What’s a Professional Employer Organization?

If you think that the PEO definition stops at a payroll services provider, you are missing most of the fundamental services that a Professional Employer Organization (PEO) offers.

In fact, using a PEO partner properly helps small businesses grow faster with better retention. If you are thinking about taking your business to the next level as a small business owner, consider how a PEO can help you.

Companies that grow too fast without the proper planning and resources find themselves growing themselves into problems. Problems could be with compliance, being inundated with on-boarding or just not able to properly manage the growth effectively.

A PEO is a third-party provider that works as a partner to help the business grow with the right human resources and infrastructure in place. This eliminates many of the common problems with growing and scaling a business.

What a PEO Is

A PEO is a human resources services provider, not just a payroll or a temporary staffing company. Professional Employer Organizations (PEOs) is a business that serves as an employee of record for client companies’ employees. Client companies then lease back their employees. Leasing employees back to the company allows the PEO to price services based on economies of scale.

Why not just hire direct?

It would seem easier to hire and control your own employment process. However, costs and legal constraints are a significant reason business owners either elect to not offer employee benefits or seek the aid of a PEO partner.

Many small and mid-sized business owners either can’t afford to administer or don’t want the hassle of dealing with the complex set of rules and regulations involved in managing employees.

While payroll providers are a common cost-effective human resources outsourcing strategy, the PEO structure takes payroll and all other HR tasks off the hands of business owners. From payroll processing to workers’ compensation compliance, the PEO serves as the employer of record. By doing this, they also take the primary liability away from the client company.

Federal Employment Taxes Liability for Errors

When you own a business, there is no excuse for naivety or ignorance. Even if you don’t know what the rules are, you are responsible for following them.

Should an employer delegate tasks such as paying payroll taxes, to a subordinate, when the employer is still responsible for making sure it is done correctly?  

Failure to properly pay federal employment taxes is punishable by paying the taxes, paying up to $10,000 in fines or five years in prison for a felony charge. This debt is not dischargeable by bankruptcy proceedings either.

When working with a PEO, the client company’s liability is reduced because the PEO provider becomes the employer of record. A business owner will still want to keep an eye on what is being paid in the event that an error does occur but should be able to trust the PEO services company he partners with.

How Employee Leasing Works

Because the PEO is the employer of record, the business needs to lease the employees back from the PEO.

Employee leasing isn’t as complicated as it may seem. The client company (aka small business owner) creates a job description for a position that needs to be filled. This is then posted through normal business recruitment channels. If the client company is new to the PEO, it will want to confirm the benefits options and pricing per new employee.

The client company goes through the recruitment process as it would if it were going to be the employer of record. The offer is made to the new recruit and upon acceptance the PEO onboard the new hire with all payroll and benefits details. This is usually done via a self-service online portal and designated customer service point of contact to answer specific questions.

From the perspective of the new employee, the portal serves as the backend resource to access all his human resources information. He is able to change bank information, view paychecks, update life insurance beneficiaries, and access documents if he needs proof of employment for things like a home loan. The PEO portal gives employees immediate access to all relevant employment information reducing the need to impose on managers and company owners.

Benefits of PEOs

There are many benefits small and mid-sized businesses get when working with a Professional Employer Organization. One of the biggest benefits is reducing the headache of dealing with the compliance heavy details of payroll, taxes and record-keeping. Small business owners can eliminate the pain associated with this administrative task and focus on building their business through revenue generating tasks.

Using a PEO is also cost-effective for employee benefits such as health insurance and retirement benefits. Because the PEO has many clients, it has power in numbers. When it comes to health insurance, the power of numbers usually results in spreading risk across a bigger pool that reduces the costs to specific individuals. That means money savings to small business owners.

A small business owner can also improve his recruiting efforts by advertising employment opportunities that include benefits. Talented employees expect more than just a good wage; they expect a compensation package that includes health, life and retirement benefits. Benefits packages allow a small business owner to compete with major corporations offering huge employee fringe benefits. The great thing is that the small business owner doesn’t need to bring the cost or liability in-house to accomplish this.

Disadvantages of PEOs

With all the advantages of PEOs, it is important to understand that there are a few downsides to the structure. Still, most small business owners see the value of a PEO relationship in spite of the disadvantages because the benefits are much stronger.

