What is a PEO?
A Professional Employer Organization (PEO) is a company that serves as a human resources partner for businesses that want to outsource the tasks and reduce costs. To legally administer many of the roles, the PEO becomes a joint-employer through employee leasing, meaning that they are the employer of record. This gives the PEO both the ability to manage employees and shared liability.
Many small business owners aren’t experts in payroll taxes, unemployment or workers’ compensation coverage, to name a few. Without professional help, the business risks falling out of compliance and getting penalized in civil or criminal actions. The PEO is there to prevent that by shifting employee liability under its own employer identification number.
What is a PEO
A PEO is a company that serves other businesses as a professional human resources company. Unlike a recruiting agency or temporary agency, the professional employer organization handles all tasks that an internal human resources department would typically do.
In order to legally complete some of its tasks, such as creating larger groups for lower health insurance costs, the PEO must partner with companies seeking to utilize its services.
As a partner, the PEO handles all aspects of human resources under its own federal employer identification number (FEIN) while the business partner conducts business operations. The PEO employee leases people back to the business. While there are many benefits to the PEO-business partnership, every business owner needs to weigh the options before jumping in.
What PEOs Do for Business Owner
Even though PEO services have been around since the 1960s, they became popular after the passing of The Affordable Care Act that demanded business owners provide health insurance to full-time employees if they had more than 50 people on staff. The added costs widened the open door for PEO services to help mitigate business costs and take a ton of administrative tasks off of the plate of small business owners.
The services of the PEO are generally bundled, meaning the business owner can’t say he just wants payroll services. The PEO and business owner both benefit from better pricing with this bundling. Some companies do outsource human resources tasks, such as payroll, a la carte. Some PEO services may offer this, but usually, a business owner is financially better off using the complete PEO package.
Human Resources and Recruiting
As a partner of the business, the PEO helps recruit talent for the company. With specifications and job descriptions set in place by the business owner, the PEO is given the green light to seek out talent.
According to NAPEO, a small business that uses a PEO grows up to nine percent faster and has a 10 to 14 percent lower turnover rate.
They are also 50 percent less likely to go out of business. This last statistic is partly due to the quality recruiting the PEO offers, but is also, in part, due to better benefits and fewer potential liabilities. A company not meeting something as standard as workers’ compensation requirements could face severe financial and legal penalties leading to financial hardship or insolvency.
Payroll Administration Services
One of the critical tasks that a professional employer organization does is to manage payroll. Not only is it legally necessary to pay employees timely and correctly, filing the correct withholdings and paying the right Federal, but state and county entities must also be done correctly and promptly. The employer shifts funds to the PEO payroll account just before paydays and provides accurate time cards.
The PEO then processes payroll, pays employee and employer taxes and handles any issues or questions employees may have. The PEO will also file quarterly payroll tax returns, so the company remains in compliance.
Unemployment is paid by employers as a percentage of payroll known as State Unemployment Tax Assessment (SUTA). Administering unemployment can be time-consuming and frustrating for business owners. When a former employee files for unemployment, a series of claims forms must be completed, and responses to notices must be filed. This is especially true if the claim is being disputed. These tasks also shift to the PEO.
In addition to administering claims, the PEO will monitor unemployment rates, making sure the business owner is not being overcharged for unemployment insurance. The professional employer organization becomes responsible for looking out for the business owner’s best interest.
Employee Benefits Program
One of the reasons small business owners don’t offer employee benefits plans is the cost. Benefits include health insurance, disability insurance, life insurance and retirement plans such as 401(k) programs.
Health insurance is one of the reasons more PEOs are offering more services to small and mid-sized business owners. As the ACA took effect, many business owners feared having to cut jobs or close their doors because they could not afford the high rates of health insurance for employees. By pooling many companies together within a large employee group, the PEO can generate more favorable rates for business owners.
This is also true with retirement plans and other benefits. By offering these programs with lower administrative costs, business owners can find better talent and keep that talent longer. It is no secret that good employees feel better appreciated, are more loyal and remain more productive when they have excellent employee benefits packages.
Workers’ Compensation Insurance
Business owners with employees know they need to have Workers’ Compensation insurance. Texas is the only state in the union that doesn’t legally demand that employers maintain workers’ compensation insurance. The PEO can streamline not just the insurance process for a small business, but also monitors the rating of employees and loss history to keep premium costs down. A PEO also allows for their client’s to have lower rates, and your Year-End Audits go away forever.
Drug Testing Programs
Many companies are doing drug testing before making official offers to new candidates. This process has many privacy issues that can create a minefield for owners. The PEO removes the risk from the small business owner who can focus on getting the right candidates into the process. The PEO will then handle the documentation and order the screening, ensuring there is no violation in employment standards and rules.
