We are using Mercurial by having local repositories on each of our workstations and pulling/pushing to a development server.
That sounds fine to me. My team is about double the size and it works great.
I'm not sure this is the best workflow, as it is easy to forget to Push after a Commit,
You don't have to push after every commit; you push when you want to push. That's the big idea about DVCS: that Commit and Push are distinct!
and 3 way merge conflicts can cause a real headache.
Are you working on the same lines of code a lot? On my team of 5-6 programmers, pushing/pulling a few times a day, and committing up to a couple dozen times a day, I can't remember the last time I've had to manually resolve merge conflicts. Certainly not in the past month or two.
Is there a better workflow we could use, as I think the complexity of distributed VC is outweighing the benefits at the moment.
Perhaps you should describe your workflow in more detail, because the only complexity over centralized version control that I encounter on a typical workday is maybe one command, and the benefits are huge. Doing "hg blame" just once saves me more time over the centralized version than all the "hg push"es I've had to type all year!