How Start-ups benefit from using a PEO
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New business owners can benefit from partnering with a startup PEO.
Startup companies and their owners have all the exact requirements that existing and growing companies do.
In fact, their need for human resources help might be even greater than that of other companies since they have to spend so much time recruiting the right people and don’t want to worry about accidentally breaking the rules and regulations. Compliance infractions can kill a startup before it can even begin operating.
Using a PEO as a human resources partner is one of the smartest investments a startup can make in its long-term team development. Doing so not only invests in compliance that can save hefty regulatory fines but also develops the right company structure designed to build a positive culture. This positions a new company for success and growth.
Business Human Resources Needs
Every business starts with an idea that requires people to execute and deliver results. Whether a startup is fully funded or working on a bootstrap budget, developing the right company organizational chart allows leaders to see the people priorities a business has. While one or two people may fill all the jobs initially, as revenues grow and demands on time increase, focusing efforts on key hiring is a top priority.
A PEO exists exclusively to support the development of teams as they grow within the organizational structure set in place to properly onboard any new recruit. It will also help facilitate payments to independent contractors if the small business is not ready to bring on a full team of employees.
Payroll Processing and Taxes
Small business owners often get paid from company profits and don’t have employee benefits.
As employees are hired, they must decide whether to hire someone in-house to process payroll, learn to do it themselves, or outsource.
Because of the extreme liability, employers can feel overly burdened to do it right.
Hiring a general human resources person costs at least $50,000 annually; outsourcing is usually cost-effective and safe.
For a moderate cost (per employee per paycheck), the small business owner only needs to be concerned with adequately maintaining scheduled hours and funding the payroll account properly. HR outsourcing services are the perfect solution to take on the rest of payroll processing. If the startup anticipates needing more than payroll services, consulting with a PEO is the first step to creating a human resources strategy that doesn’t require five HR outsourced vendors and unnecessary costs.
Workers’ Compensation Insurance
As a business owner, you understand what economies of scale can do for your operations.
Buying more gets discounts on supplies, batch production makes labor efficient, and distribution gets easier with more locations to sell. From an administrative standpoint, a startup can accomplish the same thing for workers’ compensation insurance through a PEO provider who serves as the employer of record with employee leasing back to the client company.
The Professional Employer Organization (PEO) has many company clients. This means they can pool employees together in the same work class and reduce the overall costs to any one particular client. It’s an efficient way for a new business to get the coverage required by law without overpaying.
Workers’ compensation insurance is calculated based on company experience, payroll, and job classification. While a startup may not have a negative experience by way of claims, it doesn’t have a positive history either. Utilizing the expertise of the size of the PEO’s employee pool helps reduce costs.
Most PEOs can also accommodate a pay-as-you-go structure, keeping costs reflective of the actual employee pool a business utilizes.
Health Insurance
It wasn’t long ago that many startup business owners on a bootstrap budget elected not to pay expensive health insurance premiums early in the company’s life.
Many have taken this calculated risk while building company revenues.
But, for startup owners with families, this isn’t always feasible and the Affordable Care Act (ACA) also set the law prohibiting it.
Partnering with a Professional Employer Organization (PEO) allows a startup to obtain health insurance for owners, partners, and any employees hired for less than it would cost to get coverage alone. This is another way that the PEO uses economies of scale to benefit its company clients.
By increasing the number of employees, the risk is spread across a large number, and prices drop per employee.
Providing health insurance does more than protect the health of owners and partners; it allows the startup to offer health benefits to new prospects.
Doing this elevates the company profile to prospects who feel the company is well funded and striving to build a strong corporate team.
Retirement and Other Employee Benefits Packages
Even successful businesses find offering retirement packages and other employee benefits such as disability insurance, life insurance, and even commuter benefits cost-prohibitive. From the employees’ perspective, having the opportunity to fund their extra benefits for less than what it would cost is a significant benefit.
Professional Employer Organizations (PEOs) can negotiate with third-party providers to offer voluntary payroll deductions for various benefits.
In many cases, this doesn’t even need to be a cost an employer absorbs beyond the monthly fees already being spent on PEO services.
PEOs offer a vast selection of additional insurance, such as pet insurance, disability, life insurance, legal aid, etc.
