Why I don't (usually) recommend PEOs: An analogy
- Claire Baker
- Apr 24, 2024
- 6 min read
Updated: Apr 30, 2024
Are you searching for a payroll provider but you're confused by the difference between a PEO and self-managed payroll?
For a technical explanation of the difference between a PEO and what I call a "payroll software provider (PSP)," read our deep dive here. The extended analogy below is meant to help put the decision about whether to engage a PEO into context.
You can think of the difference between a PEO and what I call a "payroll software provider (PSP)" like the difference between air travel and ground transportation.
🛩️ Air Travel (like a PEO) gives you a predictable experience at the cost of flexibility
🏎️ Ground Transportation (like a PSP) puts you in control of your journey
Scenario
Imagine that you live in Chicago and you need to travel to Detroit for a week-long conference. Should you drive or fly?
"Convenience" that isn't so convenient
We think of flying as more "convenient" than driving, but is it really? Planes may move more quickly, but airports are loud, chaotic, and crowded. Planes are uncomfortable, restrict your personal space, and even control when you can eat, drink, or go to the bathroom.
Just like how airlines impose inconveniences to keep air travel safe and sustainable at scale, PEOs impose restrictions and rigid workflows for the same reasons.
With air travel, you must accommodate the airline's schedule, even if it means foregoing a night of sleep for a redeye or missing your meeting entirely because of flight delays. Similarly, the PEO will impose stiffer deadlines (and additional late fees) in order to give themselves enough processing time to meet the true deadline.
Similar to the indignity of the airport security line, a PEO imposes their own schedule and additional tasks to ensure their client-companies comply with labor laws. Just like you may need to occasionally justify an innocent tube of toothpaste or forgotten hand tool in your carryon, you will need to constantly explain your context and strategic objectives to the PEO. Occasionally, a PEO may prevent you from taking the approach that is best for your business simply because the PEO doesn’t support it. For an example of how this created an existential threat for one business, read this case study.
The risk of lost luggage adds to the burden of air travel. It doesn’t happen often, but when it does, it can ruin your whole trip. Similarly, sometimes your company’s requests get lost in the shuffle and the PEO messes up a critical or sensitive People process. For an example of how a PEO messed up a sensitive termination leading the employee to threaten legal action, check out this case study.
When you consider the constraints and inconveniences of a highly-managed experience like air travel or a PEO, the freedom and traveling or running your business your way becomes more attractive. When you're "in the driver's seat" of your payroll and People org, you chose your own route, schedule, and stops along the way.
Just like how airlines impose inconveniences to keep air travel safe and sustainable at scale, PEOs impose restrictions and rigid workflows for the same reasons.
Time
A direct flight would take about an hour and fifteen minutes, while driving would take about four hours and fifteen minutes. So it's more convenient to fly, right?
Not so fast.
When you fly, you travel on the airline’s schedule. They not only determine when you take off and land, but also require that you leave plenty of extra time for check-in and security, checking luggage, baggage claim, ground transportation, and waiting in long lines for each, all of which add to your travel time.
By the time you reach your hotel, at least four hours and fifteen minutes will have passed since you left home, the same amount of time it would have taken if you drove.
And that's if there are no delays.
Similar to air travel, PEOs sell their service based on a promise of all the work you'll be "saving." In reality, a PEO just adds a level of abstraction on top of the same processes. Instead of entering information into a government website or form, you're entering the same information and clicking the same buttons as you would without it.
Although the PEO has processes that make it more efficient for them to provide their service, they impose extra inconveniences on you in the first/last mile that cancel out the time savings for you. The PEO will build in its own processing times by shortening deadlines for you and limiting your options for any given workflow.
The PEO will build in its own processing times by shortening deadlines for you and limiting your options for any given workflow.
Cost
The difference between airfare and gas ($350 and $60 respectively at time of writing) is not the only price difference between the two options. Flying also comes with additional hidden costs and tasks that would not apply when driving, including transportation to and from the airport, checked luggage fees, and overpriced airport refreshments.
Similarly, a PEO is more expensive and comes with a number of additional costs and mark-ups. You might be limited to the vendor options that the PEO supports, or wind up paying for a service that would be free otherwise. For example, USCIS's e-verify service is free, but one PEO charges $1000 per year to use their e-verify subscription.
Other costs come at a stiff mark-up. For example, if a tax agency assesses penalties, the PEO will pass on the penalties to you and add a penalty of their own. To read about how tax penalties can still happen with (and be caused by) a PEO, check out this case study.
On the other hand, just like how driving is cheaper overall and gives you opportunities to save more money along the way, managing your own payroll gives you more control over costs beyond your payroll subscription. Similar to how refreshments cost less at the gas station than the airport, you'll have more vendor options and pricing models without the restrictions of a PEO.
Conclusion
While the vast majority of flights take off and payrolls are processed without incident, those aren't the experiences we remember. Similar to air travel, the convenience and cost savings that attract people to the PEO model rarely work out as advertised.
Companies engage a PEO thinking that letting the PEO “drive” will simplify their People Operations, but a PEO simply repackages many of the same tasks and serves them up with a different user interface. Other organizations engage a PEO for compliance reasons, not realizing that the way the PEO ensures compliance is by forcing their client-company through rigid, inflexible processes that are even more restrictive than the regulations they wish to simplify.
The inconveniences and extra costs imposed by the PEO aren't as unavoidable as you think. There are lower-cost solutions to managing HR operations and compliance that work within your existing systems.
Many bookkeeping services and fractional HR providers offer payroll management on a pricing structure that doesn’t increase exponentially with total payroll as your team grows.
Or you might not need to outsource your payroll at all. Most modern self-managed payroll services like Gusto and Rippling offer the same features and support to their non-PEO customers as their PEO customers enjoy, without all the additional restrictions (they're literally the same exact screens! 🤯).
While the vast majority of flights take off and payrolls are processed without incident, those aren't the experiences we remember. Similar to air travel, the convenience and cost savings that attract people to the PEO model rarely work out as advertised. If you could travel in comfort to the same destination with fewer compromises, why pay the extra cost of air travel or a PEO?
Of course, just like air travel is still a better choice for some trips, a PEO is still a good fit for some businesses. If you’d like to read more about the situations where we recommend a PEO and learn more about both models, you can read our deep dive here.
You can also take our free assessment to find out which model we recommend for your business and circumstances here.
The important thing is to understand what you're trying to achieve with a PEO and understanding the trade-offs for each model.
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Want to learn more about the benefits and pitfalls of different payroll models? Check out these related articles:
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