A professional employer organization (PEO) 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.
So, why should you hire a PEO? Tell me if this scenario sounds familiar:
As a small business with less than 10 employees, it was fairly easy to handle the various human resources functions of a team that size. No one was too worried about ‘HR’ or anything too official.
But as the number of employees in your org balloons to 20 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 added time-consuming stressors on your plate. Instead, devote your time to vision and growth strategy, and bring in a PEO to help with the rest.
According to the NAPEO, 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 (PEO) is a firm that provides comprehensive HR solutions for businesses.
Organizations hire PEOs to outsource HR tasks such as:
- Employee benefits administration
- Compliance with employment laws
- HR consulting
- Risk management
You can think of them like a co-employer with their client companies, sharing employer responsibilities.
In many ways, 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 HR 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?
Working with a PEO gives you access to HR services that can save you thousands of dollars, hours, and headaches. Overall, PEOs can help with:
PEOs can lift the burden of payroll processing 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 can become the Employer of Record (“EOR”) and handle all of the employment tax administration, ensuring that everything is handled appropriately for IRS purposes.
Human Resources Consulting
Employers without an HR background often struggle to manage conflicts, infractions, and progressive discipline—but a PEO knows labor laws and can offer real-time advice to solve problems and find effective solutions.
Employee Benefits Administration
PEOs may have access to an excellent group benefits plan, retirement plans, or health insurance or may be able to operate and administer a plan entirely on their own.
PEOs can also help implement new plans, administer existing plans, assist with healthcare and other claims, control health spending accounts, and assist with disability claims.
PEOs can help employers secure lower-cost workers’ compensation coverage for companies and administer screening to assist with claims.
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 and offboarding.
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 their HR people operations 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. 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). So in this way, your PEO provider can help protect both your bottom line and your peace of mind!
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.
How to choose a professional employer organization
Since a PEO will effectively act as an arm of your business, it stands to reason that the PEO you end up engaging with should be chosen carefully. Here's a comprehensive process for whittling down your options and finding a great fit.
1. Assess Your Business Need
- Identify the specific HR services your business requires (e.g., payroll, benefits administration, compliance management).
- Determine the level of support needed in areas like employee training, risk management, and legal compliance.
2. Research Potential PEOs
- Look for PEOs with experience in your industry.
- Check their client reviews and testimonials to gauge their reputation and service quality.
3. Compare Services and Costs
- Evaluate the range of services offered by each PEO.
- Understand their pricing structure (e.g., flat fee, per-employee fee) and compare the cost-effectiveness.
4. Check Accreditation and Compliance
- Ensure the PEO is accredited by relevant bodies like the Employer Services Assurance Corporation (ESAC).
- Verify their compliance with local and federal employment laws.
5. Review Employee Benefits Offered
- Compare the quality and range of employee benefits each PEO offers.
- Assess how these benefits align with your workforce's needs and how they might aid in employee retention and recruitment.
6. Evaluate Technology and Infrastructure
- Check if the PEO provides robust technology solutions for payroll, HR management, and employee self-service portals.
- Assess the ease of integration with your existing systems.
7. Understand the Scope of Liability
- Clarify what liabilities are shared and what remains the responsibility of your business.
- Discuss the PEO’s practices in handling compliance issues and legal disputes.
8. Ask for References and Case Studies
- Request references or case studies from businesses similar to yours.
- Learn from their experiences and the impact of the PEO services on their operations.
9. Review the Service Agreement Carefully
- Thoroughly read the contract or service agreement.
- Pay special attention to the terms of service, cancellation policy, and any hidden fees.
10. Plan for Transition
- Develop a clear plan for transitioning to the PEO.
- Ensure there are strategies in place for communicating changes to employees and integrating the PEO’s services with your current operations.
11. Evaluate Continuously
- After selection, regularly assess the PEO’s performance.
- Ensure they continue to meet your evolving business needs and maintain a strong partnership.
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.
What kinds of organizations benefit from using a PEO?
While professional employment organizations offer myriad benefits, they're not for every organization. If one or more of the following describes your org, you may be a good candidate to work with a PEO:
- Small to Mid-Sized Businesses
- Companies with Limited HR Expertise
- Businesses Looking to Scale Rapidly
- Organizations with a High Employee Turnover
- Companies Needing Streamlined HR Processes
- Industries with High Regulatory Compliance Demands
- Businesses Seeking Competitive Employee Benefits
- Organizations Without an Established HR Infrastructure
- Businesses Operating in Multiple States or Internationally
- Companies Looking for Risk Management Support
Before approaching a PEO, it's advantageous to consult with your leadership team and audit how your existing HR operations are working and their strengths and weaknesses. This way, you'll be better prepared to approach a PEO with clear goals for the business relationship.
Other types of HR outsourcing
It's possible that your organization only needs to outsource one or two areas of your people management operations. If that's the case, you might consider engaging with a firm that specializes in outsourcing specific services, such as:
- Employer of record: EOR services perform many of the same functions as an PEO but is the legal employer. For more, read our the difference between PEO and EOR.
- Payroll Services: These firms take care of payroll processing, including tax deductions, pay slip generation, and compliance with tax laws.
- Recruitment Process Outsourcing (RPO): RPO can take on the entire or parts of the recruitment process to an external service provider.
- Employee Benefits Administration: These services allow you to outsource the management of employee benefits such as health insurance, retirement plans, and wellness programs.
- Training and Development: Many providers offer professional development and training programs to help your employees develop new and existing skill sets.
- HR Consulting: There's always the option of engaging external HR experts for strategic advice, often for specific projects or to address particular challenges.