Self-Employed Insurance Needs
Many startups begin with one person at their kitchen table using independent contractors, favors and family support to get things moving. Even this solopreneur has a need for insurance. Imagine one injury that leads to downtime in the business. This not only cuts off revenues but increases medical costs to the household. In many cases, one uninsured event can financially destroy a young company.
The solution is to find insurance to protect the risk without breaking the bank. A PEO is able to help a startup fill insurance gaps as needed. This means that the startup owners and partners can get health and disability insurance from day one. Workers’ compensation gets added as needed. In fact, the owners can elect to have themselves included in workers’ compensation that may help facilitate closing larger contracts.
For example, a general contractor might need to show a workers’ compensation certificate of insurance to a major project developer. By working with the PEO, the startup has quick access to workers’ compensation without confusing applications and long underwriting procedures. The speed of implementation is a cornerstone of successful entrepreneurs and the PEO helps facilitate moving things along quickly.
On-boarding Employees
It doesn’t take long before a startup begins hiring employees.
The on-boarding process for new employees requires collecting the right personal and financial data from employees and adequately setting them up on payroll and benefits services. The Professional Employer Organization (PEO) takes this off the hands of the startup partners, getting every new employee established with the proper administrative account access credentials.
An even greater benefit is that the PEO ensures compliance with state and federal regulations at every step of the process.
Going National with Talent Searches
More employers are hiring remote workers. A national PEO makes looking for the best talent outside the immediate area very attractive because it has insurance and access to benefits across state lines. Under traditional employer-employee services, the small business owner would need to have insurance that complies with the state of residence for an employee.
That means that a startup in Chicago hiring a remote team member in California would have to comply with federal, Illinois, and California laws.
The risk of making a mistake and being liable under California law might have previously kept a startup from hiring that individual.
With a PEO partner, the startup doesn’t need to worry about the compliance issue since the PEO has that liability taken care of.
The startup only needs to worry about finding the best talent to fulfill the company’s growing need while the PEO takes care of all on-boarding and compliance.
Independent Contractor Management
Startups maximize budget costs by outsourcing as much work as possible. In fact, modern business models of major corporations include outsourcing more work. The gig economy, as it is referred to, allows companies to get the talent they need while skilled employees control how they deliver the goods, usually from home offices. While independent contractors don’t get on-boarded the way a W2 employee does, companies still need to remain compliant.
The IRS has very stringent rules governing what constitutes an employee versus an independent contractor and penalizes businesses for failing to pay federal employment taxes. Criminal prosecution and jail time have been sought for egregious acts to willingly not pay the proper payroll taxes.
The PEO becomes an administrator for independent contractors making sure that businesses remain compliant with the rules and that independent contractors are receiving the proper checks and notices for taxes. While startup partners must still take the time to coordinate the contracts and assigned tasks for independent contractors, they no longer need to be knee-deep in issuing payments.
Risk Management
Every startup has a level of risk involved. There is no guarantee that any new business will succeed and often the odds are against new businesses. The Small Business Administration (SBA) claims that 30 percent of new businesses fail in the first two years, with 50 percent closing in the first five and 66 percent within the first 10 years in business. These numbers are daunting for new business owners in any industry.
To set a new business up for success requires proper capitalization, a sound business plan and risk management. Companies that work with PEOs have a track record for success with 50 percent fewer going out of business compared to those not working with a PEO.
How can a human resources arm lead to business industry success?
The numbers don’t lie, according to the statistics from NAPEO:
Businesses working with a PEO grow seven to nine percent faster
Employee turnover is 10 to 14 percent lower for PEO company clients
Business closure is 50 percent less likely
The value of the PEO isn’t founded in rocket science. It is the reason major corporations with exceptional corporate cultures dominate the market: they have great people and invest in them.
Investing in People with the PEO Model
With all the human resources services offered by a PEO, it is easy to see why a company of any size in any industry will have a better chance of attracting and keeping talented employees. Human resources is much more than file maintenance and employee on-boarding for benefits administration.
It is a critical component that every great company spends time and money on building their people up to be better.
Investing in your own leadership and the growth of your team will drive productivity, improve overall employee morale,
and help a startup get buy-in from employees for a new visionary approach.
