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What Is A Professional Employer Organization?

As a business owner, juggling multiple balls in the air has by now become your forte.

Whether you are the owner or part of the executive team, you are likely overseeing everything from production to sales to business development and marketing.

As the business grows, the needs and complexities of the team will change as well.

As a small business with less than 10 employees, it was relatively easy to handle the various human resources functions of a team that size. No one was too worried about ‘HR’ or anything too official.

Then an employee left suddenly and you were busy enough though to quickly replace them with 4 more people. Then, as the team quickly grew to 20 employees and then 50 and then 100, and contractors and other workers are brought into the mix, you’re suddenly faced with a variety of people issues—some of which may require immediate attention. 

There is no reason why, as an already stressed business owner, you need to be putting all of these extra stressors on your plate. Instead, devote your time to vision and growth strategy, and bring in a Professional Employer Organization (“PEO”) to help with the rest. 15 percent of all businesses with 10-99 employees in the United States have already made the jump.   

What is a professional employer organization?

A professional employer organization is an organization that assists other organizations with their HR management. Services range from administrative tasks, such as payroll and benefits administration, to helping you stay on the right side of regulatory compliance.

How does a professional employer organization work?

PEOs are an outsourced human resources solution for your business. No two PEOs operate in exactly the same way, but each offers a variety of HR services that help ease the internal burdens of your organization and make sure that your people needs are being met by skilled professionals without having to worry about adding a multifaceted HR department to your in-house team.

PEOs help in a variety of roles in terms of their structure within an organization. Some simply act as an outsourced service—an arm’s length third-party that a business can turn to for their human resources administrative services. There are also organizations that can provide human resources strategy and support so you don’t need an additional department.

Others are built on a co-employment model, where they may share employer responsibilities with their client (the workplace) and thus handle a number of the crucial human resources functions in a co-employment relationship. Certified PEOs (“CPEO”s) have been certified by the IRS to handle federal taxes on your behalf, but only a small number of PEOs are certified to that level. 

What does a professional employer organization do?

Overall, PEOs can help with:

  • Payroll Processing 

In a larger organization, there may be a department of several people devoted just to payroll processing, but small and mid-size organizations rarely have such budget luxuries. PEOs can lift the burden by taking everything off-site, without a business having to worry about covering multiple extra salaries. 

  • Employee Tax Filing

If the PEO is operating on a co-employment model, the PEO will often become the Employer of Record (“EoR”) and handle all of the employment tax administration under their own tax identification number. This takes the burden of handling withholdings and deductions off of an employer and places it on their outsourced employment service. This ensures that everything is handled appropriately for IRS purposes, rather than leaving the employer with that extra responsibility.

  • Human Resources Consulting

Employee issues are a natural part of the workplace, from conflicts between employees to minor infractions and progressive discipline. Employers without an HR background can be lost as to how to handle these issues, but a PEO knows labor laws and can offer real-time advice to solve problems and find effective solutions. 

  • Employee Benefits Administration

Depending on the employment relationship, a PEO may have access to an excellent group benefits plan or health insurance or may be able to operate and administer a plan entirely off their own—taking the burden off of employers. PEOs can help implement new plans, administer existing plans, assist with claims, control health spending accounts, and assist with disability claims. 

  • Workers’ Compensation

Workers’ compensation can present its own series of complexities, with most states legally requiring coverage. PEOs can help employers secure lower-cost coverage for companies, and administer screening to assist with claims. 

  • Recruitment

Scouting great talent can be one of the hardest parts of business growth, especially when owners and managers are struggling to determine who will be the right ‘fit’ for a company. PEOs use professional recruiters to source talent from well-screened databases and can handle the interview and screening and even part of the onboarding process 

  • HR Compliance and Risk Management

Depending on its location, a business may require a number of comprehensive policies that govern employees in order to stay compliant with state or provincial, and federal laws. These may include health and safety policies, harassment policies, human rights policies, or other policies that simply assist employers with their daily operations. PEOs can draft these policies and help train employees on how they impact the workplace. 

