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What Is A PEO? What to Know About Professional Employer Organizations

by Justin Felton on Apr 14, 2022 11:49:33 AM

If you’re a business owner, you know it can be challenging to stay on top of all the workforce management issues you need to juggle like payroll, HR, and benefits. That’s especially true if you’re handling all these tasks yourself or have someone else on your team balancing this role with other responsibilities. As you strive to grow your business, you may be wondering what options are out there that can help alleviate your burden, so you can focus on more strategic activities. One possibility to consider is a PEO. But just what is a PEO?

Many businesses consider a PEO to help them with their workforce management, but there are a variety of options. One approach is not necessarily better than the other; the key is to understand what you’re looking for in a business partner to decide which is the best fit for your organization. To help you understand if a PEO is a good choice for you, here we’ll discuss:

  • What is a PEO
  • How does a PEO work
  • What are the benefits of a PEO
  • What are the disadvantages of a PEO
  • What does a PEO cost

After reading this, you’ll know if a PEO could be a good option to help your company manage employees more effectively and efficiently, so you can focus on more strategic activities. 

What is a PEO?

A PEO is a professional employer organization. It’s also known as an employee leasing model, and that definition is pretty descriptive since a PEO will hire your employees and you will lease them back. In this way, you’re technically both co-employers; the PEO will act largely as the administrative employer, and you will be onsite as the worksite employer.

How does a PEO work?

Each PEO operates slightly differently but, generally speaking, the PEO offers full-service outsourcing and will be responsible for a wide range of administrative workforce management functions, such as PEO payroll services, HR, benefits and compliance. Specifically, the PEO typically handles:

  • Hiring and terminating employees, although under your co-employment relationship with a PEO, you will maintain on-site responsibilities, such as assigning tasks and providing your employees the tools and places to work
  • PEO payroll services, including withholding and remitting taxes to local, state, and federal tax agencies since they’re the employer of record for tax purposes
  • Administering employee benefits, including health insurance, retirement benefits, and other perks
  • Maintaining workers’ compensation coverage and handling claims administration
  • Ensuring compliance with federal and state labor and employment laws to lower your risk; keep in mind that you may need to comply with rules that apply to larger companies when you’re part of a PEO that you may have been exempt from before as a small employer, such as the ADA exemption, which covers only employers with less than 15 employees

You, on the other hand, will maintain control of day-to-day operations and decisions like marketing and customer service. Your client service agreement will outline exactly the roles and responsibilities of the PEO, so be sure to carefully review your contract to understand exactly how your specific arrangement will work.

What are the benefits of a PEO?

The full-service approach of a PEO offers a number of benefits to small and mid-size companies, including:

  1. Reduced administrative time: Since the PEO will handle a lot of administrative tasks associated with managing your workforce, you’ll be free to concentrate on other core business functions to help generate revenue and grow your company.
  2. Health insurance cost savings: Since you’ll be part of a larger group of employers, you gain more health insurance purchasing power with a PEO. So, for example, you may see savings of 20% to 30% on your monthly premium compared to what you’re currently paying in small group rates with PEO insurance.
  3. Enhanced employee satisfaction: Since a PEO gives you access to more competitive benefits, your offerings can help boost morale – and recruitment and retention.
  4. Lower risk: By working with a PEO who has expertise in applicable state and federal tax and employment laws and regulations, they’ll have the knowledge to help you stay compliant with ever-changing rules and meet required deadlines.

What are the disadvantages of a PEO?

While there are many benefits to using a PEO, there may also be some potential drawbacks depending on the unique nature of your business. These may include:

  • Limited choice: Since the PEO is the employer of record, they control the benefit carriers and plans you offer your employees. So if you have a preference for your PEO insurance offerings, you may not be able to pick and choose.
  • Lack of control: In reality, the PEO has the right to hire and fire your employees. While hirings are far more common than firings, putting that decision-making authority into someone else’s hands may be something you want to consider, especially if you’re used to running your business in a hands-on way.
  • Impact on culture: As we mentioned earlier, when you sign on with a PEO, they’ll hire your employees and you’ll lease them back. While the PEO will handle the new hire documentation and onboarding of your employees, the arrangement may cause some confusion for your employees – especially because employees now will get paychecks from the PEO instead of you. In addition, because the PEO is responsible for handling a lot of HR responsibilities that were previously managed in-house, it could have a negative influence on your culture, especially if you have a tight-knit company.

What does a PEO cost?

There are two different ways that a PEO may charge you: a flat fee per employee per year or a fee calculated as a percentage of your payroll. Most PEOs take the latter approach, so what you’ll pay will depend on the number of employees you have. While each PEO may charge differently, you can expect to pay somewhere around 3% to 15% of wages to the PEO as an administrative cost.

In addition, depending on your needs, you may end up paying for services with a PEO that you don’t use.

How to Decide if a PEO is Right for Your Business

Now that you know what a PEO is, you probably have a better understanding of the approach and whether it may be a good fit for your company. If you’re still debating the best outsourced partner for payroll and other workforce management needs, a side-by-side comparison of a PEO versus payroll provider may help you decide.

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