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Is a PEO really worth it?

Unpopular opinion: I think PEOs are a waste of time and money. 


I hold two ideas in my mind at once:


💭 I know a lot about the three horrors a PEO is meant to solve (taxes, benefits, and compliance), so managing them myself seems less daunting.


💭 Most people have better things to do than figure out the logic (or lack thereof) of taxes, benefits, and compliance.


I do think that tools that make payroll taxes, benefits, and compliance more accessible are valuable. 

I just don’t think that a PEO is as effective a tool as people think it is.



Wait. Hang on a second. What is a PEO anyway?

PEO = Professional Employer Organization

Does that clear it up?

Didn’t think so. 


To oversimplify, a PEO “hires” your employees and leases them back to you.


The PEO issues the paycheck, but you pay the wages, taxes, and employer portion of benefits.

Since the PEO is the employer on paper, they handle registering for state agencies and tracking compliance laws.

And because PEOs can pool all of their client-employees, you get access the more affordable and flexible large-group benefits.


All for the low-low price of $75 – $150ish per employee per month.


Sounds great, right?


But wait. How often do these compliance situations really come up?


🤔 How often do you hire someone in a new state? 


A couple of times a year? A couple of times a month?

There are only 50 states. Eventually, you collect them all, right?

Paying someone to register you in a new state can cost anywhere from $200 – $800.


If you have a team of 10 and you only hire in 1-2 new states per year, you just paid the PEO between $9,000 and $18,000 to save $200 – $1,600.

If you have a team of 50 and you hire in 10 new states a year, you just paid the PEO between $45,000 and $90,000 to save $2,000 - $8,000.


🤔 Do they really save on insurance?


Sure, the plans are cheaper. 

But the cost per employee is higher.


And groups with 50+ employees already qualify for large group pricing anyway (in all but four states).

Most PEO health plans are only 10% - 20% cheaper than comparable small group plans.


Say you have a team of 20 with 40 covered lives (counting dependents).


$600/mo plan: You would save $28,800 - $57,600 per year on insurance, 
but pay $18,000 - $36,000 more for the PEO model. 
Net savings = Best case is $39,600. Or you could wind up underwater by up to $8,000

$1,200/mo plan: You would save $57,600 - $115,200, 
but pay $18,000 - $36,000 for the PEO model. 
Net savings = $21,000 - $97,200


But wait. How much does the salary on a payroll and benefits manager cost?


And, not to be insensitive, but is the company paying all of that? Or are you passing on some of that cost (and savings) to the employee?



🤔 What “compliance” service do they even provide anyway?


Having a pre-programmed sick time policy that you can “switch on?” 

Configuring your sick policy in your HRIS isn’t the hard part.


Knowing when to pay someone’s final paycheck and what you need to pay out? 

That information is one Google/AI search away.


If only the young, white, cis males get promoted, you still have a discrimination suit on your hands.


If you’ve got a grabby manager, your company faces the harassment suit.


If you doctor timecards, the PEO doesn’t get sued.



🤔 Is it really saving you time?


In my experience, PEOs often slow down the processes they manage, not speed them up. A company representative needs to make the choice, submit the request, hit the “approve” button.


But you need to give enough lead time for the PEO to do it for you and wrestle with them to get it the way you want.


And you still need to fix it when the PEO doesn’t pick up what you’re laying down.


Consider the person-hours and opportunity cost of all of that time you spend managing the PEO. It can really add up.



😃 💡 What are the alternatives.


Guys. You can get a decent payroll and benefits manager for like $75,000 per year. And they can manage your payroll in a couple of hours a week, so they'll be able to do more than just payroll.


Or you could get a managed payroll service for like half of that.



🤔 When is a PEO a good idea?


There is no one-size-fits-all solution. I still recommend a PEO to some clients. My recommendations depend on their specific situation, but here are some of the things I look for:


🤏 You’re small and you’re going to stay that way. The time drag of a PEO is less for small teams that don’t hire often than it is for big ones. In this situation, the insurance savings make sense.


🏚️ Your payroll is a mess and you have a bad track record of staying on top of it.


💸 You have money to burn and you don’t mind wasting time, either.


🛡️ You don't plan to grow, your team is pretty stable, they make relatively high salaries, you don't have a lot of other systems that need to run through your HRIS, and it doesn't make sense to have a full time or fractional HR person on staff.


Every situation is different. If you're not sure whether a PEO is the right model for you, let's talk about it. We'll discuss your pain points, your team, and what you need from your HR tech stack. Then we can talk about what the benefits and trade-offs of a PEO in your specific situation.




No obligation. We just love to talk about this stuff and learn more about how people make their decisions. We'd love to meet you.

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