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Before deciding how to lighten your HR load, learn what a professional employer organization (PEO) is, how it works, and the advantages and risks of partnering with one. — Getty Images/ Catherine Falls Commercial

The world of human resources (HR) is constantly changing. For your small business to stay compliant, your HR team must stay on top of local, state, and federal laws. A professional employer organization (PEO) is one option for outsourcing your HR tasks, offering a potential relief from the constant HR management pressure.

A PEO oversees most HR functions, including employee risk management and benefits administration; however, partnering with a PEO involves participating in a co-employment relationship.

Before deciding how to lighten your HR load, learn what a PEO is, how it works, and the advantages and risks of partnering with one.

What does a professional employer organization do?

A professional employer organization is a human resources business that provides and administers HR services and benefits. It operates as a co-employer, meaning you retain control over day-to-day employee management, but the PEO serves as the employer for legal purposes.

PEOs differ from administrative services organizations (ASOs) because ASOs don’t use the co-employment model or offer as many HR services. As a co-employer, the PEO puts your staff on its payroll. It sends W-2s with its name, not yours, as the employer and claims employees on their taxes.

Along with taking over the administrative burden, a PEO assumes employee liabilities, such as workers’ compensation claims and unemployment compliance.

PEOs offer different service levels, but HR functions typically include:

  • Providing health, disability, and workers’ compensation insurance.
  • Offering various retirement plans and services.
  • Delivering safety and employee development training.
  • Onboarding new employees and giving outplacement support to outgoing ones.
  • Administering and processing payroll.
  • Ensuring compliance for payroll, training, and taxes.

Comparing PEO services: what solutions offer

When deciding on a PEO company, you’ll find that solutions may offer similar options but approach them differently. For example, some providers like JustWorks understand the unique needs of small teams and tailor their packages accordingly, while others like Insperity specialize in supporting middle-market organizations.

Suppose a mid-size firm is expanding nationally. Insperity has over 90 locations coast to coast and can provide local support. In addition to standard PEO services, Insperity assists with multistate labor laws and workforce analytics.

Mitigating risk is essential for companies to grow quickly. PEO solutions can provide peace of mind while ensuring your business stays compliant. TriNet PEO provides compliance support and helps protect your organization from employer liabilities, like harassment or wrongful termination claims.

On the other hand, small businesses focused on retaining employees and improving performance may look to Paychex PEO. With proactive advice from an HR professional, you can develop a strategy that aligns with your goals and enact actionable steps.

A PEO service like Rippling is appealing to startups and high-growth companies. It integrates its technologies for easy onboarding and offboarding, meaning your company can move on or off the PEO plan without disrupting your payroll or employee data.

However, if you want a fully integrated system that can be up and running within a few weeks, ADP Total Source could be the answer. It features pre-built data connectors and integrations with more than 300 programs and it can develop a custom application programming interface (API).

As you can see, PEO providers offer many options for businesses in all industries and stages of growth. They can be as hands-on or hands-off as needed.

[Read more: 5 Things You Need to Know About Choosing a PEO]

A PEO oversees most HR functions, including employee risk management and benefits administration; however, partnering with a PEO involves participating in a co-employment relationship.

How does partnering with a PEO work?

A PEO works by sharing employment responsibilities. Both parties sign a contract referred to as a client service agreement (CSA). The PEO is the administrative employer, whereas your company is the worksite employer.

While you still make hiring and termination decisions, the PEO assumes the role of the legal and tax-related employer. They provide workers’ compensation coverage, administer benefits, withhold and file payroll taxes, and do other HR tasks.

PEOs leverage employees from many small businesses to negotiate better rates and features for worker benefits. In return, companies benefit from having access to resources like safety programs, high-quality benefits, and other employee perks.

How much does a PEO cost?

PEO pricing typically includes a cost per month per employee or is based on a percentage of your total payroll costs. Some services cost under $100 per employee, whereas others may charge more than $150 per worker per month. As a percentage, a PEO can charge up to 11% of your total payroll expenses.

According to the National Association of Professional Employer Organizations (NAPEO), “[t]he average client of a NAPEO member company is a business with 19 worksite employees.” In addition, 15.3% of PEO clients have 10 to 99 employees. Therefore, a business with fewer than 10 workers will not realize as many benefits as a slightly larger company.

Why use a PEO?

According to NAPEO, small businesses that use a PEO “grow 7% to 9% faster, have employee turnover that is 10% to 14% lower, and are 50% less likely to go out of business.” Moreover, a PEO provides cost savings of up to 27.3%.

Companies partner with a PEO to:

  • Save time and focus on core business operations.
  • Access HR expertise without employing specialists.
  • Secure higher quality insurance plans at a lower cost.
  • Manage employee risk and improve safety programs.
  • Create a consistent onboarding process.
  • Maintain compliance with local, state, and federal regulations.

[Read more: How to Create an Onboarding Process — Even If You Don't Have an HR Department]

Potential disadvantages of outsourcing to a PEO

Although outsourcing human resources provides plenty of benefits, there are some possible disadvantages. For instance, the co-employment arrangement means giving up control over employee benefits management and HR processes.

In some cases, your staff may resist the changes or struggle with differences in your corporate culture. Furthermore, the cost can be prohibitive for small businesses.

Partnering with a PEO

A PEO can relieve many small business burdens and help your organization expand. With employee recruitment more difficult than ever, offering comprehensive benefits and perks gives you a competitive edge.

Before starting your search, use these resources to learn:

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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