Using a PEO: Pros, Cons, and Costs

Viktoriia Keliar Chief Operations Officer

According toย  NAPEO, more than 200,000 small and mid-sized companies benefit from PEO services. Half of the companies opting for the PEO model have been in business for five to nine years, which indicates that it helps drive growth. Meanwhile, the US market of professional employer organization services looks set to rise at a CAGR ofย  11.15% from 2022 to 2030. Whatโ€™s all the buzz about?

Professional Employer Organization (PEO) is a third-party vendor offering a comprehensive HR solution for small and medium-sized businesses to focus on core operations. The PEO services typically cover HR management, payroll processing, and regulatory compliance management.ย 

Iโ€™m Viktoriia Keliar, the COO and tech operational management expert with a legal background at Alcor. The Alcor model is an all-in-one solution for tech companies to scale in Latin America and Eastern Europe by hiring from 0 to 100 software engineers in a year.

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In this article, Iโ€™ll run you through the definition of a PEO company, the pros and cons of professional employer organizations, and the costs and modes of collaboration. The cherry on top: a guide into PEO alternatives. Read on!

What Does Working with a PEO Provider Look Like?

The cooperation looks as follows:

  • A PEO partnership presupposes establishing your own legal entity in the country of expansion.
  • As a client company, you have a shared liability with your PEO provider, acting as co-employers.ย 
  • Despite all the HR outsourcing benefits of a PEO, the recruiting part is yours. In the best-case scenario, they will recommend a tech recruiting agency to cover these functions.
  • You hire a selected software engineer from a local or global talent pool through a PEO. They manage the employment process, compensation, taxes, accounting, employee benefits, and other administrative tasks while you cut costs.

However, the services of PEO agencies are limited to their location. Put differently, if you want to scale to several countries, youโ€™ll need to either establish your own legal entity in each or look for an alternative solution. On that and the PEO advantages and disadvantagesโ€“further on in the article.

Benefits of Using PEO Servicesย 

Cooperating with a professional employer organization sounds good. But what advantages of PEO services will you get after signing the contract with such an agency?ย 

1. Your company will access enterprise-level benefits

Suppose youโ€™re an SMB and seek HR-operations-related assistance in your local area. In that case, you might hire a PEO vendor who will supply your tech staff with private health insurance, life insurance, disability insurance, or retirement plansโ€“perks that not every small or medium business can afford and at lower prices.ย 

2. You will save considerable funds

By resorting to a professional employer organization, you can save up toย  27% of the costs spent on HR functions. However, these cost savings are significant if you fall into the category of PEO clients. Two-thirds of all US companies using PEO have from 10 to 49 employees. If your goal is to expand further and quicker, itโ€™s wiser to consider models that offer more considerable savings, like a software R&D center.

3. PEO stands for security

You will share liability with your PEO partner and receive more legal protection, as mentioned. A professional employer organization partner must be qualified to provide legal assistance, comply with GDPR policies if your company uses information on EU data subjects, be aware of changes in employment laws, and apply them in your tech company.

4. Youโ€™re free to use PEO services even for your coders abroad

If you think back-office outsourcing is only possible in your country, I have good news. You can hire engineers even in the most distant location from your country and manage their work via an international or global employer organization. For that, you will need to be legally present there as well. An employer-of-record solution is more suitable if you want to legally hire foreign contractors without establishing a legal entity. ย ย 

5. You will be able to focus on your core business

Suppose you delegate operational functions to your PEO partner. In that case, you will free up lots of time to concentrate on the core business and invest your resources in product development team management. You will also be focusing on lead generation and sales rather than spending several days a week to pay salaries and taxes for your engineering team.ย 

Risks of Using PEO Servicesย 

Despite the benefits of using a PEO, you should be aware of the disadvantages of using a PEO solution. Letโ€™s discover the possible drawbacks of professional employer organization firms below: ย 

1. Prices for employee benefits tend to fluctuate

PEOs capitalize on lower benefit rates thanks to their relations with benefit carriers. At times, though, they might move to a different one. As a result, the fees for employee benefits you pay may rise, not to mention potential changes in PEO pricing over time. Unfortunately, you cannot do much to influence your PEO provider.ย 

Solution: Discuss pricing changes in advance

Bring up this topic before signing your contract and try to set a fixed price for a certain amount of time. In this case, youโ€™ll be able to plan your budget.

