What is a PEO and How Can it Help HR? (2023 Guide)
A PEO, or Professional Employer Organization, is a company that provides HR outsourcing and employee benefits services to small and medium-sized businesses.
PEO companies are becoming increasingly popular as businesses look for ways to outsource HR functions and save money on employee benefits.
In addition to saving money, a PEO can also help businesses manage their HR more effectively and comply with labor laws.
In this article, I’ll cover what a PEO is, how it can help your business (especially your HR department), and the benefits of using a PEO.
Keep reading to find out more.
What Is a PEO?
A PEO is the third party that performs HR functions for small businesses.
By outsourcing these admin tasks to a PEO, business owners can focus on growing their business while entrusting the daily operational responsibilities to somebody else.
The need for a PEO usually comes about when businesses begin to experience growth and can no longer handle the complexities of managing employees independently.
This allows businesses to reduce costs and provide higher-quality HR services.
The National Association of Professional Employer Organizations states that approximately 487 PEOs in the United States serve over 4 million worksite employees.
PEO Vs. HRIS
Businesses of all sizes typically use HRIS systems, but PEOs are generally geared towards specific types of companies.
While an HRIS system will automate and keep track of HR processes, a PEO will manage and perform those processes on behalf of the business.
PEOs can provide comprehensive services that include payroll, benefits administration, compliance with employment laws, and much more.
There’s also the concept of employer services assurance corporation, which in this case, would be more like an insurance policy that guarantees the PEO’s services.
This would come in handy if the PEO were to close its doors or could not provide the services that it initially agreed upon.
Standard vs. Global PEO
PEO services can also differ in scope and even the countries they serve.
There are two main types of PEOs: standard and global.
Standard PEOs will typically offer services within their own country, while global PEOs provide services across international lines.
This allows businesses to expand into new markets without hiring a whole new HR team or worrying about the compliance issues that come with foreign employees.
Global PEOs can provide a full range of HR services, from payroll and benefits administration to recruiting and training.
In this regard, human resources is a complex and ever-changing field.
It can be challenging for small businesses to keep up with the latest trends and regulations unless they have a team of HR professionals on staff.
This is where PEOs can come into play – providing the necessary support so that business owners can focus on expanding their businesses and taking care of their employees.
Various PEO Benefits
A professional employer organization can offer various benefits to a business, as follows.
The IRS requires that employers withhold payroll taxes from employees and regularly pay them to the government.
Employment tax laws are complicated for businesses to manage independently.
Considering tax filing deadlines and penalties for non-compliance, it’s no wonder that many businesses choose to outsource their payroll tax responsibilities to a PEO.
Workers Compensation Insurance
A PEO can help businesses obtain workers’ compensation insurance.
This type of insurance protects businesses from liability if an employee is injured.
The PEO industry has helped standardize pricing and coverage patterns, making it easier for businesses to obtain this critical insurance at an affordable price.
Providing in-house health insurance can be expensive for businesses, especially if they have a large workforce.
A PEO can help businesses obtain group health insurance at a lower cost than if the company were to purchase it.
PEOs are also familiar with the Affordable Care Act and can help businesses comply with the law’s requirements.
As the number of employees grows, so does the need for healthcare.
Whether there is a co-employment relationship, the PEO will take on many employer responsibilities associated with having a large workforce.
This includes compliance with employment laws and regulations, handling employee disputes or grievances, and managing employee performance.
By outsourcing these responsibilities to a PEO, businesses can focus on their core competencies without worrying about HR and employee management issues.
Integration With HR Software
Various HR software platforms are available in the market.
A PEO will integrate with these platforms to ensure that the client’s data is correctly captured in the PEO’s system.
This ensures that all employee information is stored in one place, making it easier to manage and access when needed.
As per the client service agreement, some certified professional employer organizations also provide employee training services.
This is beneficial for businesses that do not have an in-house HR team or the resources to provide training themselves.
PEOs can help businesses deliver training in various situations – from new hire orientation to sexual harassment prevention training.
