employees at work
A professional employer organization, or PEO, is a widely used option for small and midsized businesses looking to hire employees but outsource many of the associated tasks. — Getty Images/PeopleImages

You probably wore multiple hats in the beginning stages of building your business. But as your company grows, this can become a disadvantage. Outsourcing human resource activities frees up your time and improves operations. One option is a professional employer organization (PEO).

A PEO handles many administrative tasks, including payroll, employment taxes, and benefits. This partnership means the PEO is the employer of record (EOR), but you maintain complete control over your staff and day-to-day work activities. Consider these five PEO facts when researching potential HR solutions.

Awareness of the PEO industry is growing

In 2018, the National Association of Professional Employer Organizations (NAPEO) began tracking PEO awareness among business owners and decision-makers. NAPEO reported that by 2022, “awareness of PEOs rose to 65%,” a 44% increase since 2018.

Also, PEO usage surged nine percentage points year-over-year, with 33% of decision-makers using a PEO in 2022. More than 80% of respondents who don’t currently use PEO services conveyed interest “in using one going forward.”

According to NAPEO, PEOs serve 173,000 small and mid-sized companies with a workforce of four million people. The total number of employees is about the same as the combined totals from Kroger, Amazon, Home Depot, and Walmart (the United States only).

Moreover, the number of worksite employees (WSEs) “grew at a compounded annual rate of 7.6%” from 2008 to 2020. That figure is “7% higher than the compounded annual growth rate of employment in the economy overall during the same period.”

[Read more: Managing Your Own Payroll & Benefits? Why It Might Be Time to Consider a PEO]

PEO client companies have similar attributes

Although companies of all sizes and industries use PEO services, most PEO clients fall into a few categories, noted a NAPEO study. Nearly half of PEO clients are in the manufacturing; professional, scientific, and technical services; or construction sectors. Businesses with 20 to 49 employees use PEOs the most (37%), with firms of 10 to 19 workers coming in second (28%).

Guardian's 11th Annual Workplace Benefits Study found that “the largest share of companies using PEOs (50%) have been in business between five and nine years.” And NAPEO found “42% of younger decision makers (25-34 years old) reported using a PEO in 2022, the highest percentage across all age categories.”

PEO clients also share other traits. Guardian said that companies using PEOs:

  • Prioritize employee financial wellness: Almost eight in 10 PEO members think they are responsible for ensuring the financial preparedness of their staff.
  • Acknowledge the importance of workplace flexibility: Over half said providing telecommuting and flexible hours is necessary.
  • Support paid leave policies: PEO clients are more likely than non-PEO members to accommodate workers following a severe illness or disability.
  • Offer better mental health resources: PEO members are more likely to provide behavioral health, an employee assistance program (EAP), and employee support groups than companies that don’t use PEO services.

In 2018, the National Association of Professional Employer Organizations (NAPEO) began tracking PEO awareness among business owners and decision-makers. NAPEO reported that by 2022, “awareness of PEOs rose to 65%,” a 44% increase since 2018.

The advantages of PEOs extend beyond access to benefits

Many small businesses leverage professional employer organizations to simplify HR administration and improve employee benefits. Indeed, Paychex found the No. 1 benefit of outsourcing HR “was having fewer mistakes.” Nearly a third told Guardian that PEOs helped “remove distractions relating to HR administration, enabling them to focus on business and revenue generation.”

But that’s not all. According to NAPEO, PEO members are “50% less likely to go out of business” and “grow 7% to 9% percent faster.” This information corresponds to Guardian’s survey: "More than 8 in 10 employers using a PEO say they’ve experienced significant or moderate growth in the past three years.”

Over one-third of PEO members responding to the Guardian’s study cited the following advantages of PEOs:

  • Ongoing support for employment and compliance laws.
  • Cost reductions for accounting and payroll processing.
  • Availability of dedicated resources for workforce planning, cyber security, and more.
  • Comprehensive support for benefits administration and communication.

PEOs can reduce your risk and liability

Keeping up with evolving state and federal rules is challenging and expensive. Companies must understand the Affordable Care Act, the Fair Labor Standards Act, the Family and Medical Leave Act (FMLA), and many other labor and tax standards. Unfortunately, the Small Business Association (SBA) said firms with fewer than 20 employees “spend 36% more per employee than larger firms to comply with federal regulations.”

PEOs provide several services to decrease your risk and liability, depending on your needs and industry, such as:

  • Help develop an employee handbook and workplace safety program.
  • Create a return-to-work plan for workers’ compensation claimants.
  • Assume full liability for filing accurate employment tax forms and deposits.
  • Offer lower workers’ compensation insurance rates.
  • Assist with Occupational Safety and Health Administration (OSHA) inspections.
  • Complete year-end tax filing.
  • Ensure compliance with state worker classification and sick leave laws.
  • Prepare for Department of Labor, compliance, and I-9 Form (immigration) inspections.
  • Manage audits for yearly workers’ compensation or retirement plan offerings.
  • Provide referrals to legal services.

There are certification programs for PEOs

According to Guardian, most businesses (48%) chose a PEO after doing “their own research,” whereas 44% received suggestions from HR coworkers and 40% conferred with brokers. But if you outsource payroll to another company, you want to know that the company is trustworthy. Fortunately, there are several certifications available for PEOs.

For instance, the IRS created a Certified Professional Employer Organization (CPEO) designation. If a PEO is a CPEO, it has submitted financial and background information to the IRS. Thus, the IRS has designated it as being financially sound. You can find a full list of certified PEOs on IRS.gov.

A PEO can also become an Employer Services Assurance Corporation (ESAC). To qualify, participating PEOs submit financial and operations updates to receive ongoing certification. You can find an accredited PEO in your area on the ESAC website.

This article was originally written by Jamie Johnson.

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