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Is Partnering with a PEO a Good Option for Your Business? A Look at Risks and Benefits

Human Resources

Partnering with a PEO or staffing agency may offer a potential advantage to small businesses that want to compete in the larger marketplace. Generally speaking, this means a small business may have access to administrative services that cover part of or the entire employment lifecycle, including:

  • Recruiting and hiring
  • Development of an employee handbook
  • Offering an attractive benefits package
  • Ongoing management training
  • Consultation on employee coaching, corrective action, and handling unemployment claims

In this way, small to midsize businesses may enjoy a relationship where their employees gain access to benefits normally available only to Fortune 500 companies. Partnering with a PEO or professional staffing agency can also free the CEO or business owner from labor-intensive and time-consuming administrative tasks to focus on what's most important: planning for the future growth of the company.

The strategic side of HR

Companies partnering with a PEO often experience reduced insurance costs, workers' compensation discounts, and a lower state unemployment insurance rate, all because their employees are listed under the PEO's federal ID number for payroll purposes. For business owners who can't afford to hire in-house HR and payroll administrators but have a pressing need for assistance in these areas, this arrangement can offer a solution without the financial burden that comes with hiring additional personnel.

"When employers start to realize what HR can mean to developing their workforce, the light bulb comes on," notes Jillienne Allgäuer, a Paychex HR consultant. "They see the strategic side of HR and how it helps them be more competitive."

Consider the risks

Of course, partnering with a PEO or staffing agency may not be right for every small or midsize business. Certain risks or disadvantages must be considered, depending on the potential PEO partner and/or terms of a contractual agreement. Here are factors to consider:

  • PEOs are often an ideal solution for smaller-sized companies. If your business experiences rapid growth (thus causing a need to quickly hire a whole new crop of employees), the fees charged by a PEO can increase as well.
  • Any quality PEO or staffing firm will likely vet your business operations and finances prior to entering into a co-employment agreement. These organizations prefer working with businesses in good financial shape, without any pending litigation against them or allegations of misconduct or wrongdoing.
  • Under certain contracts, PEOs and staffing agencies may have a say in hiring and firing matters – a potentially thorny issue for business owners who desire total control in these areas.

Choosing the right PEO

Studies demonstrate that small businesses that work with a PEO grow 7-9 percent faster than their peers. They're also 50 percent more likely to stay in business, experience 10-14 percent less employee attrition, and reduce administrative expenses by $450 per employee.

The key is determining which PEO makes sense for your business and specific HR needs. Your selection criteria should consider these factors:

Accreditation, auditing, and performance. Consider PEOs that are members of the National Association of Professional Employer Organizations, and routinely have their financials reviewed and approved by an objective auditor.

Expertise in compliance. A wide range of HR administrative duties are affected by federal, state, and local mandates. A strong PEO stays up to speed on ever-changing compliance requirements (another frequent headache for business owners who try to do this on their own), and helps to support your compliance efforts.

Client and professional references. As with any third-party vendor you consider for your business needs, it's important to thoroughly check a PEO's track record in working with companies like yours. Speaking to their current customers and getting professional references enable you to better assess their claims of past successes.

Service-level agreement (SLA). This is the operating document that defines your relationship with the PEO, so it's essential to fully understand what services are provided, and exactly how much consultation and guidance you can reasonably expect. The SLA also defines and outlines which responsibilities the PEO will assume, thus determining the scope of its arrangement with you.

After carefully assessing the risks and considering the benefits of a PEO, does it sound like a promising solution to your HR, payroll, and human capital management needs? Taking this step can help you regain the operational freedom to pursue the strategic growth of your business.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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