HR professionals often find themselves working on a team of one. This can be an overwhelming position to find yourself in. You may want to consider if a professional employer organization (PEO) is an option for your company. A PEO can help in the following areas: benefits administration, compliance assistance, recruiting/hiring, payroll administration, drug testing programs, unemployment administration, workers’ compensation administration, and Family Medical Leave Act. The following article will cover what a PEO is, how it works, the benefits of using a PEO and things to keep in mind when deciding if it’s a fit for you or not.

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What Is a 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.

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.

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.

  • 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.
  • 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.

What Are Things a PEO Doesn’t Do?

It is easy to get caught up in thinking a PEO can do everything. Read the following examples for things to keep in mind before deciding to work with a PEO.

Example 1

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.

Example 2

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.

Example 3

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.

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?”

Step 2: Research

Take time to understand what each PEO offers. There could be differences in the services they provide. You need to understand what you are getting yourself into and understand what you are purchasing.

Step 3: Ask About Their Technology

Sometimes a PEOs’ 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: 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.

Questions You’ve Asked Us About PEOs

The cost of a PEO is a fee ranging from 2%-6% of your total payroll. The cost includes wages, taxes, benefits, and HR consulting. Usually, you write one check per pay period.
Yes, PEO’s work in all industries — law firms, construction companies, medical spas, mechanics, nursing homes and more. On average, a small business with anywhere from 10 employees to 100 employees will find a PEO very helpful. Companies with more than 100 employees may find it beneficial to bring HR in house, although some larger businesses find value in joining a PEO.
One of the major differences between a PEO and a staffing company is the co-employer relationship in offering HR services. Staffing firms do not own the employment relationship.

Emily is the HR Manager for PatientBond. She is the excited for the opportunity of creating an HR department with her current employer. Emily pursued a Master’s in Human Resources from USU and comes with 4 years of experience from various companies. Emily serves as the Director of Social Media for the Salt Lake SHRM chapter.

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