Building Morale Among Employees
The PEO partnership opens up doors for a small startup to build in the infrastructure for employee development and growth. Training opportunities are available along with the many other compliance training services that the PEO already offers. At the request of the client company, the PEO can conduct surveys, personality assessments and mentor relationship. This gives employees the ability to see a road map for success not just for the startup but also for their own future success.
When your employees believe you are capable of delivering the promises of the company and see a way for them to grow and succeed at their own goals and dreams, work improves. Employees believe they matter and are more conscientious in how they work and the goods they deliver.
Consider a new software company that hires a coder to build the platform for a new program. The idea feels like a revolutionary concept that could be the next Facebook. It is all very exciting and the coder along with other employees feel company leadership can make it happen. If the coder is identified as a strong team leader, a career/promotion path is outlined that aligns not just with what the company needs but also with the coder’s own personal goals for growth and success.
By investing in the employee, the company has a loyal team member who wants to excel at his job because he wants to move up the ladder as quickly as possible.
Giving Up Company Control
One of the criticisms often heard by those who don’t want to adopt the PEO partnership model is that you are giving up company control. You don’t retain control over employees, and you must consult with another party every time you want to make an employment adjustment, meaning you can’t just hire and fire without following protocol.
This is a short-sighted approach to a key partnership for many small and mid-sized business owners. The small business owner has the final say as to who they want to hire and fire and when. However, the PEO only remains the employer of record for compliance purposes. By following the extra protocol steps, the small business owner ensures he isn’t making a hasty decision that could lead to any number of adverse actions, such as a lawsuit, fines, or criminal prosecution. Control remains with business leaders.
Defining the Return on Investment
Every business should consider investing in a PEO partnership and the return on that investment. Don’t just compare the cost of HR outsourcing payroll, which can be as low as $15 per employee per paycheck. Consider payroll processing as well as the additional savings benefits.
While a startup business owner will still need to pay his pro-rata portion of workers’ compensation insurance and health insurance premiums, the overall savings add up due to the economies of scale. Pricing for the PEO will depend on the overall selection of services bundled together.
Run the Numbers
When considering the costs associated with hiring a Professional Employer Organization (PEO), it is essential to understand that these costs can vary depending on the specific PEO and the range of services required. Typically, PEOs employ one of two pricing models: a flat fee per employee or a percentage of the total payroll. To put these costs into perspective, let's compare them to the average expense of hiring a human resources generalist to handle internal HR needs.
On average, a human resources generalist costs around $51,593 annually. However, for small business owners with a payroll of approximately $1 million, the costs of outsourcing comprehensive HR services to a PEO can range from $20,000 to $40,000 per year. It is important to note that PEOs often charge a monthly fee that covers a wide range of services beyond basic HR functions.
These additional services may include payroll processing, benefits administration, risk management, and compliance assistance. When all these services are factored into the monthly fee, most companies end up paying around two to four percent of their salary costs. By outsourcing HR services to a PEO, businesses can benefit from cost savings and access to expertise in various HR functions.
The specific costs associated with hiring a PEO will depend on factors such as the size of the company and the level of services required. It is advisable for businesses to carefully evaluate their needs and compare different PEOs to find the most cost-effective solution for their specific requirements.
Developing Corporate Culture in Growth
As the company grows and the PEO manages the HR tasks, the employer can decide to invest in better ways to build team spirit and cooperativity. The startup can invest through the PEO to hold different training, team-building exercises, and leadership development. When a small business truly understands the value of a partnership and not a provider of services with a PEO, they can develop the programs hand-in-hand and work specifically for the company.
Getting Started Right with A PEO
There are both regional and national PEO providers. Finding a broker who can help place your business with the right one is the first step to ensuring the partnership will work for everyone. The PEO broker works for you, the business owner. Explain what you need immediately and lay out your growth plan so he can find the PEO provider to help you grow properly.
There are many great large and small PEO providers. Whether you go with Insperity, TriNet, or Justworks, being comfortable with the pricing, growth strategies, and online platforms is important. Don’t decide just on the price. You wouldn’t do that if you were buying critical business equipment needed for operations and you shouldn’t do it when investing in your biggest asset – your people.
