Let’s start with the basics. What is a professional services organization? A PEO is a company that enables clients to outsource HR services, including employee benefits, payroll and workers' compensation, recruiting, risk/compliance management, and training and development. Off-loading these time-consuming responsibilities allows a company’s internal teams to focus instead on higher-value tasks, like growing their business and other revenue-generating activities.
Many new startups jump at the chance to hire a PEO because the time and effort required to secure competitive benefits packages and become experts in the nuances of regulatory compliance and healthcare reform far outweighs the costs. PEOs charge a service fee for taking over the HR and payroll functions of the client company, typically ranging from 3-15% of total gross payroll. It’s all about the time value of money, people!
The answer to this question depends largely on the size of your business. Most startups we’ve spoken to agree that PEOs are essential when you’re just getting started, especially when it comes to brokering benefits packages and learning the ins and outs of compliance issues. Most startups just don’t have time to focus on these issues. Says Gregg Carey, Co-founder and VP of Operations at Voxy, “We use Insperity. PEOs are great because they’re able to get good insurance rates for companies who don’t have the scale to negotiate, so it's a huge cost savings to partner with them at this stage. In terms of managing benefits, it's very important to go with a PEO (until you get up to 75 employees or so)—you just don’t want to have to learn about all of that yourself.”
So what happens when you hit that 75-100-employee mark? According to Bridget Best, Director of Finance at Kickstarter, as their headcount grew, they wanted more flexibility in their benefits packages. “When you're on a PEO, you get the pricing that reflects the PEO's clientele because you're part of a big group. Everything gets bundled together and you’re limited to choosing from their plans. Now that we're not using a PEO, we have much more flexibility. We can shop around more for what makes sense for our employees, and we’re paying hundreds less per month.” PEOs are also very expensive, which becomes more burdensome as your company grows. Kickstarter had been using Ambrose, which made it very easy for them to grow in the early stages, but once they hit 75 employees, they felt they could get more value by moving some of those tasks in house and shopping their own benefits packages. Says Best, “Ambrose was great, but their costs were really high because of the way they insure their employees, and because of the high level of customer service they provide—they're extremely responsive.”
What does the post-PEO landscape look like?
Kickstarter moved to Creative Benefits, an employee benefits company. “Creative Benefits is great if you don’t want a PEO model. They have great service, and are very responsive and on the ball. I can’t recommend them enough. Creative Benefits brokers our benefits and helps us negotiate our carrier rates. They also shop around our dental every year. They also do a lot more to ensure that things go smoothly.”
It’s important to note that, without a PEO, companies use a variety of HR management tools for different tasks, as opposed to using one comprehensive platform for all administrative to-dos. Kickstarter chose ADP as its third-party payroll service and is currently using its lowest-tier of service. Says Best, “It’s hard to find a one-stop-shop for both payroll and benefits, and pricing is not as good as if you cobble it all together on your own.”
Non-PEO options for HR administration
Of course, even some brand-new startups choose to go it alone. Says Alex Betancur of Jump Ramp Games, “We don't use any HR admin tools at all. We're two co-founders—one manages payroll, the other takes on compliance. PEOs are quite expensive. It’s more cost-effective to do this ourselves than to pay $1,200 per employee when some don’t even take insurance. It takes more of our time, but we wind up with an extra $5-10K to invest in the business. I would suspect that we'll probably continue to operate this way for the a while, because the costs continue to go up.”
For those who opt out of the PEO model, there are any number of HR admin and payroll administrators from which to choose. Who do people love for benefits? Sherpa, Namely and Zenefits rise to the top of the list, and Zenefits gets unanimous accolades for its low-maintenance, easy-to-use interface.
For comprehensive payroll services, ZenPayroll, now Gusto, is a popular one. Says Mattan Griffel, founder and CEO of One Month, “I love ZenPayroll. They have a great team, and their interface is really simple and easy to use.” Paychex is another solid choice, as is SurePayroll, a small business-focused subsidiary of Paychex. According to Tom Hessert of Derby Jackpot, “SurePayroll has been in the business for a long time. There are a lot of nuances in the payroll space, so we wanted to go with an older, more established company, as opposed to some of the new startups in this space.”
So the choice of whether to use a PEO is really a matter of how you want to spend your time and resources as you build your business. Would you like to manage all HR functions internally (which will require multiple services), or outsource them to a company who will navigate the complexities of benefits, payroll, compliance on your behalf?