Remote Work Glossary

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What Is a Professional Employment Organization (PEO)?

The PEO acronym stands for professional employer organization, a company that serves as a co-employer and provides businesses with human resources (HR) services such as payroll processing, employee benefits administration, compliance assistance, and risk management.

PEO services help businesses offer more competitive benefits packages and relieve time-consuming tasks from in-house staff. This can be especially helpful for growing businesses lacking an in-house HR department.

What are the most common PEO services?

PEOs provide a wide range of services, including:

  • Handling health insurance, retirement plans, and other employee benefits
  • Calculating pay, managing taxes, and ensuring accurate IRS withholdings
  • Assisting in business compliance with local, state, and federal regulations
  • Managing workers' compensation programs and compliance with employment laws and workplace safety regulations
  • Supporting recruitment, onboarding, and employee performance management
  • Handling payroll taxes and filing reports
  • Providing training resources for employees
  • Advising on employment law

PEOs take on HR functions so businesses can concentrate on their core operations. This gives small- to mid-sized companies the expertise and economies of scale that larger corporations benefit from, especially in managing complex employee-related matters. PEOs are a great option for companies trying to reduce administrative burdens and provide top-tier benefits at a cost-effective rate.

How does co-employment with a PEO work?

When a business partners with a PEO, they start a co-employment relationship. The PEO and business agree to share certain employer responsibilities and liabilities, as laid out in their service agreement. This arrangement lets the business control day-to-day operations like employee management, product development, and various business activities while the PEO takes over the administrative tasks. These include managing employee benefits, processing payroll, and handling employment taxes.

The service agreement specifically details each party's roles, listing which employees are included under the PEO's care and outlining the compliance duties each must fulfill. Typically, the PEO absorbs a significant portion of employment-related liabilities, including responsibilities for payroll taxes, HR tasks, and risk management. PEOs also manage workers' compensation insurance and help improve workplace safety and compliance.

How much does a PEO cost?

On average, PEO services cost about $1,000 per employee per year, although pricing varies depending on factors like company size and scope of services. They might also charge a percentage of your total payroll, typically 2-12%.

Companies that provide basic insurance and payroll services will be on the lower end of the price range. On the higher end, you'll find PEOs that service high-risk industries but also have higher workers' compensation costs.

Is a PEO the same as an EOR?

An employer of record (EOR) and PEO both support business owners in handling teams worldwide. The key distinction is that a PEO works alongside your company as a co-employer. In contrast, an EOR becomes the official employer for your team members spread across various locations.

Some of the differences between a PEO and EOR include:

  • Co-employment: A PEO has a co-employment arrangement with your company, sharing employee management responsibilities. An EOR is the sole legal employer of your staff.
  • Legal responsibilities: While a PEO shares legal and administrative duties with your company, an EOR takes on all legal responsibilities for compliance, payroll, and HR.
  • Day-to-day control: In a PEO arrangement, your company controls employees' day-to-day activities and decisions. With an EOR, the EOR handles most administrative and HR aspects, reducing your control over these processes.
  • Employment benefits: A PEO allows your employees to access better benefits through a more extensive pooled resource. An EOR typically provides and manages benefits for your workforce without pooling.
  • Global capability: EORs are generally better suited for managing and paying international employees; they typically handle global payroll, labor laws, and regulations in different countries. PEOs are often more limited to national or less extensive global operations.

What are the benefits and drawbacks of a PEO?

Businesses often work with a PEO company because a certified PEO can help them streamline HR operations, offer better benefits, and save money. That said, there are substantial drawbacks to consider, including data security and an employee disconnect from HR.

Advantages of a PEO

Some of the key PEO benefits include:

  1. Cost savings: PEOs leverage the number of employees they manage to secure lower rates on health insurance and other benefits, reducing overall costs.
  2. Compliance: PEOs ensure businesses meet all local, state, and federal regulations, reducing the risk of non-compliance penalties.
  3. HR management: PEOs provide HR professionals who handle everything from recruitment to employee relations, allowing stakeholders to focus on core business needs instead.
  4. Payroll processing: PEO payroll services efficiently manage payroll and tax administration for accuracy and timely processing.
  5. Better benefits: Employees can access better health, dental, and retirement plans typically only available to larger companies.
  6. Scalability: PEOs can easily adjust to a business's changing needs and support growth without expanding internal HR departments.

Disadvantages of a PEO

Before contracting with a PEO, client companies should consider some of the drawbacks, including:

  1. Loss of control: PEO HR outsourcing can mean less control over certain aspects of employee management and company culture.
  2. Dependency: Relying on a PEO for HR services can make companies dependent on their systems and processes, complicating future transitions back to in-house management.
  3. Employee mismatch: Employees might feel disconnected from the PEO, which might have a different understanding and commitment to the company's goals than in-house HR.
  4. Limited flexibility: A PEO's terms and services might not be as flexible as desired, which can limit a company's ability to make quick adjustments based on changing business conditions.
  5. Complexity in relationships: Working with a PEO adds another layer of complexity to business operations, especially when issues require coordination between the client company and the PEO.
  6. Data: Data managed by a PEO is kept out-of-house, which can present security and accessibility concerns.

Is a PEO a good idea?

PEOs offer valuable HR outsourcing services that can be especially beneficial for companies lacking an in-house HR team. Using a PEO can help streamline administrative tasks like payroll, employee benefits, and compliance so companies can focus on core operations. Additionally, PEOs help businesses provide competitive benefits that attract top talent.

However, not every company will benefit from a PEO. Businesses best suited for PEO services often have some of the following characteristics:

  • Rapid growth: Companies experiencing fast growth and need to scale their HR operations quickly without building a large internal team
  • Limited HR expertise: Smaller businesses that lack the expertise or staffing to handle HR, payroll, and compliance effectively
  • High regulatory demands: Companies in industries with heavy regulatory burdens
  • Desire for risk management: Businesses looking to mitigate risks associated with workers' compensation and employee relations

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