- Employee Assistance Programs (EAP): Employee support service providers can be contracted to offer services that complement standard healthcare plans, including counseling, mental health support, and work-life solutions.
- Compliance Management: Since compliance can be a legal minefield, you may wish to seek external expertise to ensure adherence to employment laws and regulations.
- HR Technology Services: These firms support the management of HR-related software and technology systems, such as HR information systems (HRIS).
- Performance Management: You can hire external services to design and implement performance appraisal systems and processes.
- HR Audits: Consider engaging a firm to conduct audits of HR policies, practices, and procedures to ensure effectiveness and compliance.
Frequently Asked Questions
Q: What are Certified PEOs ?
A Certified Professional Employer Organization (CPEO) is a specific designation by the IRS for PEOs that meet rigorous, federally-regulated standards. CPEOs undergo a thorough certification process by the IRS, ensuring they meet requirements related to financial responsibility, tax compliance, and other regulatory criteria.
The advantages of working with a Certified PEO (CPEO) versus a standard PEO include:
- IRS Certification: CPEOs must pass stringent IRS requirements to ensure compliance.
- Tax Liability Protection: CPEOs assure against certain federal employment taxes.
- Financial Transparency: CPEOs are subject to financial audits.
- Credibility and Trust: CPEO certification demonstrates a higher level of credibility.
- Reduced Tax Risks: CPEOs can reduce the risk of tax-related issues for client companies.
Q: What are ESAC Accredited professional employer organizations?
ESAC (Employer Services Assurances Corporation) accreditation is another form of PEO certification. EOs that are ESAC accredited have undergone a rigorous process to meet specific financial, ethical, and operational standards set by ESAC.
ESAC Accredited PEOs offer many of the same benefits as CPEOs. The key differences are:
|CPEO: Certified by the IRS based on federal tax compliance and financial standards.
|ESAC: Accredited by the Employer Services Assurance Corporation for operational, financial, and ethical standards.
|Focus of Accreditation
|CPEO: Focuses on tax compliance and financial responsibility.
|ESAC: Emphasizes financial stability, ethical practices, and operational standards.
|CPEO: Recognized and regulated by the IRS.
|ESAC: Focuses on broader compliance aspects, including financial, ethical, and operational standards.
|Scope of Assurance
|CPEO: Primarily focuses on tax-related assurances and financial aspects.
|ESAC: Broader focus covering financial stability, ethical practices, and operational standards.
|CPEO: Provides certain protections related to federal employment taxes.
|ESAC: Offers client protections through adherence to higher operational and ethical standards.
|Emphasis on Compliance
|CPEO: Strong emphasis on IRS compliance and tax-related matters.
|ESAC: Focuses on broader compliance aspects including financial, ethical, and operational standards.
Q: How do PEOs make money?
A: PEOs make money through fee structures based on the services they provide to their client companies. Here are common ways PEOs generate revenue:
- Administrative Fees: PEOs typically charge a service fee, often calculated per employee or as a percentage of total payroll. This fee covers the cost of managing HR tasks such as payroll processing, benefits administration, and HR compliance.
- Insurance Commissions: PEOs may earn commissions or receive a portion of the premiums from insurance products they offer, such as health insurance, workers' compensation, and retirement plans. They often negotiate better rates by pooling employees from multiple client companies.
- Markup on Services: PEOs might charge a markup or earn revenue by providing certain services, such as HR consulting, training programs, or additional HR-related tools and technologies.
- Interest Income: PEOs may earn interest by temporarily holding funds before distributing payroll or taxes to appropriate entities. However, regulations often limit the duration and use of these funds.
- Ancillary Service Charges: PEOs can generate revenue through additional services not included in the standard package, such as employee training, background checks, or specialized HR consulting.
Q: What is a disadvantage of using a PEO for staff leasing?
A: The main disadvantage is a loss of direct control over HR functions.
When a company engages with a PEO, they share employer responsibilities. While this can streamline HR tasks, it also means relinquishing some control over HR functions like hiring, firing, and day-to-day employee management.
Decisions regarding certain HR matters might also require coordination or approval from the PEO, impacting the company's autonomy in people management.
Q: How will a PEO partnership impact our day-to-day operations?
A: Partnering with a Professional Employer Organization (PEO) can significantly impact your day-to-day operations in several ways:
- Streamlined HR Tasks: A PEO can handle various HR functions like payroll processing, benefits administration, and compliance tasks, freeing up your time to focus on core business activities.
- Access to Expertise: A PEO affords you access to HR professionals who offer expertise in navigating complex employment laws and regulations—ensuring compliance and reducing the risk of errors.
- Improved Employee Benefits: PEOs often offer access to better employee benefits and cost-effective insurance plans by pooling employees from multiple client companies.
- Enhanced HR Technology: Many PEOs provide access to advanced HR software and technology, streamlining processes like time tracking, payroll, and employee self-service portals.
- Focus on Strategic Growth: With routine HR tasks managed by the PEO, your company can focus on strategic growth initiatives, innovation, and enhancing the overall business strategy.
- Co-Employment Relationship: The co-employment model means the PEO shares employer responsibilities, impacting certain HR decisions that might require coordination with the PEO.
- Change in Administrative Procedures: Your company might need to adapt to new administrative procedures or systems implemented by the PEO, affecting how certain HR-related tasks are executed.
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.
A professional employment organization is meant to make business easier—especially when your team is outgrowing your in-house HR capacity.
To help to find the right PEO service for you, check out our pick of the best professional employer organizations.