If a certified professional employer organization cannot provide all the HR services a business needs, the PEO can connect the business with an employee leasing company.
This type of arrangement is also known as a co-employment relationship.
Under this arrangement, the employee leasing company becomes the employer of record for tax and insurance purposes.
Using some of the best payroll software available, the right PEO provides payroll processing services that are simple, efficient, and accurate.
This payroll solution helps businesses save time and money while ensuring that employees are paid correctly and on time.
The PEO will also handle direct deposits for the business, making it easier for employees to get their paychecks.
HR professionals from the PEO will work with new employees to help them transition into their new roles.
This includes conducting orientation sessions and providing information about company policies and procedures.
Streamlining new top talent into the business is a critical component of what a PEO can provide.
A PEO might just be the solution if a business wants to streamline its benefits packages and offer its employees attractive and affordable options.
With access to different health plans, disability insurance, and retirement savings programs, businesses can provide their workforce with quality coverage without breaking the bank.
With various HR tasks and responsibilities comes the need to mitigate risks.
A PEO will have a risk management team to identify and assess risks and plan to address them.
The HR team still needs to be involved in the risk management process and decision making, but having a dedicated PEO working with them will help mitigate risks and keep your employees safe.
Having a PEO in your corner is a valuable asset for risk and worksite employees.
Businesses must carry unemployment insurance to protect against employee layoffs and terminations.
This is an expensive type of insurance, but it can become affordable when businesses outsource their HR responsibilities to a PEO.
With the right PEO, you can ensure that your company is compliant with all applicable laws and regulations related to employment and insurance.
PEO Potential Drawbacks
There are a few potential drawbacks to using a PEO.
The PEO cost structure may be a barrier for some businesses.
PEOs typically charge a fee that is a percentage of the total payroll.
For example, if the PEO charges 5% of the total payroll and the business has $10,000 in total payroll costs, the PEO fee would be $500.
While the cost savings from using a PEO can be significant, some businesses may not have the budget to absorb the additional costs.
Considering economies of scale, it is essential to note that the more significant the business, the greater the potential savings that might arise.
Performance Management Is No Longer Done In-House
Having control over employee performance management is essential for some businesses.
When businesses outsource their HR functions to a PEO, they no longer have direct control over managing performance.
This is where employee handbooks and policies come into play.
Businesses must have a clear and concise employee handbook that outlines the company’s expectations for employee performance.
The client company would still conduct employee performance reviews, but the PEO would handle the actual performance management process.
While there are potential drawbacks to using a PEO, most businesses find that the benefits far outweigh any potential issues.
Choosing The Right PEO
To ensure you are getting the most out of your PEO partnership, it is essential to carefully consider all options and select the right one for your business.
For example, if your business suffers from employee turnover and needs help with employee retention, you will want to look for a PEO specializing in this area.
On the other hand, if you are looking for help with benefits administration, you will want to select a PEO that offers a full suite of HR services, including benefits administration.
Knowing where your weaknesses lie, and what you need help with the most, is key to understanding which PEO is right for you.
What is a PEO? – FAQ
What Is an Employer of Record?
An employer of record is a third-party company that provides employers with access to various HR services, such as payroll management, benefits administration, and risk management.
By outsourcing these functions to an employer of record, businesses can focus on their core business activities without worrying about the administrative aspects of running an HR department.
Does PEO Factor into Retirement Plans for Staffing?
PEO clients can typically offer their employees the same retirement benefits as if they were working for the client company directly.
This is because most PEOs have access to retirement plans that meet the needs of small businesses.
Professional employer organizations can help businesses with various HR functions, from payroll and benefits administration to employee retention and performance management.
PEOs can be an invaluable resource for businesses, but it is essential to carefully consider all options and select the right one for your business.
When used effectively, PEOs offer several advantages to help businesses save time and money.
Further reading on AdamEnfroy.com: Want to learn more about HR-related software?
Check out this post on HCM software to find out which systems are the best for small businesses when managing HR tasks.