The idea of loss of control is one of the biggest negatives that small business owners express as a negative component of the PEO relationship. They are involved in the hiring and firing process of all employees and may be involved in any employee dispute resolutions. This means the small business owner might not have as much control to expedite things when desired. Keep in mind that this usually ends up as being a protection of the client company, so it is worth any aggravation.

By partnering with a PEO a small business owner should still expect to have certain HR tasks remain on his plate. He must manage employees and things such as scheduling, employee reviews and be certain to fund payroll accounts. Of course, the majority of the work is eliminated but every client company should be aware of his responsibilities in the PEO partnership.

PEOs Vs HR Outsourcing

A PEO and HR Outsourcing firm are often confused. Both provide human resources services for a small or mid-sized business. However, a PEO combines a whole HR management platform for clients for a set price while the HR outsourcing firm provides a la carte services. In other words, the PEO is all-inclusive while the HR outsourcing provider allows a small business owner to choose the services needed.

For example, the PEO will offer payroll, workers’ compensation and benefits in one cost per employee. This price is set when signing up for the service. If the small business didn’t need a workers’ compensation policy or could get the policy elsewhere cheaper, they would still be paying the same price per any contracted PEO requirements. The HR outsourcing firm would allow a company to get the services needed and price it accordingly as needed.

The primary difference between a PEO and an HR outsourcing company is the former is a partner to client companies while the latter is a service provider.

Joining a PEO requires meeting specific credit and workers’ compensation claims history. PEOs need to think about the entire group of client companies to make sure everyone continues to get the best pricing. HR outsourcing companies are hired guns that provide payroll or other services on-demand.

Small and Mid-Sized Business Growth

Growing a business takes strategic planning. It involves considering budget needs, the return on investment of new employees and making sure the right talent is in place to execute the company’s vision.

Whether you are hiring your first employees or expanding your workforce by two to three times, working with a PEO will help you develop the right strategy for growth.

A PEO makes a small business seem like a bigger company with comprehensive benefits packages. The result is the ability to recruit and keep better talent without breaking the bank. NAPEO reports that companies that use a PEO grow faster than those that don’t. Additionally, they are less likely to have personnel turnover.

The most shocking statistic is companies using PEOs to assist with HR tasks are 50 percent less likely to go out of business!

Developing a loyal and compliant workforce helps a company build a positive corporate culture. When employees feel valued, fewer sick days are reported and productivity goes up. Employees seem happier at work and that translates to better customer service. These are all critical components to the long-term success of a growing company. The PEO provided services help keep the culture positive as new people are on boarded in a systematic way.

Reducing Regulatory Risk

No business can afford to accidentally make a mistake when it comes to regulatory compliance. Ignorance does not equal innocence and every small business owner must act to ensure that all employment laws are followed. Benefits administration is heavily regulated and comes with significant penalties if not strictly adhered with.

State Unemployment Taxes (SUTA Rate): Every business owner must comply with state unemployment tax laws and pay the required amount based on employee payroll. When employees are let go from service, the correct paperwork and notices must be completed and replied to in a timely fashion.

Federal Insurance Contributions Act (FICA Taxes): The correct amount of federal employment taxes must be withheld from each W2 employee’s paycheck based on wages and withholding. It is the responsibility of the employer to pay the correct amount of the business portion for Social Security and Medicare taxes. They must also properly allocate the right amount of employees’ portion when preparing paycheck and paying allotments to the IRS.

Health Insurance Requirements: The Affordable Care Act (ACA) changed how every business owner looks at health insurance as a benefit. For small to mid-sized businesses with 50 or more employees, health insurance is not mandated as a company benefit.

Privacy and Security Training: Protecting consumer data is more important than ever. Companies not in compliance with employee training and have breaches may have insurance claims denied and held liable for thousands, if not hundreds of thousands of dollars in damages.

To remain in compliance doesn’t take much but is required annually to meet requirements.It is the job of the PEO as the HR arm of the client company to know when regulations change and when new compliance issues affect a small business.

The regulatory environment is constantly changing at the federal, state and local level. A small business owner could easily get bogged down trying to keep up and accidentally violate laws. The PEO’s job is to stay on top of all regulations and notify the business of any new compliance changes and requirements.

Improving Recruiting Efforts and Hiring Decisions

Having a benefits package is a huge advantage when recruiting new talent. But, a PEO can do more than just help you set the program in place to attract top new employees it can also help in the screening process. More and more employers are using credit and background checks, pre-employment testing, personality evaluation, and drug screening when hiring new people.

