PEO Mythbusters #4: PEOs Don’t Reduce Costs

PEO Mythbusters #4: PEOs Don’t Reduce Costs

by on 16 Mar, 2022

Cost reduction is the driving force behind countless business and HR decisions. That’s why many companies choose to work with PEOs (Professional Employer Organizations). However, some businesses are under the wrong impression that PEOs save time but don’t save money.

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The origin of the myth is simple. While many aspects of working with common HR outsourcing forms are beneficial, they primarily save you time rather than money.  

Meanwhile, a professional employer organization offers several ways to reduce costs. According to a 2019 study by the National Association of Professional Employer Organizations, the average ROI of working with a PEO is 27.2%.

Let’s debunk the cost reduction myth.

Do Other HR Outsourcing Solutions Reduce Costs?

Besides PEO, other types of HR outsourcing services are:

  • Dedicated Payroll Processors – Companies that take over your payroll calculation, administration, and compliance.
  • Administrative Services Organizations (ASOs) – Companies that offer selective HR support, including payroll processing, benefits administration, and compliance guidance.

These solutions come with a variety of benefits. However, most of them have to do with saving time for your internal HR team.
By delegating time-consuming payroll processing or benefits administration to an HR support partner, your HR department gains valuable time to focus on core functions that include improving company culture, resolving employee conflicts, focusing on leadership development, supporting DEI, and more.

However, neither of the above solutions comes with direct cost-reducing benefits.

How do PEOs Reduce Costs?

Just as other HR outsourcing solutions, professional employer organizations can help your HR team save money. Additionally, they can do what others cannot – cut costs. Here is how.

HR Administration

One of the key reasons why companies outsource HR is the need to delegate administrative tasks, such as payroll processing (that can take 10+ hours per month) and benefits administration.

Similar to payroll processors and ASOs, a PEO can handle all the necessary administrative tasks to give your internal team enough time to focus on key HR functions.

However, unlike ASOs and payment processors, a PEO can also remit payroll taxes, using its own EIN (Employer Identification Number). This doesn’t just save you time but also cuts costs associated with tax-paying liability and compliance.

Workers Compensation

Depending on the state you live in, outsourcing HR to a PEO can reduce workers’ comp costs. By taking advantage of the PEO’s experience rate, you can pay lower premiums on workers’ compensation insurance.

This is especially important for new companies without any claim history. As you become a part of the PEO’s client pool, each claim starts having a less drastic effect on the premium.

Other ways a PEO can reduce workers’ comp costs include:

  1. Designing high-quality return to work programs.
  2. Identifying and managing workplace risks.
  3. Arranging employee safety training.

The PEO also takes care of workers’ comp policy compliance with state and federal regulations, helping you avoid related fines.

Group Health Insurance

Many small companies can’t afford high-quality health insurance. When settling for less-than-satisfactory options is out of the question, business owners struggle to cover high premium costs.

PEOs use economies of scale to give their clients an opportunity to use high-quality employee healthcare benefits at a reasonable price.

Taking advantage of excellent benefits doesn’t just reduce costs, it helps small and midsize businesses position themselves as employers of choice.

Retirement Plans

More than 30% of private industry workers don’t have access to retirement plans. The main reasons why small and midsize companies struggle to find a good retirement plan for their employees are compliance difficulties and high administrative costs.

When you partner with a PEO, you can join the outsourcing solution’s retirement plan as a co-sponsor. The PEO can use economies of scale to offer better less expensive options. Meanwhile, a team of experts can take care of all costly administrative tasks that include auditing, plan management, and non-discrimination testing.

Unemployment Insurance Management

Handling unemployment claims can be time-consuming and costly. A PEO can take care of unemployment insurance premium management and ensure each claim’s validity. If an employee files a claim, PEO can represent your company at the hearings.

Depending on the state you work in, you may have access to PEO’s claim history, which can reduce the cost of your premiums.

Personnel Costs

With the median salary of an HR specialist in the United States exceeding $60,000, hiring a large HR department is beyond something small businesses can afford. When you factor in recruiting, onboarding, training, and retention costs, supporting such a team becomes a serious challenge.

By working with a PEO, you can delegate the majority of HR functions to a team of experts. This prevents you from hiring extra HR department employees.

Keep in mind that partnering with a PEO doesn’t mean replacing your internal team. However, it can help you avoid extra hiring costs. 

Myth Busted

While such HR outsourcing solutions as ASO and payroll processors can’t provide a consistently positive ROI, a reliable PEO can.

By handling payroll taxes, using economies of scale for employee benefits, and ensuring HR compliance, a PEO is both a time-saving and cost-cutting solution.

PEOs don’t just reduce costs. They allow your company to take advantage of new money-saving opportunities that don’t have anything to do with outsourcing.

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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