What is a Professional Employer Organization (PEOs)?

PEOs offer businesses cost-effective outsourcing services for managing HR responsibilities, such as company payroll, employee benefits, time tracking and attendance, recruiting and training. Every business incurs costs associated with attracting and retaining quality candidates for their open work positions. In the case of small businesses, these costs can be difficult to manage because a smaller company has fewer resources to direct to its HR department. A large company dedicated solely to providing workforce management services can assist smaller companies by providing access to valuable employee programs that are inaccessible on a small scale, like health insurance plans.

When a business works with a PEO , they form a co-employment partnership, where the PEO takes on specific employer rights, responsibilities and risks. In turn, the business remains in control of its operations, the hiring process and the management of employee performance and advancements.

SMBs that partner with professional employer organizations ( PEO ) typically benefit more from the partnership if they have the following traits:

• Number of employees: 15% of companies with between 10 and 99 employees utilize a PEO, though companies of all sizes can benefit from such a partnership.
• Growth-oriented objectives: SMBs that want to focus on growing business can do so by giving PEOs control of HR tasks.
• Operation within specific industries: PEOs commonly partner with SMBs in the professional service, technology, finance and marketing industries.

Benefits of using a PEO

As with any business practices, partnering with a PEO can have different pros and cons. Professional employer organizations can offer several advantages for streamlining normal operations processes:

A focus on business growth

By partnering with a PEO, a business can outsource most, if not all, of its HR needs, so the focus shifts toward activities that grow the organization. As a result, managers don’t have to focus on the daily HR responsibilities as much and can instead place their full attention on increasing revenue, reaching customers and developing the business.

A wider range of benefits

Many small businesses are unable to provide the same level of medical coverage as larger corporations. With a PEO, however, these small businesses can provide higher-quality employee benefits packages, including retirement matching, 401(k) and other savings plans. Common components of a benefits package offered by PEOs include:

• 401k plans or other retirement planning options
• Health market access including the options to include dental, vision and lifeinsurance
• Dependent care benefits
• Paid time off and vacation day accumulation
• Commuter benefits
• Educational assistance
• Short- and long-term disability and personal accident insurance (on top of Workman’s compensation)

Reduced employee turnover

The improved benefits that PEOs are able to provide for businesses can improve employee satisfaction and make it easier to retain quality talent in your organization. When a PEO assists your internal HR department with employee relations, it can provide the flexibility and guidance needed to easier solve workplace conflicts.

Efficient payroll management

Using a PEO for payroll is an effective way to manage your company’s labor expenses. PEOs process employee payroll and manage the regular compensation of an organization’s staff. Additionally, PEOs manage payroll records and documentation, issuing pay stubs and tax forms and documenting employee paid time off usage and accrual. A Certified PEO (CPEO) is registered with the IRS and submits the necessary documents to state and local employment departments as well as the IRS to provide timely compliance with federal regulations for their business partners.

Recruiting, hiring and onboarding support

PEOs help small and medium-sized businesses create ideal employee recruitment processes that fit each business’s unique needs. They also work with SMBs to design job descriptions, conduct salary and wage surveys and improve interview processes.

Workers’ compensation management

Most PEOs provide workers’ compensation coverage when they partner with SMBs. The PEO manages and resolves employee claims and provides loss prevention reviews to help businesses design loss prevention strategies and return-to-work plans. Certain states, such as Oregon, require a PEO to maintain workman’s compensation under all circumstances.

Performance management and support

PEOs support SMBs in managing employee performance reviews and assist them in conducting performance appraisals regularly. To further support employee performance improvement, PEOs frequently provide businesses with compensation tools and resources, advancement and reward program designs, and leadership coaching. An experienced PEO is able to help discover ways a business can improve its management practices to motivate employees and grow its company’s goals.

Related: Outsourcing Human Resources: Things to Consider

Control personnel costs with a PEO

PEOs can help businesses control expenses by reducing costs associated with hiring, benefits and technology implementation. Additionally, businesses that partner with PEOs can save on HR processes, like maintaining software and managing payroll. PEOs can also help businesses save on lost time by taking over the necessary paperwork and documentation processes so that business owners can focus on strategies and initiatives to grow their organizations.