Maintaining Employee Documentation
Employee files help every small business owner keep the right documentation for every employee. Files should start with the hiring paperwork that includes resumes, interview questions, core competencies score and an offer letter that includes the job description. It should also include copies of performance evaluations, disciplinary actions, complaints, and commendations.
Personnel files are private and must be held in confidence, so employees have confidence in the business operation respecting their personal information. If the employee files a complaint or sues the small business, the employee’s records are the first source of whether an employer followed the rules.
How the Professional Employer Organization Works
Before signing up with a PEO, understand how the partnership works. The PEO has the FEIN of record. This means that the IRS sees the business’ employees as the PEO’s employees for tax purposes. Health insurance companies see the PEO as the employer for your insurance premiums and pool of insureds. Workers’ compensation insurance companies seek the PEO as the primary employer for employees.
The PEO has all of this responsibility and control, while the small business funds the entire operation. Before tax payments or payroll process, the PEO requires that the small business fund the account. This allows seamless processing. The cash goes from the business operating account into a designated account that the PEO maintains for the business.
Benefits of a PEO
When a small or mid-sized business is considering partnering with a PEO, there are a couple of critical considerations involved: cost, fit and time. If the PEO can administer the bundle of products and services to save the small business money, there is little reason to piece it together with various outsourced providers. The other reason is to free up the time of small business leaders to focus on growth and marketing rather than administrative tasks.
Also, most small business owners and managers choose to work with a PEO broker, as these professionals know the various PEO providers and can tailor the right PEO for each business.
Most small business owners don’t want to think about workers’ compensation insurance but need to trust that it is taken care of properly. When the work isn’t just outsourced, but liability is transferred to a business partner, the small business owner has more confidence that the PEO will do the right thing and keep everyone in compliance on all issues, because this is also in the PEO’s best interest.
Business owners also enjoy the ability to attract and retain talent because they are better suited to offer competitive benefits packages for much less than if they did it alone. Power is in large numbers when it comes to benefits. The PEO provides the volume with employees from many companies under one human resources roof.
Disadvantages of a PEO
As great as the PEO concept is, there are some disadvantages for the small business owner to consider. For the partnership to work, the small business is handing over control of its people and human resource processes. The PEO will have its way of doing things, and the small business owner will have little input to making changes or altering the program.
Because the PEO is doing your recruiting and has many points of contact with employees, they influence the company culture is always compliant. The PEO reflects the business to its talent prospects and employees. Choosing the wrong PEO can create a conflict in the overall culture that business leaders want to create.
There are also security concerns when it comes to employee records and company systems. This could lead to employee resistance when it comes to bringing on a new PEO. Small business leaders must conduct comprehensive due diligence since the PEO will be collecting funds to pay employees and has all personal data for the entire workforce of the company.
Again, this is why the majority of owners and managers chose to work with a PEO broker.
Choosing A PEO
When looking for a professional employer organization, take the time to assess what your small business needs. It can all sound very appealing to have someone come in and take so many administrative tasks off your plate. At the same time, if you don’t require everything, bundling everything with a PEO will not be the best option.
There are many popular PEO services on the market including:
According to Fit Small Business, Justworks is the best overall PEO provider. However, PEO providers often have niche industries they excel in, and this should be considered.
Companies like ADP and Paychex are known for outsourced payroll services but have expanded considerably to help businesses get the solutions they need. There are also many smaller, regional programs that might specialize in state human resources laws and compliance. A multi-state company wouldn’t benefit from a state-specific PEO, while a small company in a state with a high-regulatory environment could.
The PEO Broker
A broker is there to work on your behalf. They will look at your company’s needs and then find the right PEO with the right solutions for you. The PEO broker is not only there to analyze and determine your needs, but also has the knowledge to understand the various proposals coming your way entirely. The goal is to prevent you from merely price shopping, thinking each proposal is the same and then not getting a vital service covered or overpaying for your PEO benefits.
Because the PEO broker works for the small business, he has a vested interest in finding the right solution. Great PEO brokers will do most of the work for you and then provide you with the top two or three solutions. That’s their job; if you have a PEO broker that just transfers all proposals to you, this is probably a broker that didn’t take the time to understand your business needs fully and isn’t prepared to help you make the right decision.
Final Thoughts on PEOs
The PEO is there to help a business owner with compliance in many areas: labor law, insurance, workers’ compensation, employment taxes, and unemployment administration. By utilizing a PEO, a small business can more efficiently grow, using economies of scale for human resources and benefits.
Saving costs on administrative and actual costs for human resource needs allow a business to focus energy and budget items to marketing, growth, and development. Business owners can confidently hire, knowing a third-party properly vetted candidates, keeping everyone in compliance.