PEO 101: A Beginner's Guide to Outsourcing HR
Updated: September 19th, 2023
Are you looking for help with recruitment, enhancing employee benefits, or expanding your business? A Professional Employer Organization (PEO) can be an invaluable asset. Discover all you need to know about them in this post, from the range of services they provide and associated costs to why you might need one.
Professional Employer Organization: What Is It?
A PEO, which stands for "Professional Employer Organization," is a company that helps other businesses manage their HR and employee-related responsibilities. When a business decides to partner with a PEO, they become co-employers. This partnership involves close collaboration with the business's team and management, focusing on delivering training, services, and technological solutions. This cooperative arrangement is typically formalized through a document known as the Client Service Agreement (CSA).
Once the PEO provider and the client company sign the CSA, they start sharing legal responsibilities for certain HR tasks. Usually, the PEO pays the employees' salaries at the worksite and handles all the tax-related tasks. This means they report, collect, and deposit the employment taxes with the local, state, and federal government authorities. Additionally, the PEO is responsible for providing the form W-2, which shows how much they paid to the employees under their own Employer Identification Number (EIN). The PEO's legal liability is the most important factor that differentiates this HR outsourcing model from others in the market.
Probably one of the most important distinctions to be made in the industry of HR outsourcing is the difference between PEO and employee leasing. Since they were historically one and the same, a lot of people still use the two names interchangeably. However, PEOs have evolved greatly since and now offer more services and carry more responsibilities than any other HR outsourcing model. One of the biggest differences between them lies in their employees. A PEO will help you find talented workers who will stay with your business after the contract with the PEO company is up, but an employee leasing company will only give you workers for a short time.
What’s the difference between PEO and PSP?
Unlike PEOs which offer an extensive list of HR outsourcing services, Payroll Service Providers (PSPs) handle only payroll processing, tax compliance, administrative needs, and paying your employees their salaries according to your set payment schedule.
What's the difference between a PEO and an HRO?
A PEO is an employer of record, which means they share some of the responsibility with the client company to optimize their HR services. However, a Human Resource Outsourcing (HRO) company works as a standard third-party provider where you purchase only the needed services. This means that if you sign a contract with an HRO company, they’ll handle some HR duties, like payroll and health insurance, but nothing else.
How Does PEO Work?
Larger companies may have the money to handle the time-consuming and difficult details of HR on their own, but small and medium-sized businesses (SMBs) may not, which is why a PEO can help them. Their services offer comprehensive HR outsourcing, including talent acquisition, onboarding, payroll, HR administration, risk management, and much more. With the help of a PEO, businesses can focus on company culture and core business operations rather than spending time on tedious HR tasks. They also allow businesses to reduce administrative costs associated with payroll and benefit processing. PEOs work with companies from all industries and specialties, including construction, transportation, and manufacturing. They also work with different professionals, including retailers, doctors, mechanics, and more.
When you hire a PEO to help you with these services, they’ll lease their experts to your business and take responsibility and liability for those services and operations. Even though your employees might be listed on the PEO's books, they are still your employees. This means your business will still be in charge of and have control over key tasks like product development and production, business operations, marketing, sales, and customer service. They ensure you comply with state and federal labor laws, provide safety programs, and offer employee training and development. They also provide access to retirement plans, health insurance, workers’ compensation coverage, unemployment insurance, and much more. Some larger PEOs even have the resources to offer a 401(k).
The features and services offered
Some of the most important features of working with a PEO include:
- Human resources: PEOs provide human resources consulting, management, and software platforms to help with the tasks involved. Their team of experts handles everything from recruitment to training and professional development on subjects such as harassment, health, and safety
- Payroll management: They can keep track of employees’ working hours, their attendance, and their salaries. This can include keeping workers’ compensation coverage up to date
- Healthcare benefits: They provide their client companies with benefits such as life and health insurance and much more. They help your employees enroll in these benefit plans and process their claims
- Retirement programs: They provide retirement plans such as 401k and oversee the benefits your employees get
- Compliance with legal requirements: They handle employment compliance with labor laws in different states, the Occupational Safety and Health Administration (OSHA) rules, and the Equal Employment Opportunity Commission (EEOC) laws. They will also share some of the risks involved in running your business
Advantages of PEOs
Working with a PEO can offer your business a range of benefits, including the relief of employer responsibilities, employment administration, access to a team of professionals, reduced liability, competitive employee benefits plans and prices, and a boost in productivity and profitability. Business owners can enjoy the peace of mind of knowing they aren't alone in navigating human resources functions and administrative tasks.
Drawbacks of PEOs
There are some important considerations when you decide to work with a PEO. Firstly, determining the precise cost of their services can be a bit challenging since it often depends on factors unique to your business. Secondly, while PEOs usually offer insurance and benefit packages, you might find that your options are somewhat limited in terms of providers, which might not perfectly match your preferences or your employees' needs. Lastly, because PEOs serve multiple clients, you may not always receive the same level of personalized attention and commitment that an in-house HR team would provide to your company.
