Why PEOs Aren't as Effective as They Once Were

July 26, 2016 Zuman

In a handful of recent posts, we've begun to explore the role of PEOs - or Professional Employer Organizations - modern HR administration and operations. As we detailed in "4 considerations when leaving a PEO," these systems only work up until a certain point, usually for those businesses with fewer than 25 employees.

Leaving the PEO model can be cumbersome and often involves long-term cost analysis and proper timing. Even then, there can be a significant adjustment period. But while this can be a complex process, there is no denying the sharp increase in departures from PEOs. And rightfully so, as PEOs just aren't as effective as they once were.

No more hurdles

Under the Small Business Efficiency Act, which went into effect in July 2016, businesses across the country no longer have to contend with one of the biggest obstacles in leaving a PEO. Before the SBEA was ratified, companies would have to deal with double taxation unless the move away from a PEO happened before the mid-year point. Not only that, but now wage bases generated by two major pieces of legislation - Federal Insurance Contributions Act and the Federal Unemployment Tax Act - won't restart if a company leaves a PEO at mid-year point. This freedom has allowed companies nationwide to explore models outside the PEO without it having to affect the way they do business.

Best of both worlds

In recent years, a new way of doing things have changed HR departments everywhere. Human resources business process as a service (HR BPaaS) is like the best of both worlds: the expertise and insight of an HR department that allows employees to stay on payroll. That means companies can retain original staff and hire new employees on their own terms. BPaaS works differently than your standard PEO, and companies can retain the direct overhead with their employees. But even as the the employer-employee dynamic remains clear, BPaaS offers effective HR support, and that can help to reduced a company's HR liability and prevent needless litigation. 

BPaaS also one other major benefit when it comes to proper HR oversight. BPaaS is geared toward keeping  companies in line with both state and federal requirements and maintaining regulatory compliance.

A new awakening

For years, people have focused predominantly on the many perks of PEOs.
And there are quite a few to this system, including:
    •    Payroll processing.
    •    Handling employee benefits.
    •    Workers compensation administration.
    •    Filing payroll taxes.
    •    Covering unemployment claims.

But even with all these myriad of benefits, there has been a distinct shift in recent years, with many people more fully understanding the true nature of PEOs. For one, people realize PEOs do not have the market share of HR benefits and that other systems can handle many of the same functions mentioned above. Many of these same executives have begun to realize PEOs play a support role, and that the power lies within the company to handle HR functions and find methods that work toward their unique structure and situation. Some companies may only require a payroll service, for instance, and doing business with a PEO wouldn't always be necessary. This shift in companies as of late is essential and proves that there are some solutions that work outside the standard PEO model.

Though PEOs were long viewed as a staple with in the greater HR community, a change has come that shows far more opportunities are available. It's these options that can help bushiness remain competitive as they find new ways to streamline their various internal processes. 


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