Staffing and Recruiting

Professional Employer Organizations (PEO): All You Need to Know

April 20, 2022
Reх Huхford
More companies are using professional employer organizations to make hiring and HR easier for remote employees. Learn more about the benefits of PEOs and differences with similar services.
Professional Employer Organizations (PEO): All You Need to Know

According to the National Association Of Professional Employer Organizations (NAPEO), there are 487 PEOs in the United States, providing services to 173,000 small and mid-sized businesses. Over the years, many companies have started using PEOs for their HR needs. But if you are still wondering what a Professional Employer Organization is and how it can help your business, this article is for you.

In this guide, we'll discuss the role of PEOs in today's business space and which services they provide. You'll also learn the difference between a PEO and similar services, such as an EOR or HRO.

PEO Meaning

A professional employer organization or PEO is a company that provides comprehensive HR services to businesses on a co-employment basis. In other words, a PEO leases its employees to a company and takes charge of many employee-related liabilities and responsibilities.

For instance, employers can outsource their HR functions, including payroll, employee benefits, employment taxes, and compensation to a PEO. Typically, PEOs are beneficial for small and mid-sized businesses that do not have the necessary infrastructure to manage these functions in-house.

As mentioned earlier, the PEO becomes a co-employer in this case. It means the PEO provides services for the client's company and its employees. However, it's important to note that the employer still has the right to ownership over the company.

The Client Service Agreement (CSA) determines the tasks and responsibilities the PEO takes over. The CSA is a contract that dictates the scope of work and the roles of both the PEO and the client company.

What Services Do PEOs Provide?

Professional employer organizations profile a wide range of services to their clients, broadly categorized into three main buckets. These are HR Administration and Compliance, Employee Benefits, and Payroll Administration. Here's a closer look at how a PEO provides these services to its clients.

Employee Benefits

Employee benefits refer to the various programs and perks that a company offers its employees. These often include health insurance, retirement plans, paid time off, and similar.

A PEO can help an employer design and implement employee benefit programs compliant with state and federal laws. Doing so is particularly important if you're hiring overseas employees.

An international PEO can ensure that you provide the employee benefits required to give your employees under the workforce's country of residence laws. In this way, you can avoid any claims of misclassification and employee mistreatment.

Employee Training and Development

Professional employer organizations also help train a company's employees. For instance, if a company wants to reskill or upskill its employees, it can outsource this task to a PEO.

Moreover, PEOs also provide compliance training to employees on various employment-related laws, such as anti-discrimination and harassment policies. By doing so, PEOs help businesses avoid any potential legal liabilities.

Some benefits of employee training and development include:

  • Employee Retention: When employees see their employers spending money on their training and development, they feel appreciated. That, in turn, reduces employee resignation rates.
  • Improved Employee Productivity: A well-trained and skilled workforce is more productive than an untrained one.
  • Reduced Costs: Properly trained employees can often do the job of multiple employees, which leads to cost savings. Instead of recruiting new talent, companies can train their existing workforce to save money that would otherwise go on lengthy hiring processes.

HR Assistance

PEOs also provide HR assistance to their clients. The service can include but is not limited to:

  • Handling employee relations issues, such as conducting investigations into complaints and providing guidance on disciplinary procedures
  • Maintaining employee files and ensuring compliance with data privacy laws
  • Helping design and implement HR policies and procedures
  • Coordinating payroll administration with the client's payroll provider
  • Guiding on compliance with employment laws, such as the Family and Medical Leave Act (FMLA)

PEOs can also help businesses with recruiting and onboarding employees. Often, companies don't have the time or resources to take on these tasks themselves. That's where PEOs step in to save the day.

Payroll

Payroll includes all activities related to an employee's compensation, such as calculating wages, withholding taxes, and issuing paychecks. Payroll administration is a complex and time-consuming task. A PEO can help businesses outsource this task so they can focus on more important things, such as growing their business.

When a PEO takes charge of a company's payroll, it manages everything from start to finish. The administrative service of PEOs includes collecting time and attendance data, preparing payroll checks, issuing W-2 forms, and releasing the payments.

Like domestic PEOS, an international PEO also handles the same payroll tasks for a company. For example, you may want to hire employees from Uruguay or another Latin American country. An international PEO would take care of the payroll processes so that you don't have to spend time and effort learning about the country's regulations and laws around payroll management.

Tax Preparation

Tax preparation is a lengthy process that can be daunting for business owners. A PEO can help by preparing and filing all their tax returns, including federal and state taxes. A PEO will manage all the steps of tax prep, whether locally or internationally.

  • Organizing the Paperwork: The first step in tax preparation includes organizing the business' financial documents. A PEO can help by collecting and compiling all the relevant data.
  • Calculating the Taxes: Once all of the data is collected, a PEO will calculate the company's taxes.
  • Filing the Tax Returns: A PEO will then file the company's tax returns with the Internal Revenue Service (IRS) and state taxing agencies.

Recruiting and Staffing

According to Society for Human Resource Management (SHRM), recruiting an employee takes approximately 42 days. That's a long time, especially considering most small and mid-sized businesses usually get swamped with other tasks.