How can a startup find the right PEO?
Finding the perfect Professional Employer Organization (PEO) for your startup involves a mix of practical steps and insights from those who've been in your shoes. Start by looking at how much the PEO's services will cost and weigh that against the potential benefits to your business. It’s all about getting the best bang for your buck.
Next, dive into the specifics of what each PEO offers. Does their service lineup match what your startup needs? Think about the essentials like payroll, employee benefits, and HR support—these are critical for smooth operations.
Experience in your industry can make a significant difference. A PEO that knows the ins and outs of your field can navigate industry-specific challenges and keep you compliant with regulations, saving you from potential headaches down the road.
Don’t skip on scoping out customer reviews and testimonials. What others say about their experiences can give you a clearer picture of what to expect and help you gauge the PEO’s credibility and quality of service.
And here’s a tip: lean on your network. Chat with other startup founders or small business owners who’ve worked with PEOs. Their experiences, whether good or bad, can offer valuable insights and help you make an informed choice.
By taking these steps—assessing costs and benefits, checking service compatibility, verifying industry expertise, reading reviews, and networking with peers—you’ll be better positioned to choose a PEO that not only fits your startup’s current needs but also supports its growth.
How do I choose the right PEO for my startup?
Choosing the right PEO (Professional Employer Organization) for your startup may seem overwhelming, but there are several essential factors to consider to ensure you make the best decision. Here are some steps to help guide you towards selecting the ideal PEO for your business:
Assess industry expertise: It is crucial to find a PEO that has experience and expertise in your specific industry. Different industries have unique needs when it comes to HR management, payroll, benefits administration, and compliance. A PEO well-versed in your sector will have knowledge of industry regulations and understand the specific challenges you may face.
Determine service requirements: Carefully evaluate the services your startup requires. Some common PEO offerings include HR administration, payroll and tax processing, employee benefits, risk management, and compliance support. Identify which services are essential for your business and ensure that the PEO you choose can cater to these needs effectively.
Consider scalability: As a startup, your business may experience rapid growth, so it is essential to select a PEO that can scale alongside your company. The PEO should have the capacity to accommodate your expanding workforce, handle increased administrative tasks, and provide additional services as your needs evolve.
Evaluate cost-effectiveness: Cost is a significant consideration for any startup. While it is important to find a PEO that fits within your budget, focus on the value they provide rather than solely comparing prices. Look for competitive pricing structures and transparent fee schedules. Assess the ROI of their services based on the time and resources they can save your startup.
Prioritize Service: Good customer service is crucial in any business partnership. The PEO you choose should be responsive, accessible, and willing to address your concerns promptly. Assess their level of communication and support during the evaluation process to ensure they are committed to providing excellent customer service to their clients.
Research reputation and credibility: Look for reviews, testimonials, and case studies of the PEO you are considering. Assess their reputation within the industry and evaluate feedback from other businesses they have served. This research will help you gauge their reliability, professionalism, and track record in delivering quality services.
Request references and speak to current clients: Reach out to the PEO and ask for references from their existing clients. Speaking directly with these clients will give you insight into their experiences, challenges, and overall satisfaction with the PEO's services.
Engage in comparison shopping: It is advisable to research multiple PEO providers to find the best fit for your startup. Request proposals or quotes from several companies, comparing their offerings, contractual terms, and costs. This will provide you with a broader perspective and help you make an informed decision.
Remember, choosing the right PEO is an essential decision that can significantly impact your startup's HR and administrative operations. Take your time, consider these factors carefully, and don't hesitate to ask questions to ensure you find a PEO that aligns with your business goals and needs.
Ready to find the perfect PEO?
We specialize in connecting startups with the ideal Professional Employer Organization (PEO) tailored to their unique needs. With deep expertise and extensive knowledge of the PEO landscape, we simplify the process of finding the right PEO partner.
Our team has successfully assisted over 3,000 clients, guiding them through the maze of available options to find a PEO that perfectly aligns with their business objectives. We make the selection process as straightforward as filling out a form.
By entrusting us with your PEO needs, you benefit from our proven track record and commitment to making your setup with a PEO seamless and effective, allowing you to focus on growing your business with the confidence that your human resources, payroll, and compliance are in expert hands.