What Is a Professional Employer Organization (PEO)?

PEO stands for professional employer organization. PEOs can be a great option for small to midsize companies. Generally, a PEO offers services such as benefits, payroll, workers’ compensation, etc. Small to midsize companies can outsource their HR needs to a PEO to take care of needs that may distract them from their focus on growing their company.

Certified PEO (CPEO)

A Certified PEO chooses to meet certain standards regarding tax compliance, financial reporting, and more. To become certified, these PEOs volunteer to be audited by the IRS, and as a result they’re allowed to take on extra responsibilities surrounding things like payroll administration and tax reporting. 

How Does a PEO work?

When a company enrolls with a PEO, the employees become employees of the PEO. The employees still report to the company, but the PEO becomes the employer of record. The client and PEO become co-employers. A PEO handles the payroll and insurance administration and provides advice on worksite safety, employee rights, labor regulations, and employee wellness. They will deal with unemployment insurance, workers compensation benefits, and discrimination lawsuits, write the employee handbook and handle most other HR needs. A PEO is just one type of co-employment that companies might use.

Services a PEO Will Provide

Here are some of the services that many PEOs provide. As you research different PEOs, make sure to ask if they provide the specific services that your company needs.

Services a PEO Will Not Provide

Often, PEOs don’t provide the following services. As you learn more about different PEOs, you may want to ask them how they approach the following: 

What Are the Benefits of Using a PEO?

There are a lot of benefits to outsourcing HR services to a PEO. PEOs can help you find ways to offer benefits, supplement services, share in the responsibility of employment liability and assist with compliance.

More Affordable Benefits

A PEO can negotiate for lower insurance rates because all their clients pooled together can make it possible to amortize the cost of benefits plans over a broader base. This creates potential savings for the small and midsize business customers who can offer their employees a comprehensive benefits package.

Supplement Services

PEOs can offer a number of supplementary services such as background checks, employee handbooks, and drug testing.  PEOs handle issues like workplace violence, harassment or racial discrimination complaints, and a host of other legal issues. This will reduce the time you spend doing transactional HR and insulating your company against a variety of legal claims.

Reduced Liability

The PEO reduces your employment liability. Since the PEO is the employer of record, they take on more of the liability.

Compliance Assistance

Since a PEO is the employer of record, they also have the responsibility of keeping your company compliant. PEOs can be excellent on the compliance side of things.

Access to Experts

PEOs employ many HR experts to run HR for all their customers. If any questions come up, you can ask them.

Drawbacks of a PEO

It is easy to get caught up in thinking a PEO can do everything, but there are lots of things they can’t do. Here are a few things to keep in mind before deciding to work with a PEO.

General Limitations

Take time to understand what the specific PEO you’re looking into the can and cannot do. Some PEOs can do international payroll while others cannot. Some may or may not work with independent contractors. PEOs are limited in how many insurance carriers they partner with.

No Learning and Development

Typically, PEOs do not offer learning and development. Some may, but learning and development does not tend to be an area they focus on. PEOs typically focus on payroll, benefits, questions that relate to HR-related matters, and workers’ compensation.

Shared Attention

A PEO has many clients, so your company won’t get exclusive attention. PEO communication and responses are usually delayed. It’s hard to get the personal and in-depth attention that your company might need at times. Because of the co-employer relationship, your requests need to go through the PEO. You have to wait on the PEO to fill the request no matter how simple it may be.

Expensive

PEOs are expensive and could easily cost your company four times as much as a good HR software solution. PEOs are typically priced on a per-employee-per-month (PEPM) or percent of payroll model.

With some PEOs you could end up paying a hefty initial implementation fee, 1 – 15% of employee payroll each month or $100 PEPM, and a variety of service or administrative fees. That will cost you a multiple of what you would pay for a good HR software. Many small companies prefer to have an operations person take on HR responsibilities with the help of technology.

Learn how HR software can help you handle your HR needs at an affordable price.