Some of the most common expenses related to increasing your workforce are recruitment fees, the cost of training and relocation expenses for the new employee. In addition, your company’s internal human relations department will incur their own expenses related to the retention of your new hires, such as administrative costs and office overhead. Outsourcing your needs to a PEO can reduce these costs, reducing in-house administrative and HR costs and managing the fees to relocate and train employees.

Co-employment contract basics

When you decide to partner with a PEO, you are effectively re-designating the responsibility for your employees to the PEO, which is referred to as a co-employment model. In this partnership, both your company and the PEO are employers of your workforce. Both the original hiring company and the PEO share liability over workers and payroll requirements.

Companies enter into a service agreement with a PEO and pay a monthly fee based on a percentage of the managed employees’ salaries or a flat rate based on the number of people managed by the PEO. If you choose to cancel a service agreement with your PEO, the employees will remain your employees and all administrative and management responsibilities will be returned to your company. You can then find the option that would best fit your company next, whether it be finding another employee leasing option or managing your workforce in-house.

What to look for in a PEO

To make sure that the organization you choose to partner with is right for your company, it is essential to look for the following characteristics in a PEO:

• Relevant expertise: Ensure the PEO you choose has adequate expertise in handling HR activities. For instance, reputable PEOs should have qualified and experienced personnel.
• Regulation compliance: The PEO you choose should have specific parameters in place that adhere to local, state and federal regulations regarding HR management.
• Technology use: Consider the technology needs of your business, and choose a PEO that can offer human capitalmanagement software. They should also be flexible with the programs you already have or plan to use.
• Professional memberships: Look for PEOs with professional memberships in industry trade organizations, such as the National Association of Professional Employer Organizations (NAPEO).
• Benefits funding: Search for a PEO that offers fully insured employee benefits plans. If the PEO you are considering offers partially self-funded benefits plans, ensure the third-party administrator (TPA) that the PEO uses is fully authorized to do business in your area.

FAQS about professional employer organization (PEOs)

What’s the difference between using a PEO and other types of HR outsourcing?

PEO partnerships encompass a co-employment model, whereas simply outsourcing your HR services does not. In a co-employment model, the PEO assumes all liability for the administrative work completed, while you remain liable for the outsourcing company’s completed work. A PEO co-employs an existing workforce and provides HR and other operations support to a company. When a company’s contract with a PEO ends, the employees once managed will remain as the original company’s staff. Outsourcing employees using temporary staffing companies and employee leasing groups only provide qualified laborers on a project-by-project basis without additional administrative support.

Does a business lose control of the company when using a PEO?

A professional employer organization acts as an intermediary between employees and a company, assuming some HR responsibilities but ultimately working as a contractor for the company. The company contracting with a PEO always has the power to end the relationship and resume business with complete control. During the partnership, the PEO maintains employee and payroll records, generally focusing on operations related to employment.

What’s the liability that a PEO assumes on behalf of a business?

PEOs accept all of the liabilities associated with a business’s payroll and tax reporting. Additionally, PEO services share a business’s employment risks and frequently include employment practices liability insurance as part of their services. Maintaining personnel and payroll records is regulated by federal and local laws. Therefore, a PEO is also responsible for keeping up to date with current record-keeping requirements and employee privacy laws. The PEO must also follow any applicable state regulations regarding their financial audit practices, such as using generally accepted accounting practices (GAAP).

Are PEO’s federally recognized as employers?

Yes, all 50 states have differing labor laws regarding PEOs and the IRS recognizes PEOs as employers that are responsible financially for their laborers. The IRS remits taxes from employees of a PEO for unemployment insurance and income tax purposes and provides guidance in employee retirement planning. Section 3511 of the IRS code explicitly states that a Certified Professional Employer Organization (CPEO) is considered a third-party payer and is generally responsible for paying taxes and filing returns.