2. You may experience communication delays

Youโ€™re not the only client your PEO provider serves. Sometimes, your business may lack laser-focused HR support and a personal approach when promptly needed.ย ย 

Solution: Think beyond PEO

PEO services might be a great temporary solution. At the same time, you should think ahead. While an in-house HR team may be costly, you can at least look for providers with 24/7 account support, likeย  Alcor.

3. You outsource only part of the hassle, especially when expanding abroad

Your PEO provider is accountable for the software engineers it employs and their duly remuneration, while you are fully responsible for the legality of your tech business. If you scale abroad, then your PEO wonโ€™t help create your legal entity, set up your bank accounts, and handle corporate taxes and accounting. It is the main drawback of the co-employment model.ย 

Solution: Consider the Employer of Record or a software R&D model

EOR and software R&D services include the functions typically covered by a PEO and ensure full legal compliance when hiring overseas, even without a legal entity. The only duty on your side is to abide by the contract with your provider.

4. Syncronizing PEOs and other vendors is painstaking

Few vendors include recruiting tech specialists as an additional service in their package. Thus, you will need a recruiting agency. Want to outsource back-office operations fully? Here comes the need for an operational support provider. As you can imagine, discussing cooperation, signing the agreements, and syncing all these providers takes time and effort.ย 

Solution: Opt for an all-in-one provider

This way, you wonโ€™t have to manage several intermediaries at once and will be able to fulfill the purpose of hiring a PEO in the first place, which is to focus on your strategic goals.

PEO Services Costs

The pros and cons of using a PEO are covered, so letโ€™s dive into the costs.ย ย 

PEO fees may follow two key approaches:ย 

  • the number of your employees;ย 
  • the percentage of your annual payroll.ย 

The first is beneficial if your employeesโ€™ pay hinges on commission, while the second works best for predictable and stable yearly remuneration.ย 

The per-employee model ranges from $100 to $160 monthly or $1200 to $1920 annually for each employee. As for the payroll-based model, the costs vary from 2% to 12% of the employeeโ€™s annual paycheck.

PEO Alternatives: EOR, ASO, R&D

According to Guardian,ย  22% of tech companies use professional employer organization services to manage their workers. The pros and cons of a PEO taken into account, who gains the most?ย 

Itโ€™s a win-win solution for 5-10-year-old SMEs with less than 100 employees. Leveraging PEO in their workplace enables them to compete with larger firms or focus on strategic HR plans. Consider the following alternatives if you donโ€™t fall into this category or have other business needs.

EOR

Employer of Record (EOR) is a company that acts as the legal employer for your developers. This agency hires engineers in your team, puts them on its payroll service in the country of registration, and manages other operational business activities, from HR functions to accounting.ย 

Regardingย  PEO vs EOR, PEOs mostly perform HR-related functions, including training and development and employee performance measurement, while EOR covers the legal part of employment more thoroughly. Additionally, an Employer of Record neither requires you to enter a co-employment agreement nor to open any legal presence in a foreign location. To sum up, with EOR, you can go global, and PEO is best for staying local.

Find out more about EOR vs staffing agency and how to find an Employer of Record!

ASO

Administrative Services Organization (ASO) is a business process outsourcing provider with expertise in HR administration. Such firms take care of employee benefits management and payroll processing but do not share the employeesโ€™ liabilities with the client.ย 

What about PEO vs ASO? Having a much narrower scope of services than PEOs, ASOs work well for companies seeking to outsource only the abovementioned functions, save even more on fees, and operate domestically.

