June 21, 2022 | 5-minute read (870 words)
A PEO — which is an acronym for a professional employer organization — is an outsourcing firm that works with small- and medium-sized businesses to manage many HR administrative functions that are intrinsic to running a business, such as benefits and payroll.
The chief benefit of bringing on a PEO is that it lets leaders focus on growing their businesses instead of spending time on labor-intensive administrative duties.
In order to manage these employee-related liabilities and responsibilities on behalf of the business, the PEO must enter into a co-employment relationship with the employer.
You may be puzzling over the logistics of the co-employment relationship, but it is actually fairly straightforward: The PEO is the employer of record for tax purposes only. The business owner retains full authority over their workforce and decisions related to the hiring or termination of employees.
So what kind of business hires a PEO? Businesses in almost all industries, such as manufacturing, medicine and accounting, can partner with a PEO. Most PEOs require a minimum of five employees, and a number of them provide industry-specific services.
A PEO is not a staffing company
A word of caution: Employers sometimes mistakenly deem PEOs to be the same thing as a staffing company.
This is inaccurate because a staffing company hires workers for client businesses on a contract basis and remains the sole employer for these hires. On the other hand, PEOs fulfill the HR responsibilities of the client business as a co-employer.
Deconstructing eight key benefits of a PEO
According to the National Association of Professional Employer Organizations, businesses that work with PEOs grow 7% to 9% more quickly and face 14% less employee turnover than their competitors.
The burdens a PEO can relieve for business owners include:
1. Payroll and taxes
An IRS-certified PEO will pay employee payroll and pay local, state and federal employment tax liabilities with funds received from the client. Many PEOs also integrate payroll with work hours and attendance.
2. Benefits administration
Through economies of scale, PEOs typically allow small businesses to secure better benefits than they could otherwise provide, sometimes at lower rates. They may offer health and life insurance, dental and vision care, disability coverage and retirement savings plans for employees. The PEO will also manage employees’ enrollment, claims and inquiries pertaining to these benefits.
PEOs help businesses remain compliant by tracking employment laws and by providing risk-management strategies. The PEO is on hand to assist with complex employment issues and ensuring HR operations run smoothly with compliance experts looking out for your business.
4. Risk mitigation
The PEO’s HR experts take care of unemployment insurance, workers’ compensation, Affordable Care Act compliance and Occupational Safety and Health Administration inspections, if applicable.
Some PEOs provide safety audits and employee training programs. They can also collaborate with your in-house team to implement industry-specific workplace safety measures to lower your business’ risks.
5. Hiring and onboarding
The PEO’s HR professionals are trained in recruitment services and talent management. They can provide recruiting, performance management, employee onboarding and development to improve employee engagement and reduce turnover.
Some PEOs offer data analytics to help you improve business practices to increase employee retention. Examples of these insights include:
• Is your pay scale competitive?
• Which skill sets are best suited to particular roles?
• How efficient are your individual employees? How productive are various teams?
• What roles need to be filled?
• How does your business’ turnover rate compare to rivals?
7. Employee handbook
Your business’s employee handbook should clearly define its policies and procedures. In the best-case scenario, it is a tool employers use to improve the business and to inform employees about the company’s values and goals. Under the co-employment arrangement, the PEO will create and maintain the employee handbook and similar documents.
8. Background checks and investigations
A PEO can oversee background checks for potential new hires and manage internal investigations if an employee files a complaint.
Choosing a PEO: What to look for
To find the right PEO for your business, research various firms to see how well they may suit your needs. You will want to pay close attention to find a PEO that:
• Is IRS-certified or accredited by the Employer Services Assurance Corporation
PEOs with IRS certification have met the agency’s strict financial, legal and reporting requirements. This certification ensures certain financial protections and tax benefits that clients of noncertified PEOs may not necessarily have. PEOs accredited by the ESAC must be financially stable and must adhere to operational standards and regulatory requirements.
• Will bill you fairly
For their role in the co-employment relationship, the PEO’s fee is usually based on the total number of employees and the range of services provided. A PEO may charge more for in-depth services, like data insights or talent management, but these features can give you a good return on investment.
• Meets the highest standards of excellence
Select a PEO with a strong financial, compliance and client retention record. It should also be able to satisfy the unique demands of your particular business and employees. Once you know it can deliver the required services, consider whether the PEO will be able to scale their offerings as your business grows.