fees per employee, service charges, and minimums. Costs add up for comprehensive service, so evaluate pricing carefully.
Pros of In-House HR
Full Control
Handling HR in-house means you have complete control over all policies, procedures, systems, and strategy. You don’t need to consult an outside provider.
Customization
An in-house team can tailor HR practices, handbooks, training, and messaging to your company’s specific culture and needs. A PEO might bring more generalized boilerplate practices.
Internal Expertise
Your own HR staff has intimate knowledge of your business objectives and org chart. This helps facilitate highly customized talent management.
Confidentiality
Some HR issues require extreme discretion, such as investigations or executive compensation. This can be handled more confidentially in-house.
Cons of In-House HR
Expensive Overhead
Having a dedicated HR team on staff adds significant payroll and benefit costs. Small teams also lack scale efficiencies.
Complex Compliance
With employment law complexity and risk, small companies can easily make costly compliance mistakes without sufficient in-house expertise.
Benefits Disadvantage
Small businesses are unable to provide competitive, large-company benefits without the economies of scale that PEOs offer.
Recruiting Limitations
In-house recruiters at small companies have limited reach compared to the candidate pipelines and technologies of large PEOs.
Limited Expertise
While outsourced providers specialize in HR, generalists handling HR internally for small companies may lack specialized expertise in key areas like compensation planning.
The Takeaway
Deciding between a PEO and in-house HR depends on your budget, growth stage, appetite for control, and assessment of each option’s capabilities and service breadth. Working with a PEO offers access to technology and sometimes a reduction in costs, but comes with new compliance procedures and rules with respect to employee management decisions. Your in-house team brings more customization and control, but requires greater overhead and growth challenges.
Most companies experience dynamic changes as they grow, and your HR needs will evolve. Consider starting with a PEO to access crucial capabilities, then bringing certain HR functions in-house selectively over time. But carefully analyze your firm’s culture, mission, and objectives. For the right organization at the right stage, keeping HR fully in-house can be ideal for personalization. There’s no universally right choice, but considering these key factors can lead you towards the best decision for your company’s unique needs.
