5 Myths About Professional Employer Organizations (PEO)

Jul 09, 2018
| Jan Kaupas
5 myths about PEOs

HR outsourcing has seen a significant increase in usage in recent years, and a recent report from PrismHR shows this trend isn’t slowing down.

As more businesses turn to outsourcing to meet their HR needs, it should come as no surprise that professional employer organizations (PEO) are also growing at a rapid pace.

PEOs help their small business clients overcome their HR challenges and allow small business owners to invest more time in the rest of their business that can help with growth. 

Despite the increased popularity, a few myths still exist that prevent some business owners and brokers from partnering with a PEO.

Myth 1: Working with a PEO Causes Business Owners to Lose Control of Their Company

We hear from both small employers and brokers that one reason why they don’t consider working with a PEO is because this working arrangement means a loss of control for the business owner.

Whether it is a loss of control of employees or the overall business, this is a concern that even NAPEO has mentioned as a barrier to PEO use.

However, small business clients don’t lose any control when adopting a PEO solution. In fact, business owners maintain full control of all day-to-day business decisions, including over personnel matters. Working with a PEO doesn’t prevent a small business from hiring, firing, or promoting employees.

All the owner would need to do is inform their PEO of any employee-related decisions so that all HR and employment documentation is taken care of properly to ensure compliance.

Don’t let this myth prevent you from considering a PEO solution if it could benefit your company or client.

Myth 2: Professional Employer Organizations Only Take Business Away from Brokers

Even though PEO and other HR outsourcing solutions are becoming popular options for small and medium-sized businesses (SMBs), not everyone has a positive outlook on this growth.

For many insurance, benefits, and financial brokers, the growth of PEOs presents a challenge as these organizations take away clients and negatively impact their books of business.

This has led to some resentment amongst brokers when it comes to PEO, as they view them as competitors.

But did you know that not all PEOs are looking to take away clients, and actually want to partner with brokers (while offering compensation)?

Believe it or not, this is true. Some PEOs, like Extensis, have a broker-only selling model. This means that a PEO doesn’t sell directly to SMBs, but instead partners and works only with brokers.

Not only does this model help brokers protect and grow their book of business by providing a new, competitive HR solution to offer clients, but it also opens brokers up to a new source of income.

Brokers who are losing clients to national, direct-selling PEOs can looks to broker-only PEOs to help protect and grow their business.

Myth 3: All PEOs Are The Same

Another common misconception about PEOs, especially to brokers and business owners who aren’t too familiar with them, is that there isn’t much that distinguishes one PEO from another.

However, this if far from the truth. One example, which we just touched on, is the selling model that a PEO uses. There are 3 common ways PEOs sell their services:
  • Direct: A PEO engages and sells their solutions straight to small and medium-sized business owners
  • Broker-focused: The PEO works exclusively through a broker to offer their services to a client. The broker helps introduce the PEO to the potential client, and stays involved throughout the entire sales and onboarding process, and even after the partnership begins.
  • Hybrid – Some PEOs sell both directly to businesses and through brokers, essentially combining the two methods.

Another characteristic that differentiates PEOs is whether they are a large, national PEO (who has clients throughout the U.S.) or a regional/local PEO (who generally only work with clients in specific geographic locations).

Additionally, there are certain distinctions that not all PEOs have. One is being accredited by the Employer Services Assurance Corporation (ESAC). This accreditation recognizes that a PEO has proven its financial stability, ethical business practices, and adherence to regulatory requirements.

A second is becoming a Certified Professional Employer Organization (CPEO) as designated by the Internal Revenue Service. A PEO that has been recognized as a CPEO means that it meets the many strict guidelines and requirements set by the United States government, and offers clients additional peace-of-mind with their PEO partnership.

Myth 4: PEO Partnerships Only Help Benefits and Insurance Brokers

While some brokers aren’t aware that PEO partnerships are an option for their brokerage, many do. And while the industry knows that PEOs can help benefits and insurance brokers, many financial brokers and advisors believe PEO partnerships cannot help their business.

However, financial professionals also stand to benefit from exploring PEO solutions for their clients.

Doing so can help these brokers offer a full HR service to their clients, with the PEO taking over the additional HR-related work such as benefits, administration, payroll, and more.

This can help financial brokers earn residual income while maintaining (and even enhancing) their status as a trusted advisor to their clients.

Additionally, PEO partnerships can help financial advisors and brokers protect and grow their book of business, which is critical in today’s competitive market.

Myth 5: A PEO Relationship is the Same as Employee Leasing

Besides the idea of losing control, perhaps the next most popular misconception about PEOs involves the relationship between a client company’s employees and the PEO.

Some believe a PEO relationship to be employee leasing. However, this is not the case. Instead, when a client decides to partner with a PEO, their workers enter into a co-employment arrangement.

There are a few major differences between co-employment and employee leasing, but the biggest is that PEOs do not lease out employees or provide staff to their clients. Instead, the client keeps control over all hiring and other employee-related decisions.

It’s also important to know that in a co-employment relationship, employees have 2 employers – the client company and the PEO (the employer of record).

To learn more about co-employment vs. employee leasing you can download our eBook by clicking the image below.

What’s the difference between co-employment and employee leasing? Check out our eBook, Co-Employment vs. Employee Leasing: The Differences Brokers (and Clients) Should Know, to learn more about how different they really are!

Co-Employment vs. Employee Leasing