The world of human resources (HR) is constantly changing. For your small business to stay in compliance, your HR team must stay on top of changes to local, state and federal laws. A professional employer organization (PEO) is one option for outsourcing your HR tasks.
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 (PEO) 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.
Also, 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 their payroll. They send W-2s with their name, not yours, as the employer and claim 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:
- Provide health, disability and workers’ compensation insurance.
- Offer various retirement plans and services.
- Deliver safety and employee development training.
- Onboard new employees and give outplacement support to outgoing ones.
- Administer and process payroll.
- Ensure compliance for payroll, training and taxes.
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 a 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), “the 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.
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.
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.
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 the competitive edge.
Before starting your search, use these resources to learn:
- How to outsource human resources.
- Select payroll software.
- Compare PEOs and ASOs.
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