A small business can prevent potential criminal or performance issues by doing these screenings ahead of time. A PEO can facilitate all required testing and make sure it follows all compliance standards. Things like drug screening must be held in confidential files otherwise a prospects privacy rights get violated and the employer is on the hook.

Pre-employment screening is more than just preventing potential adverse issues such as theft and drug use. Leadership and personality tests help identify the traits indicative of success for certain types of positions. This is extremely valuable for mid-level and senior level management of a company. By identifying these traits in the hiring process, a small business owner can make decisions not just on who to hire but also on how to train and develop individuals for optimal success.

Team Building and Development

After employees are hired and on-boarded, the PEO serves another great purpose if needed. This is in the training and development of employees. Rather than hire compliance training, the PEO is able to conduct mandatory compliance training for employees. Beyond this, the client company can also request additional diversity training, leadership workshops and sales camps.

Developing your team is the best way to invest in the future of your company.

When companies invest in their people, their people respond by doing a better job. It isn’t just that they become trained to do a better job but instead feel pride and loyalty in a company that understands personal long-term goals. People love to see a path for success and the PEO helps a small business set this path for employees as the company grows

Before Partnering with a PEO

Not everyone will meet the eligibility requirements to join a PEO. This is a partnership between two companies so both parties need to be confident that they are working with a reliable company. The PEO will want to look at several things before signing a new PEO client partner.

PEOs often run a credit check on a business to make sure it is financially viable. Since the PEO is the employer of record responsible for federal employment taxes and state unemployment taxes, it needs to be confident that a client company is financially sound and pays its bills on time. As you can see, this is a partnership and not a for-hire service with a one-sided benefit.

The PEO will also look at previous workers’ compensation insurance history including how long the company had workers’ compensation and any claims history it may have had. PEOs need to keep claims low for the benefit of all PEO company partners and won’t build a relationship with a business that has a reputation for employee injuries.

The PEO may also look at how employment policies have existed and how consistently they have been put into effect or enforced. Since the PEO is responsible for regulatory compliance, it wants to work with companies that understand the need to follow the rules.

Comparing PEO Providers

With so many PEO providers to choose from on the market, finding one that meets your needs can be overwhelming. Some PEOs are better for different business models. A PEO broker is a person who works with business owners to find the perfect fit. After all, the PEO becomes a business partner just like an investor or bank; you need to be comfortable with the relationship.

Here are some of the top PEO providers and who they service best:

• TriNet: Works great for micro businesses with a few employees. The service and contract requirements are flexible and negotiable as the company grows.

• Insperity: Able to reduce benefits costs for small businesses under 100 employees and offer risk management strategies.

• PaychexHR: Perfect for mid-sized businesses with an assigned account HR generalist provided to address specific company needs adding a personal touch to larger organizations.

• ADP Total Source: Dynamic PEO services with exceptional online support via phone, chat, and email and gives company leadership access to training and development.

• Justworks: Meets the needs of businesses with a diverse workforce comprised of employees and independent contractors across vast geographic regions.

Choosing a Big or Small PEO

The majority of the PEO market is controlled by five or six large national PEO providers, yet hundreds of good PEO providers exist across the country. The decision for a small business owner boils down to working with big companies with the grandest economies of scale or working with a smaller provider where you may get more personalized or regionally relevant service.

Many small local companies prefer to work with a regional PEO that understands the local market and employee needs. By understanding these components, the PEO can provide solutions that make sense to the business that might not be available, with a national PEO provider offering more generalized solutions.

Client Company Size Requirements

A PEO can work with any size company, but the sweet spot of client companies is small to mid-sized companies. The average NAPEO member client company consists of 19 employees. Yet many independent contractors and sole proprietors find value in PEO services for health insurance and personal benefits.

Because a PEO can tailor services to the business, it can work with various company structures. With that said, there are times where HR outsourcing makes more sense, even for businesses that might otherwise meet the PEO ideal client standard. This is why working with a PEO broker can assist in narrowing down options when it comes to all human resources solutions.

However, if you aren’t sure exactly what the best avenue is, your broker will assess your company's needs and find the solutions and the partner to serve them best.

PEO Brokers Help You Find the Best Solution

No two companies have the same needs when it comes to human resources. Getting help to navigate the best solutions prevents costly mistakes. PEO Brokers get paid by the service provider, not the company. Finding the right service match to keep clients happy is in our best interest.