PEOs vs. Traditional HR: Pros and Cons for Businesses

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When it comes to managing the human resources department of a business, there are two main options: working with a Professional Employer Organization (PEO) or maintaining a traditional HR department. Deciding which route to take can be overwhelming, so in this article, we will go over the pros and cons of each option to help you make an informed decision.

The PEO approach

Professional Employer Organizations or PEOs provide businesses with HR services, including payroll administration, employee benefits, and HR compliance. They partner with companies to administer certain HR-related aspects of the business. PEOs can help small businesses to focus on their core competencies while outsourcing HR activities that may consume valuable time and resources. Additionally, PEOs offer lower-cost options for their clients to gain access to health insurance, dental coverage, and vision care benefits for employees. A PEO can also provide support in issues related to workers’ compensation, securing necessary paperwork, and labor laws.

Although PEOs can provide businesses with some great advantages, there are also some drawbacks to consider. One possible problem is a lack of control over the quality of services that a PEO provides. Additionally, PEOs typically require clients to sign long-term contracts, which could potentially lock a business into an agreement that they may not be completely comfortable with. PEOs also tend to charge higher fees than a traditional HR department, making it more costly for small businesses and startups. Additionally, since PEOs are typically focused on providing administrative services, there is often less emphasis placed on strategic HR initiatives such as employee training and development. Finally, since the relationship between the business and the PEO is based on a contractual agreement, it does not provide businesses with any legal protection in the case of litigation.

Traditional HR approach

On the other hand, maintaining traditional HR services in-house can give businesses complete control over their HR-related activities. Organizations can design policies, processes and guidelines specific to their business and employees. The HR team would be fully dedicated to the employees of that company which would bring them a better understanding of the company culture and employee expectations. It also eliminates concerns regarding confidentiality within your own organization.

While operating in-house HR certainly has its benefits, there are also some drawbacks to consider. One significant downfall of traditional HR services is that they can be costly, especially for smaller businesses. Hiring multiple HR employees or outsourcing HR work to different vendors can become expensive and quite challenging to manage in-house HR.

Another vital aspect of the HR department is compliance management. Traditional HR can run the risk of overlooking critical compliance issues like labor laws, OSHA regulations, and discrimination claims, and giving timely updates on new state, federal, or legal policy changes. Although maintaining compliance is a shared responsibility, ensuring that the HR department is up-to-date and relevant can be a challenge.

Take a call

In conclusion, both PEOs and traditional HR departments have their advantages and limitations. While PEOs offer access to experts, cost-efficiency, and compliance management, in-house HR departments provide better control over employee policies, procedures, and culture. However, there are also some limitations to both, such as the cost of in-house HR and the risk of missing compliance issues with the PEO. Ultimately, businesses must evaluate their needs, goals, and budget constraints to determine which approach suits their needs best. EORPEO recommends that you start off with a PEO for a pilot intervention. Depending on how the pilot progresses, the business can choose between a PEO or a traditional HR approach comprising building an internal HR team.

All the best.

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