Which HR Solution is Better for Seed Stage Startups: Zenefits or a PEO?

When it comes to selecting the right Human Resources (HR) solution for a seed stage startup, two popular options often arise: Zenefits and Professional Employer Organizations (PEOs) such as Trinet. Both have their pros and cons, and the decision should be based on your company's specific needs, size, and growth goals.

Zenefits vs. PEO: The Current Context

We recently shifted from a PEO like Trinet to Gusto, as per the request of our primary investor. The rationale behind this move is that PEOs can pose risks by slowing down the sale of a company and potentially derailing a transaction. These organizations can be cumbersome and expensive, making it difficult to manage HR efficiently. With smaller companies, it's easier to transition HR providers without significant disruption. Moreover, the Affordable Care Act (ACA) marketplace now offers deals that can help limit insurance risks, such as separate health insurance costs for employees without affecting group rates.

A Former Zenefits Employee's Perspective

As a former Zenefits employee, I have played a role in helping companies navigate HR decision-making processes. In my opinion, a PEO is an excellent choice for companies with fewer than 25 employees. For businesses with more than 25 employees, it is strongly advisable to consult with a Zenefits advisor who can provide tailored guidance based on your specific circumstances.

Zenefits: A Comprehensive Solution

Zenefits offers a wide range of HR management solutions, including payroll, compliance, and benefits, all at no cost. While this seems like a significant benefit, it comes with its own set of downsides, such as the need to choose and manage multiple HR solution providers.

Why a PEO May Be the Way to Go

According to my experience, a PEO, like Justworks, can be a more streamlined and efficient choice for startups, particularly those with up to 10 full-time employees. Here are the reasons why:

1. Integrated Platform

Justworks provides an integrated platform that handles insurance, payroll, and compliance, eliminating the need to manage multiple providers. In contrast, if you opt for Zenefits, you'll need to choose and manage separate payroll processors and handle compliance on your own, which can be time-consuming and cumbersome.

2. Liability and Expertise

PEOs like Justworks are incentivized to ensure that your company is fully compliant, as they are responsible for everything on your behalf. In the case of Zenefits, you are wholly responsible for any mistakes, and a third of businesses are fined annually for payroll and compliance issues. This can be a significant burden for startups that are just beginning and may not have the expertise to handle these responsibilities effectively.

3. Lower Insurance Costs

To further optimize your spending, PEOs like Justworks can negotiate lower insurance rates by aggregating the buying power of their clients. This results in substantial cost savings, often ranging from several hundred dollars per month per employee, compared to Zenefits, which doesn't offer this type of cost-saving aggregation.

Conclusion

The decision between Zenefits and a PEO ultimately depends on your company's size, financial position, and growth trajectory. PEOs offer a more integrated and efficient approach, especially for smaller companies. However, as your business grows and meets certain criteria, such as reaching 50 employees, you may want to consider other options.

For startups in the seed stage, Justworks is a compelling choice that can simplify HR management and potentially save you money. If you have any follow-up questions or need more clarity, feel free to reach out. I wish you all the best as you grow your startup!