Do I Still Need HR If I Have a PEO? What Your PEO Doesn't Do
Short answer: Yes, most growing companies on a PEO still need someone doing HR. A PEO handles the administrative side of employment: payroll, benefits, tax filings, workers' comp and compliance templates. It does not manage your people. Hiring, manager coaching, investigations, performance and culture still land on someone inside your company, and in most companies with 10 to 75 employees, that someone is the owner.
I spent nine years inside Insperity, one of the largest PEOs in the country. I watched great companies buy a PEO expecting it to be their HR department, then wonder a year later why the people problems never went away. The PEO wasn't failing. It was doing exactly what it was built to do. The gap was everything in between.
Here's what that gap looks like, and how to tell whether you're in it.
What does a PEO actually do?
A PEO (professional employer organization) becomes the co-employer of your workforce. That arrangement lets it take on the administrative and compliance-heavy parts of employment:
Running payroll and filing payroll taxes
Offering benefits through its larger group plans
Managing workers' comp and unemployment claims
Providing a handbook template, policy templates and compliance alerts
Giving you access to an HR helpline or service team for advice
Supplying HR software for onboarding, time off and records
That's real value. For a lot of small companies, it's the difference between offering competitive benefits and not.
What does a PEO not do?
A PEO advises. It doesn't execute inside your business. Its service team supports many client companies at once, so it can tell you what to do, but it can't be in the room doing it. Here's what typically stays on your plate:
Acting on the alerts. The PEO sends the policy update. Someone on your team still has to implement it, communicate it and make sure managers follow it.
Manager conversations. The helpline can tell a manager what to say. It can't coach them through a hard conversation, and it won't notice when a manager is the problem.
Investigations and terminations. The PEO will advise on risk. Gathering facts, documenting properly and making the call is still yours.
Hiring. The PEO handles new-hire paperwork and benefits enrollment. Writing the job description, running interviews and planning the first 90 days are on you.
A handbook that fits. You get a template. Customizing it to how your company actually operates, in every state you operate in, is your job.
Pay decisions. The PEO processes payroll accurately. It doesn't build pay ranges or a pay philosophy you can defend.
Growth planning. Nobody at the PEO is planning the roles, leaders and structure you'll need next year.
Why do so many companies miss this?
Because the sales conversation is about what the PEO includes, not about what still requires a person. And because the gap is quiet at first. With 12 employees, the owner absorbs it. At 30, the owner is spending hours a week on people issues. At 50, things start slipping: a policy that never got rolled out, a manager who never got coached, a termination that wasn't documented the way it should have been.
The most common thing I heard from owners: "I thought the PEO was handling that."
Signs you have a PEO gap
You can't name every service included in your PEO fee, or you know your team uses only a few of them
Compliance alerts and policy updates sit in someone's inbox
Your managers pull you into performance and conduct issues
Your handbook is still mostly the PEO template
You, the owner or CEO, spend more than three hours a week on people issues
You're planning to grow, add managers or hire in a new state in the next 12 months
If two or more of those sound familiar, you have a gap. Most companies do.
Should you replace your PEO or add HR support?
For most companies, neither extreme. Leaving a PEO often means giving up benefits pricing and administrative support that works. Hiring a full-time HR director at 30 employees is usually more cost than the company needs.
The middle option is to keep your PEO for what it does well and add a fractional HR leader to own everything in between. A fractional HR partner works inside your business part-time: implementing what the PEO recommends, coaching managers, running investigations properly, building your hiring process and making sure you actually use what you're paying for.
That's the model I built Possibilities Unlocked around. We don't compete with your PEO. We make it worth what you pay for it.
Frequently asked questions
Does a PEO replace an HR department?
No. A PEO replaces much of the administrative work an HR department would do, like payroll, benefits and compliance paperwork. It doesn't replace the people leadership side of HR: hiring, manager development, employee relations and culture.
Does a PEO help with terminations?
A PEO will usually advise on termination risk and process the final paperwork. It typically won't run the investigation, document the performance history or make the decision. That stays with you.
At what size does a company on a PEO need an HR person?
There's no exact headcount, but the gap usually becomes noticeable somewhere between 15 and 30 employees, when the owner can no longer absorb people issues alongside running the business. Companies that are growing quickly, adding managers or operating in multiple states tend to feel it sooner.
Can a fractional HR director work alongside a PEO?
Yes. That's the most common setup I see work well. The PEO handles administration and the fractional HR leader handles everything that requires someone inside the business.
Find out where your gaps are
Take the free PEO Gap Check. It's 10 questions and about two minutes, and you'll see your coverage score and your top three gaps right away.
UNTIL NEXT TIME,
Stacey
Stacey Dennis, SHRM-SCP, is the founder of Possibilities Unlocked, a fractional HR firm for growing companies. She spent nine years at Insperity before starting her firm.