Understanding a PEO: The Basics

When is it Time to Meet with a PEO?

Every small business owner has a vision; you are no exception. That vision usually includes creating value in the marketplace by serving client needs. In order to make this vision become a reality, your business needs to sell its products and services in a manner that simultaneously pleases consumers and increases profitability. Nevertheless, if you are like most entrepreneurs, your vision does not include all of the fine details and costs related to essential business concerns such as payroll, taxes, and government compliance. Most small business owners will be faced with these concerns and at some point, they may seek to outsource HR and administrative functions. This is where a Professional Employer Organization (PEO) comes in.

What is the Role of the PEO?

Professional Employer Organizations act as a single source provider of HR integrated services for small businesses. The purpose of PEO companies is to create solutions for businesses that allow them to effectively outsource business services and create a means for business owners to concentrate on the core competencies related to their particular organization. By assuming the administrative tasks for your business, PEOs are able to offset much of the risks associated with running your organization.

PEOs are sometimes referred to as employee leasing companies because they lease a company’s employees back to the company. In other words, the employees have two employers: you, the small business owner, which handles the day-to-day functions and assignment of tasks, and the PEO, which handles the HR-related functions. The PEO company becomes the employer of record for tax and insurance purposes, and then takes on different roles as needed by individual companies. As every company is unique, its relationship with a PEO will also be unique.

Does this Relationship Create a Loss of Independence?

As a small business owner, you may be afraid to outsource HR because you do not want to give up control of your company: an understandable yet erroneous concern. Fortunately, a co-employment relationship is not synonymous with a loss of independence. You are paid as an employee but remain the owner. This means that you will have to disclose your salary along with your total company payroll so that a PEO can correctly calculate payroll but the PEO does not have control over your salary.

If your employees are mostly family or friends, you may hesitate to hire a co-employer because you may be wary of letting a large corporation have insight into your personal information. Again, consider the fact that PEOs are third-party organizations that are working towards helping your business become more efficient. They will also help ensure employee terminations have legal grounds and they can help objectively resolve disputes (which could be very useful in situations where personal and business matters are entangled).

The PEO client services agreement is executed between you, the small business owner, and the professional employer organization. This document outlines the rights and responsibilities you have as the employer and those that the PEO has as the co-employer. Take the time to review the document and consider involving legal counsel to clear up any hesitations you may have about engaging in a co-employment relationship.

Bottom-line: PEOs deal with HR responsibilities and risks, saving you countless hours and numerous headaches, but they do not take away your independence. Let us take a closer look at some of the responsibilities professional employer organizations can take on.

What does a PEO offer?

Every professional employer organization will offer different services, including payroll and employee benefits, as well as worker’s comp, government compliance, tax liability, and other risk management issues. The role of a PEO can span the entire employment lifespan if you choose to take advantage of all of the services a PEO offers, including:

  • Recruitment, such as background screening, reference checks, interviewing, and discounted drug testing services
  • Hiring assistance and documentation, such as applications, new hire information, I-9 employee verification, personnel files, and benefit enrollment. Additionally, they have greater time to search and a much greater talent pool from which to draw from during the hiring process.
  • Employee training, development, and performance management
  • Timekeeping and record keeping
  • Enhanced payroll services, including payroll tax processing
  • Expertise and knowledge of the latest regulations, assuring compliance with local, state, and federal laws (EEOC, OSHA, SUTA, etc.)
  • Providing more diverse and comprehensive benefit and health insurance choices based on a larger employee pool
  • Managing personnel issues and disciplinary action to minimize potential liability. Additionally, some PEOs offer Employment Practices Litigation Insurance (EPLI)
  • Risk management support
  • Handling unemployment claims and worker’s comp payments

Here is a complete list of services offered by PEOs.

What does a PEO Cost?

Given the wide array of options professional employer organizations offer, you would expect them to be expensive and not worth researching further. After all, how can a company offer expertise in human resources, payroll, tax management, benefit administration and HR compliance management without costing a fortune? Why not handle all of these duties in-house and save money (and the time to find a good PEO)?

Small business owners hire PEOs because they can obtain a higher level of expertise and solutions that might otherwise be unaffordable. An investment in a professional employer organization may ultimately lower costs. You do not have to hire someone new to research, buy, learn and maintain the latest technology relating to HR and compliance or divert a current employee’s skills and attention towards monitoring the latest health care regulation changes. The co-employment relationship allows each side to focus on what they have expertise in; you handle the day-to-day operations and product development while they handle the HR and administrative responsibilities. Additionally, services are scaled to match the individual needs of the company, so costs are predictable and budgets can be managed more effectively.

Small business owners never have to worry about falling behind on tax reporting or payments if they outsource tax responsibilities to their PEO. Because of the co-employment relationship, taxes are filed in a bundle under the PEO's Federal Employer Identification Number (FEIN), relieving business owners from all of the tax liabilities.

The employees of your small business are part of a larger group since a PEO has several clients, which may result in lower tax rates for you. By conglomerating their individual clients, PEOs obtain significant leverage and cost savings when purchasing health insurance. They can then offer a range of options to their clients which in turn are provided to the clients’ employees. This allows for greater health insurance options, reduced workers’ compensation premiums, and more competitive benefits packages. Plus, the associated hassles of paperwork are also eliminated as this work is outsourced to the PEO firms.

Granted, PEO companies can certainly relieve some financial stress from your small business, but there are numerous other benefits of hiring a PEO that are more difficult to quantify. For many small business owners, studying tax regulation and compliance can prove to be extremely tedious; additionally, tracking changes in offered benefits and ensuring that employees understand company guidelines is important but not the best use of time. Spending time developing relations with clients or creating new products and services is what you want to be doing. Thus, the relief from not having to handle HR tasks or from sharing liability with a company that has more financial muscle and regulatory expertise may be an invaluable advantage to hiring a PEO.

What about a PEO Broker?

If you have made the decision to hire an employee leasing company or to research them more, you will want to know the next step. Even though PEOs offer many services, perhaps you are not interested in outsourcing HR completely. What do you do now? Fortunately, there are several companies that offer the opportunity to co-employ, but it is important to do your research to find one that best meets your needs. You have a couple of options to accomplish this.

First, you can hire a PEO broker. PEO brokers can save time and money, and eliminate frustration. They allow small business owners to communicate the needs of their businesses without having to determine proposals, options, and strategies (since the broker does that), all while minimizing employee-related costs.

While all of this is true, one must keep in mind that a broker is being paid commission by the PEO on leads they provide and deals they cut; therefore, they may be selling a package that has everything an employer needs from a certain national PEO but at a higher amount than what could be paid for the same services provided by a different PEO. This is something that every small business owner needs to be weary of when considering a PEO broker. Additionally, employers need to remember that while PEO brokers are more time-efficient compared to searching for a PEO with no help, using a broker still requires some time to discuss, propose, negotiate, communicate, contemplate, list, decide – a lot of time that a small business owner does not have.

An alternative is to use our PEO Services Matching Tool or Quick Compare Tool. By answering a series of questions, we filter through top professional employer organizations to find the ones that best match your needs. Whatever route you choose, it is important to know what you want so remember to consider these questions:

  • What kind of benefits do you want to offer?
  • Do you need help handling workers’ compensation claims?
  • Is payroll something you want to outsource to the PEO?

Taking the time to consider your options now will ultimately help your company grow. Best of luck in your search!