  • Human Resources Strategy

Business owners may need extra help with HR as they scale a business and ready it for potential investment, or if they are preparing the business for sale. PEOs can come in with strategic advice to ensure that all HR loose ends are tied up and that the business is in good shape. See our recent article on the importance of People Operations.

What are the benefits of a professional employer organization?

PEOs offer significant benefits to small or medium-sized businesses that allow them to focus on day-to-day operations instead of getting bogged down with human resources. 

PEOs can help minimize employer liability

One of the main benefits to a business joining forces with a PEO is the elimination of liability. Employers inherently run all sorts of liability risks as soon as they bring on staff, from how they handle workers' compensation claims to lack of compliance with government policies to workplace health and safety, etc. 

These aren’t just empty threats. A business that deals with a systemic sexual harassment problem will come under fire from complainants’ lawyers. Without a decent workplace sexual harassment policy in place, not only can they be held responsible for the conduct that went on, but they may have a hard time disciplining an accused person who “didn’t know their behavior was wrong.”

When it comes to workers' compensation, having the wrong policy in place can cripple a business financially. Without the right protection, an employer can be on the hook for an employee’s medical bills, which depending on their claim can cost tens or even hundreds of thousands of dollars (or in some cases more). 

PEO services have industry knowledge

The other major benefit to hiring a PEO is their inside knowledge when it comes to HR and your industry. As your team grows, you may not know how to attract top talent. While you hired your original employees based on recommendations and a gut feeling, now you’re in the position of needing to do background and reference checks and devise a compensation structure.

This is where HR outsourcing shines. HR professionals take a strategic approach to how to handle your business, from making sure that you have the right talent to ensure that you’re compensating them fairly. This includes making sure payroll is met on time, payroll taxes are covered, paychecks are paid, workplace policies are sound, and employees are set up for success.

What are some key considerations when choosing a PEO?

While a PEO may help you run your business, they will not run your business for you. This means that they will not make difficult management decisions, and they won’t make any decisions unilaterally. 

If you are trying to decide whether to go through with that merger proposal with a competitor, a PEO may help make sure that your staff is in shape, but they stop well short of helping you make that decision. Similarly, if you receive news of a troublesome employee, a PEO might help calculate discipline, but it is ultimately the business owner who decides what discipline will be issued. 

Also, when hiring a PEO, make sure that their list of services is right for you. All PEOs offer different combinations of services, so be sure to find one that provides the services that you are looking for. 

What are the costs of a PEO?

PEOs usually charge based on a business’ payroll, so the costs can vary depending on the size of the client company. You will likely need to provide some details about your payroll in order to get an accurate quote on pricing.

Remember that PEOs are meant to lead to time savings, which ultimately saves money. Overall businesses have reported saving on average 27% cost savings from bringing on a PEO. The time saved from not handling HR matters can ultimately lead to business development and other revenue-generating activities, long balancing out any costs of the PEO itself. 

Types of PEOs

Are there different types of PEOs? No, although sometimes there is confusion around terminology—the co employment relationship is sometimes referred to as employee leasing.

Final Thoughts

A professional employment organization is meant to make business easier. They offload core HR tasks and HR functions from employee benefits to employment taxes and other employer responsibilities. 

Their co-employment model makes things even easier for businesses to legally and financially respect themselves. If your team is growing, many businesses find installing a PEO to be the right answer.

To help to find the right PEO service for you, check out our pick of the best employer of record organizations.

Related Read: PEO or EOR: Which Is Right For You?

By Tim Reitsma

Tim is the co-founder and General Manager of People Managing People, an online publication focused on building a better world of work. He is experienced with people & culture, leadership, business strategy and operations with a focus on building great teams who are excited about their craft and their organization. With over 15 years of leadership experience, Tim has always been guided by his core values: faith, family, curiosity, and fun. He is a coach, mentor, speaker, advisor, and an active volunteer in his community. Tim loves spending time outdoors with his wife and two kids as well as mountain biking in the north shore mountains.

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