The best way to lower your burden is to outsource your recruiting to PEOs. They have the experience and resources to quickly and efficiently find qualified candidates for your business.

Once you find perfect employees, the PEO will also help you onboard them. The support includes creating an employee file, setting up payroll, and providing training on company policies and procedures.

What a Professional Employer Organization Doesn't Do

Now that you know what professional employer organizations do, it's also helpful to understand what a PEO doesn't do. Here are some things a PEO won't do:

Control Your Business

Even when you outsource certain services, a PEO does not have control over your business. It can't make decisions for you or take control over your employees.

The PEO will have to follow the terms of the CSA. Therefore, when you work with a PEO, be very clear about the terms and conditions of the contract.

Replace In-House HR Staff

Often, PEOs provide complementary services, which means they will take the load off your internal HR staff. That doesn't mean they'll replace your existing staff or change any core workplace policies.

For instance, if you want to hire international independent contractors or employers, your in-house team might not be well-versed in the laws of the country you want to hire talent from. In that case, a PEO will step in to help. As for your local workforce, your internal HR can be in charge of it.

Provide Benefits

PEOs don't provide employee benefits, such as health insurance, workers' compensation, and 401(k) plans. That responsibility falls on the employer. A PEO merely spells out the employee benefits or helps a company provide them to its employees. For instance, a PEO will help you manage and administer the policy when you offer paid leaves.

Disrupt Your Workplace

Many businesses are reluctant to work with PEOs because they believe outside involvement might disrupt their workplace. That's not the case. PEOs help with your HR needs and make your workplace run more smoothly. A reputable PEO will not interfere with your business processes, nor will they cause any disruption.

Differences Between PEOs and Similar Services

Besides PEOs, some other services may offer the same benefits. How can you know then which one is perfect for you? We listed the main differences between a PEO and the most used similar services for comparison purposes.

PEO vs. ASO

An ASO or an administrative services organization provides similar services as a PEO, but without the full range of HR solutions. Typically, an ASO will solely outsource specific services, such as payroll or benefits administration.

The significant difference between a PEO and an ASO is that there's no joint employment in the latter. An ASO is not a co-employer of your employees. Instead, you only outsource specific tasks to it.

PEO vs. HRO

Human resource outsourcing or HRO is an arrangement in which an organization outsources its entire human resource function to another company. By doing this, the company can focus on other aspects of business operation, such as growth and expansion.

Just like the ASO, the HRO isn't a co-employer. Therefore, it only manages the assigned HR tasks and does not co-own your employees as a PEO does.

PEO vs. Employer of Record (EOR)

An employer of record (EOR) is a company that employs people on behalf of another organization. The EOR manages payroll, taxes, and employee benefits. In some cases, an EOR might also provide HR support services.

Unlike a PEO, an EOR is not a co-employer. It merely employs people on your behalf but has no control over workplace policies. Most companies use the services of EORs when they have to hire foreign employees.

Usually, when a company wants to hire employees from another country, it has to form a legal entity in that region. However, with an EOR, you can avoid this costly step. Moreover, the EOR manages recruitment and onboarding, saving you a lot of hassle and time.

PEO vs. Staffing Agency

Both the staffing agency and a PEO can help you find the right talent for your organization as they provide access to a large pool of candidates. A staffing agency might be the right choice if you need short-term help or want to fill a vacancy quickly. For instance, if you need an extra pair of hands during the busy season, a staffing agency can provide them.

On the other hand, a PEO can be beneficial to build a long-term relationship with the workers. Plus, a PEO can help with payroll and benefits administration, which a staffing agency won't do for you.

PEO vs. HRIS

A human resource information system or HRIS collects and stores data about your employees. Essentially, it's a record-keeping system with all information about a company's personnel. A business can subsequently use this data to make better HR decisions.

While an HRIS only records employee data, a PEO offers additional services. The latter can help with payroll, benefits administration, recruiting, and tax management.

PEO vs. Payroll Services

A payroll service calculates and pays employee wages. It also files tax paperwork and manages employee benefits. A payroll service is a good option if you want someone else to handle the administrative tasks related to payroll. However, it does not offer the same range of services as a PEO.

In fact, payroll management is one of the services offered by a PEO. So a payroll service is a right choice if you only want to outsource employee payroll. But if you wish to get additional benefits, a PEO should be your pick.

PEO vs. Employee Leasing Company (ELC)

An employee leasing company or ELC is similar to a PEO in that it becomes the employer of your workers. However, the ELC leases employees to your business on a contractual, temporary basis. The key difference between an ELC and a PEO is that the former only leases employees while the latter offers a host of other HR services.

Differences Between PEO and CPEO

A CPEO is a PEO certified by the Internal Revenue Service (IRS). A PEO must meet several requirements and qualifications to get a certification. Some of them are:

  • Meeting the IRS-set expectations for experience, annual financial audits, background, and tax status
  • Satisfying some financial review requirements
  • Providing verifications for compliance with IRS requirements periodically
  • Providing background reports for individuals or companies making employee tax payments

Hiring a CPEO gives companies peace of mind because it has a much higher standard than other PEOs. Plus, you know that the CPEO will be compliant with federal regulations since non-compliance will lead to the IRS suspending the certification.