The Cost of PEOs
Most PEOs customize their service costs depending on important factors such as your business's needs and the number of employees. They divide their costs into two options: per employee or per month (PEPM). If you choose the first, they charge a percentage of what you pay your employees, which might range between 2% and 12%. Extra administrative fees might be added later to this percentage. However, the PEPM structure assigns a fixed employee fee each month, ranging from $40 to $160.
Why Your Business Needs a PEO
Whether you own a small, medium, or large enterprise, PEOs offer services that can make a big difference for your business. Firstly, they provide valuable HR knowledge and training to you, your managers, and your employees. Additionally, taking on the responsibilities of employees and management significantly reduces your business's exposure to risk. This will help you transfer your focus to achieving your goals. Despite the fact that PEOs are commonly a solution for small and medium-sized businesses, larger businesses are increasingly finding value in what they provide.
Research from the National Association of Professional Employer Organizations (NAPEO) shows that small businesses working with a PEO tend to grow seven to nine times faster, experience lower turnover rates, and are 50% less likely to fail. NAPEO also reports that PEOs serve 173,000 businesses, employing 4 million people in the United States.
For example, in the aspect of payroll services, payroll experts handle tasks like paycheck processing, benefit deductions, tax filing, and reporting. This ensures accuracy and timeliness to keep your business working and free from any law violations and costly fines.
Regarding human resources outsourcing, HR experts equip you with essential guidance for effective employee management. They provide HR software to save you time by enabling employee self-service, digital timesheets, and other features. They also optimize your hiring and onboarding processes by utilizing the best hiring methods and performing background checks. They can refine your interviewing strategy and assist your new hires for a smooth transition. They also give small businesses access to administrative services and employee benefits that they might not be able to get otherwise, like health, dental, vision, life insurance, and more.
Choosing the Right PEO Provider
As PEOs become more deeply integrated into companies' operations, it’s crucial to select a PEO company that possesses both reliability and certification. Make sure the company you’re considering is a member of NAPEO. NAPEO will ensure the PEOs they work with have an audited financial statement for their potential client companies to review. It’s important for you to check the financial background of the company and obtain credit references. Having this documentation means that the accuracy of the PEO’s financial information has been vetted according to generally accepted accounting principles (GAAP).
Look for certifications and accreditations from organizations such as the Employer Services Assurance Corporation (ESAC), the Internal Revenue Service (IRS), and the Better Business Bureau (BBB). The IRS has strict rules about background checks, finances, and reporting for PEO. A Certified PEO (CPEO) is one that has met these rules; it gives clients financial security and tax benefits that clients of non-certified PEOs don't always have. These certifications show that the PEO might offer high-quality services, follow industry standards, and abide by employment laws and rules.
Also, while you are deciding on a PEO, check the company’s administrative and management capabilities thoroughly. Examine their internal team's experiences, qualifications, and certifications and determine whether they align with the services they provide.
Additionally, keep in mind the different PEO models available. When deciding whether to use a domestic PEO or a global PEO (also known as a GEO), it’s important to understand that domestic PEOs specialize in assisting businesses in expanding within their own country, whereas global PEOs work to facilitate growth in foreign countries.
Evaluate your workplace needs and future goals to identify HR and risk management requirements and ensure that the PEO you are considering meets your objectives.
In conclusion, partnering with the right PEO can be a great way to bring numerous benefits to your business. By entrusting a PEO to handle a lot of HR responsibilities, such as taxes and tax filing, you can focus on other, more important aspects of your business. Additionally, they collaborate with top insurance companies to offer comprehensive benefits packages, allowing you to attract and retain talented employees.
However, the cost of PEOs might be expensive, depending on the type of co-employment model you opt for. They might also be less flexible with the benefit providers they choose to work with.
When deciding on a PEO to partner with, it's important to research them carefully, as they will handle sensitive employee data. To avoid future disappointments, read customer reviews of the company you want to partner with through trusted platforms, such as the BBB, before you sign a contract with them. Once they provide a service agreement, review it carefully and ask all the necessary questions. We also recommend looking through different PEO companies on our comparison page to see what is out there before making your final decision.
Top PEO Companies
Now that you are familiar with what a PEO is, their benefits, and what they can do for your business, here are our top three recommendations for the best PEO companies out there:
ADP TotalSource is a best-in-class professional employer organization (PEO) that now supports more than 500,000 employees nationwide. They oversee HR administrative functions such as onboarding, payroll processing, compliance, reporting, analytics, and more.
Read our full ADP TotalSource review here to learn more about this provider.
Paychex is a well-known B2B service provider. They offer perfect PEO solutions to businesses and industries of all shapes and sizes. With their services, businesses will be provided with a lot of HR support and guidance, in addition to the following features: employee benefits and administration, HR services and tools, payroll processing, time and attendance, a learning management system and training, and more.
Read our full review of Paychex for more information on their prices and plans.
Justworks offers small business owners a range of HR outsourcing services, such as payroll processing, benefits management, tax filing, compliance assistance, employee onboarding and termination, and HR tools and support. Unlike some other PEOs, they offer 24/7 customer service and support by phone, email, chat, Slack, or SMS. Justworks lists two PEO plans on their website, Basic and Plus, at $59 and $99 a month per employee, respectively.
To learn more about Justworks, read our full review.