R&D

Software R&D Center is a one-stop-shop solution for tech companies expanding abroad. It covers tech recruitment, an Employer of Record service, and operational support. R&D center providers cover the entire process without intermediaries and ensure 24/7 dedicated account management support. Ultimately, the client will get a fully-fledged R&D center in a foreign location, with office lease and hardware procurement included. With Alcor, youโ€™ll have your own software R&D center from 0 to 100 devs within a year.ย 

Outshining PEO, this model offers the most comprehensive scope of services and is aimed at medium- and large-sized businesses seeking to employ high-quality talent globally and scale to new markets compliantly.

Better Than IT Outsourcing โ€” Your Own Development Center

In comparison to PEO services, the Alcor R&D solution offers unparalleled tech recruitment. We recruit top 10% Valley-caliber talent in Poland, Romania, Bulgaria, Ukraine, Mexico, Argentina, Chile, and Colombia.

We participate in the hiring process, let you directly manage the tech specialists, and provide all other assistance in one place. This way, you get a seamless offshoring experience that PEOs canโ€™t offer: your own software team, managed payroll, office, and tech infrastructure with fewer risks and no legal entity required โ€” in other words, your own offshore development center with your people and culture.ย ย 

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When tech product companies decide to hire remote developers in Eastern Europe, they often reach out to us. Grammarly,ย  Sift, Ledger, Dotmatics, and other Alcor clients receive the all-in-one service that covers tech recruitment, EOR services, and full operational support.ย ย ย ย 

We assist you flawlessly and fast: 2 to 6 weeks is enough for Alcor to recruit elite talent from our network of 253,000 verified candidates. Besides, our administrative fees constitute only 10% of talent compensationโ€”quite a game-changer compared to the standard 50% outsourcing fee.ย 

Cases speak better than words. Our client,ย  People.ai, a USA-based B2B-sales tech product company, planned to offshore and create a development hub in Ukraine. They tried working with separate operational providers to set up an R&D center and failed. Then, Alcor stepped in and set up their office in Kyiv in 4 weeks. We also hired 25+ talented team members while acting as an Employer of Record, ensuring a compliant legal framework and onboarding our superior hires in line with local legislation. Plus, Alcor managed monthly payroll & accounting, remuneration remittance, and employee benefits.ย 

As you can see, Alcorโ€™s business model is unique: we provide you with top-tier talent, help you save up to 40%, and require no buy-out fees. Interested? Leave your request, and weโ€™ll get to it!

FAQ

1. What is a PEO for tech companies?

PEO or professional employer organization is a company that can hire professional programmers to your company and provide all HR-related benefits. PEOs require you to sign a co-employment agreement but they donโ€™t retain any employee contracts of your developers.

2. What are the main benefits of a PEO solution for product IT companies?

Companies take advantage of PEO services because they save time and money on hiring developers on their own, get the opportunity to provide enterprise employee benefits & perks to programmers, receive legal compliance, and can spend more time on core business activities.

3. What are the main disadvantages of working with PEO companies?

PEO services are risky because some vendors may impose hidden costs, lack IT law expertise to comply your operations with the law and offer low-quality operational functions not related to human resources management. Beyond that, you may be required to open your legal entity if you work with PEOs. Luckily, you can find out how to address these issues in this article.

4. What is the difference between PEO and EOR?

In contrast to PEO, EOR or employer of record is a vendor that can hire programmers for you and acts as their legal employer. This company can also provide other services, including HR, payroll management, accounting, etc. However, you donโ€™t get involved in any co-employment relations with your provider and donโ€™t have to settle your legal presence abroad.

โ€ โ€ 5. How to hire foreign remote programmers in the most effective way?

One of the most reasonable, affordable, and secure ways to work with overseas developers is to hire them via a professional IT recruitment provider. We at Alcor can hire you the most qualified programmers for your positions in Eastern Europe, legally support your company, handle salary processing, tax calculation, and accounting, as well as do other services upon your request. All in one place.

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