Many companies realize the need and benefit of outsourcing human resource functions. Employee leasing can fit this need perfectly for many businesses. But not for everybody. The employee leasing industry is designed to match their strengths with specific client weaknesses.
While the industry is growing more pliable and customizable, it is not all things to all people. Anyone investigating the use of an employee leasing service must be aware of the pros and cons. Knowing the pros and cons explained below will be critical to mapping out the correct business relationship for any human resource outsourcing service.
Let's start with the pros! The advantages of employee leasing are made possible through what is called a "co-employment" relationship. By entering into this relationship, the employee leasing service becomes liable for the employer responsibilities of that workforce.
This includes payroll processing, tax administration, workers compensation management, and human resources management. By utilizing the division of labor, and economies of scale, employee leasing services are typically able to perform the functions of HR management more efficiently and effectively than the client. Some more specific advantages include:
- No large annual WC premiums. Since employees are covered under the master policy of the PEO, the client does not need to purchase their own workers compensation policy. The client pays the PEO for the WC coverage in a "Pay-as-you-go" fashion.
- Instant HR framework. No need for the client to create and process forms to employ a workforce. The employee leasing service should have everything already in place. This enables a very quick startup for new businesses.
- Flat rate for administration expenses. Employee leasing services have experts in every field, including claims management, check garnishments, tax compliance, etc. Clients get access to all these experts for their contracted flat rate. If payrolls reduce for any reason, the cost of administration reduces proportionately. Companies with fluctuating payrolls particularly benefit from the flat bill rate.
- More generous employee benefits. Because the employee leasing service has a larger pool of employees, they are typically able to get better employee benefit packages at lower rates than clients could on their own.
One of the disadvantages of the PEO arrangement is that employers surrender a considerable amount of control to the HR department of another company. While this is a benefit for some companies, other companies require more specific, hands-on attention. Employers must also submit to the policies of the PEO.
Even though the PEO hires and fires at the direction of the employer, the PEO’s hiring requirements might be more strict than what is legally required, or simply different than what the employer is used to. Some employers will not want to submit to the HR policies of a third party, and will want to retain the freedom to make those decisions on their own.
Some more specific disadvantages of the PEO relationship include:
- Employee confusion as to why they are receiving a paycheck from someone other than their employer.
- Employee pushback towards any new PEO policy or rule changes.
- Business owners may feel uncomfortable not being the sole employer of their workforce.
- In a PEO arrangement, companies no longer have their own WC history. Since employee’s fall under the WC policy of the PEO, the WC history belongs to the master policy of the PEO, not the client. This can cause complications if the client company ever decides to leave the PEO and obtain their own direct WC policy. While PEO’s do provide WC history reports for their clients, these reports are less respected by the insurance carriers.
- Not all PEO’s are created equal. Some are very difficult to work with and have horrible customer service. In a single employment relationship, a client can simply fire a bad apple from their workforce without too much change. But if the PEO is doing a poor job, the correction requires a complete change in HR management.
In summary, there are both pros and cons for employee leasing services. In general, PEO’s are great for start up businesses that need the backbone and benefits of a large HR department. PEO’s are also great for small businesses that do not meet the minimum annual payroll requirements for their own workers compensation policy.
Any company with a complicated payroll (Revolving workforce, traveling out-of-state employees) can typically benefit from a national PEO that is familiar with the filing requirements of each state. Even large companies can benefit from a PEO service if their HR software and systems have grown out of date. But if the HR management of a client company is not broken, then do not fix it.
If something is broken or missing, find an HR consultant to review the goals and struggles the business. Knowing the pros and cons of the employee leasing industry is critical for any company that is looking to outsource their human resource management.