The debate between using a Professional Employer Organization (PEO) and building an in-house HR function comes up constantly as businesses scale. Here’s a framework for thinking through it.
What a PEO Actually Does
A Professional Employer Organization enters into a co-employment arrangement with your business, taking on responsibility for payroll, benefits administration, HR compliance, and often workers’ compensation. In exchange for a monthly fee (typically 2–12% of total payroll), you offload a significant portion of HR administration.
The appeal for growing businesses is obvious: you get access to enterprise-level benefits packages, HR expertise, and compliance infrastructure without building the function internally. For businesses under 150 employees, this is often a more cost-effective path than hiring a full HR team.
When In-House Makes More Sense
In-house HR starts to make financial sense around the 100–150 employee mark for most businesses — though the calculus varies significantly by industry, turnover rate, and geographic complexity. It also makes sense if HR is a core competency for your business model, or if you have culture-specific needs that a PEO can’t accommodate.
Questions to Ask Any PEO
- What is your client-to-HR-representative ratio?
- How do you handle multi-state payroll and compliance?
- What happens to our benefits if we terminate the relationship?
- How are benefit renewals structured — can rates increase mid-year?
- What is the average tenure of your HR representatives?
The right PEO is one that can answer all of these with specificity and without hesitation. Vague answers are a red flag worth taking seriously.