 Lack of Visibility

The PEO is responsible for storing company HR documents and making sure employees sign them. This takes some work off your plate, but it limits your access to those documents. For example, in order to know if an employee has signed all of their documents, you’d have to go through the PEO. If you needed to get ahold of an important document, you’d have to go through the PEO. 

Loss of Employer Tax Benefits

The co-employer relationship with a PEO is an interesting thing. Because the PEO is the employer as far as the IRS is concerned, they submit your employees’ tax documents. This means that you don’t have to worry about those taxes, but you don’t get employer tax benefits either.

How Do I Choose a PEO?

The following steps will help you know what you need to think about when deciding if a PEO can meet the needs of your company.

Step 1: Know What Your Company Needs

Take the time to understand your company’s needs because what may be important to your company might not be important for another company. A PEO is not a one-size-fits-all solution for companies. Ask yourself, “What are my reasons, expectations, and motivations for considering a PEO?”

One thing to consider is the level of control your company would like to maintain. When you hire a PEO, you gain simplicity at the cost of autonomy. If you’re a leader that values complete autonomy and total control over your organization, then a PEO is probably not for you.

Step 2: Research

Take time to understand what each PEO offers. There could be differences in the services they provide. PEOs can get you good deals on employee benefits because they employ so many people, but if you like a particular benefit provider that the PEO doesn’t do business with, you’re out of luck. You need to understand what you are getting yourself into and understand what you are purchasing.

Step 3: Ask About Their Technology

Sometimes a PEO’s technology may not be up to date. Ask about what their software has to offer, if it’s easy to access and use, and if it will fulfill the needs of your company.

Step 4: Understand the Employee Benefits Plans

Some PEOs can be limited in what they offer when it comes to benefit plans. You want to understand the benefits package they offer and if it will meet the needs of your employees and enhance your recruiting efforts.

Step 5: Ask About Administration of Unemployment Claims and Workers’ Compensation

Understand what they have in place to aid in keeping your workers’ compensation rate low, such as risk management, safety programs, and claims management. A PEO should be a liaison between employees and the insurance companies. The PEO will want to ensure the legitimacy of unemployment claims and be an advocate for your company because it affects the unemployment rates for both the PEO and your company.

Step 6: Know What You Pay for

Look for transparency from your PEO when it comes to your fees. PEOs can charge you in a few different ways: a percent of your total payroll, a flat per employee per year rate, or a set price per paycheck per pay period. Ask to see a sample invoice and glance over it to determine if your fees are bundled or not.

Step 7: Determine Transition Times

Discuss the timing of how long it would take to transition into the PEO. Make sure you understand what it would take for your company to be set up for the transition.

Step 8: Ask What Kind of Support Is Needed

PEOs typically have a strong support system in place made up of HR consultants, benefits specialists, and payroll administrators. A good question to ask is who will be assigned to your company and how long it takes to get a response to your future questions and concerns.

Alternatives to Using a PEO

If a PEO sounds helpful, but you’re not sure if it’s exactly right for your business, you may want to explore other options. If the cons of a PEO outweigh the pros, here are two alternatives your company can consider. 

Administrative Service Offering (ASO)

Like a PEO, an ASO works with 3rd party insurance partners. But while a PEO chooses 3rd party partners that best fit the needs of the various companies they work with, an ASO lets you choose your own 3rd party partners. This is great if you want more control over the insurance providers you use—and have done thorough research to find out which insurance provider is best for your company. However, be aware that because ASOs don’t get volume pricing for benefits, costs may be higher. 

Another thing to consider is that because you remain the employer of record, ASOs don’t share liability with you when it comes to compliance. This isn’t necessarily a bad thing, but it does mean that your company has full responsibility for staying compliant.

Human Resources Outsourcing (HRO)

Human resources outsourcing is the process of using an outside organization to perform human resource functions. Just like with an ASO, your company stays the employer of record. With HRO, you have lots of control over which HR functions you choose to outsource. You might choose to outsource specific tasks, or you might outsource the entire HR department. This added flexibility is one thing that sets HR outsourcing apart from professional employer organizations.