Benefits of Using a PEO

Using a PEO can have many advantages for a company, regardless of its size. Some of the PEO benefits include:

  • Cost-Effectiveness: When you use a PEO, you can save on costs related to HR, taxes, and benefits. Instead of hiring more staff in-house, you can let the PEO take charge of these tasks. The PEO also minimizes the time and resources needed to hire new talent.
  • Compliance: A PEO can help you with compliance-related issues such as filing taxes and managing employee benefits. For instance, if you hire international employees, you need to make sure you're compliant with the country's regulations and labor laws. An international PEO can help you do that.
  • Smooth HR Experience: If you're a small or mid-sized business, you might not have the capacity to handle all HR tasks. A PEO can take care of these for you, freeing up your time to focus on more important things.
  • Access to Talent: A PEO gives you access to a large talent pool. You can search through resumes and find the best employees without going through the hassle of posting jobs, vetting candidates, and wasting over a month to fill a single position.
  • Payroll Administration: Managing payroll can be complex, especially if you have employees in different states. A PEO can help you calculate payroll taxes and file the necessary paperwork.
  • Improved Employee Benefits: A PEO can aid you in designing and implementing employee benefits packages. In today's time, it's imperative to have top-notch benefit plans to attract and retain top talent.

Disadvantages of PEOs

Although working with a PEO has many benefits, it also comes with a few drawbacks and risks:

  • Loss of Control in Some Tasks: When you outsource HR tasks to a PEO, you lose some control over how those tasks get executed. The PEO will have processes and procedures that might not align with your company's culture or regular operations.
  • Employee Resistance: Your employees might not be happy working with a PEO. They might feel their position is at risk or that the PEO is taking their jobs away. It's not always easy to explain to employees the role of a PEO and showcase the benefits of such a partnership.
  • Security Issues: Depending on the PEO you work with, security risks might get involved. For instance, if the PEO stores your employee data on its servers, there's a chance that the data might get hacked. So make sure you choose a PEO with robust security measures to protect your data.

How to Select a Professional Employer Organization

Whether you select a domestic or international PEO, you need to ensure the PEO's working strategy aligns with your business goals and objectives. We listed some tips to help you choose the right PEO for your business.

  • Compatibility: Is the PEO compatible with your company's business model? You need a partner that will understand and align with your operations.
  • Scope of Services: What services does the PEO offer? Ensure the PEO has all the services you need, such as payroll and benefits administration and HR support.
  • Reputation: Before you pick a PEO, do background research on your top candidates. Find out what other companies think of each PEO on your list. Ask for referrals and read reviews online. You can also ask selected PEOs to share testimonials they've received from former or existing clients.
  • Price: How much will the PEO charge for its services? It's crucial to select a PEO that offers good value for your money, especially if you're a small business already on a tight budget.
  • NAPEO Membership: NAPEO is the national trade association of the PEO world. The PEO you select should be a member of the NAPEO. You can use the PEO search tool on NAPEO's website to see if a company is listed there.
  • Certification: CPEOs are certified PEOs that comply with the regulations set by the IRS. If you want extra peace of mind, look for a certified PEO to eliminate any risk of financial non-compliance.

PEO Pricing

The cost of working with a PEO depends on several factors. Depending on the size of your company, the required services, and the location of your employees, you may pay more or less. According to some analyses, the average cost of a PEO is anywhere from 2% to 12% of wages.

You can also choose to pay a flat fee for each employee. Typically, employers spend $900 to $1500 per employee annually. Keep in mind that the PEO may charge more, depending on the number of services you require and the complexity of the tasks.

The PEO pricing includes everything from employee administration to payroll management. That's why you should always first check the pricing and payment model of a PEO. For instance, some PEOs may require monthly payments while others may charge you quarterly or annually. Similarly, the fees could be based on a flat rate or a percentage of the employees' wages.

Consider which model is more suitable for your business and select a PEO accordingly. It also helps to compare the cost of in-house HR with the cost of working with a PEO. In-house HR can be expensive, especially if you have a small team. Meanwhile, a PEO can effectively reduce costs while offering seamless efficiency.

Final Words

Running a company can become quite challenging sometimes, especially when managing employee-related tasks. That's where professional employer organizations can be of great help. By partnering with a PEO, you can outsource all or some HR-related tasks, relieving part of your burden and getting a chance to focus on more important things. The PEO benefits include reduced HR costs, increased efficiency, and improved compliance.

Although there are some risks of working with a PEO, you can avoid them by taking standard precautions. If you work with an international PEO, you need to ensure it has the right tools and expertise to manage your employees in a foreign country while ensuring compliance with the local labor laws and tax regulations. As long as you perform thorough research before choosing a company, a partnership with PEO will bring only benefits to your business.

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