Managing your business’s human resources (HR) needs can be an enormous task, and it is often too much for one individual to do on their own. What’s worse, if you don’t have an experienced HR professional or team of professionals handling your HR, you are at a greater risk of violating labor and employment laws. If this sounds like you, you may want to consider outsourcing your HR functions to a professional employer organization – also known as a PEO.
A PEO provides HR and payroll services to businesses of all sizes. Through co-employment, a PEO becomes the manager of record for tax purposes and provides employee benefits packages under its own tax identification numbers. HR services that PEOs can provide include managing payroll and payroll taxes, administering health insurance benefits, managing workers’ compensation insurance, allocating retirement packages – like 401(k) plans – establishing employee handbooks and HR policies, training and developing employees, and managing risk and compliance.
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Finding a great PEO service calls for an evaluation of your business’s size, needs, strengths and weaknesses. Understanding your company’s needs can make choosing the right PEO service an easy decision.
PEO services are customizable tasks outsourced to a human resources company. They work best for small and midsize businesses without the budget or need for in-house HR personnel.
PEOs provide and centralize all HR services – including onboarding and employee exits. Some companies offer all-inclusive packages, while others allow you to pick and choose services.
These are some of the top HR services that a PEO company provides:
The scope of services and caliber of expertise vary among PEOs. The best provider for you depends on the HR and administrative functions your business is seeking. [Read related article: Expand Internationally by Leveraging Local PEO Services]
By centralizing your HR functions with a PEO, your business joins a larger employee base that can access low-cost benefits. Most PEOs provide HR services efficiently and replace the need for an in-house HR team. Companies can leverage a PEO to rely on a single provider to support their human resources, benefits administration and payroll processing.
As your business grows, it’s important to utilize PEO services to address the changing needs of the company. HR outsourcing services (HROs) are gateways to scaling your company and operating with much greater efficiency. These services can bridge the gap between your vision for growing the business while managing the operations of a fully functioning HR department.
Compared to keeping the work in house, partnering with a PEO offers three main advantages, according to Samantha Reynolds, marketing manager for Helpside.
PEO payroll allows your business to make single payments each payroll cycle for your employees. The payroll service calculates the number of hours worked and pay rate of each employee, and the PEO handles the rest. Using a payroll service simplifies what can be a difficult process, especially if yours is a new business. When you utilize a PEO payroll service, you’ll acquire these benefits:
A PEO can offer high-quality health insurance that’s more affordable by leveraging its buying power, according to Denise Stefan, president of Engage Insurance and executive with Engage PEO.
“Some PEOs create a private exchange for clients who are trying to keep the cost of offering health benefits manageable,” Stefan told business.com. “The client is able to define a set dollar amount to purchase certain benefits and then direct employees to the private exchange. There, employees shop for a health plan and other benefits based upon what the employer organization has selected as options.”
Stefan believes that if a PEO holds a master policy contract with multiple carriers, claims are aggregated for all employees enrolled in the policy for each renewal.
More small and midsize businesses than ever are looking to offer top employee benefits – like quality health insurance – as a way to help attract talent.
As a co-employer, the PEO pays wages and taxes, and may be liable for maintaining workers’ compensation coverage, according to the National Association of Professional Employer Organizations (NAPEO).
NAPEO says that PEOs create safer work environments when they are the workers’ compensation policyholders. Preventative safety measures – such as pre-employment drug testing, safety and training procedures, claims management of injuries, and back-to-work programs – increase employee safety in the workplace.
New businesses can benefit from PEO workers’ compensation, according to Michael Roloson, director of PEO Focus. Since PEOs are the employer of record for their clients, PEO workers’ comp can offer your business better rates by using their purchasing power to decrease insurance costs. Roloson believes that while there are pros to PEO workers’ compensation, there are also a few cons.
Here are some pros of PEO workers’ compensation insurance:
These are some cons of obtaining workers’ compensation insurance through your PEO:
The Department of Labor issued a final rule designed to increase the availability of multiple-employer plans (MEPs) in 2019. The final rule provides clarity on the types of “bona fide” groups of employers – and PEOs – that can sponsor retirement plans.
This final rule, along with the Small Business Efficiency Act, demonstrates the federal government’s recognition of PEO and small business relationships.
Most PEO retirement plans are hosted on software platforms designed to allow your employees to manage their retirement plans through the web or a mobile device. This alleviates the need for your business to create and manage the retirement benefits for the entire company.
While there may be great benefits and support of PEO retirement plans, as with any service, it has its drawbacks.
If your business separates from the PEO, a new retirement plan must be implemented. An attorney must be involved in the change, which may warrant legal fees.
The downside of relying on PEO retirement plans is the loss of control over decision-making, according to Jared Weitz, founder and CEO of United Capital Source. “You are putting your trust and reliance into an alternative organization, so be prepared not to always see eye to eye.”
The most popular type of retirement plan is the 401(k), and PEOs generally provide a more comprehensive 401(k) offering than what your small business could otherwise offer on its own. When outsourcing 401(k) management to a third party, you can save both time and money.
A PEO makes providing 401(k) plans to employees incredibly simple, according to Bryan Bowles, founder and CEO of Transactly.
“Not only do they simplify the payroll aspect of providing a 401(k), but also the various fiduciary obligations inherent with a 401(k),” Bowles said. “The overwhelming amount of diligence required by an employer in providing a 401(k) deterred us from providing a plan prior to using a PEO service.”
These are some of the advantages of PEO 401(k) plans:
Roloson said there are also downsides to relying on a PEO for 401(k) options. Here are a couple cons:
PEO services can boost employee satisfaction by consolidating all employment-related vendors into one service. With multiple vendors, software platforms and healthcare costs, it could become difficult for your small business to keep up with its HR duties. PEOs minimize stress and outsource services, including HR, health insurance, workers’ compensation management and retirement plans like 401(k)s. The benefits associated with PEOs can reduce employee turnover rates and enhance onboarding.
One of the biggest services a PEO can offer is guidance on labor and employment laws. Since PEOs are well versed on federal, state and industry-specific laws, partnering with them can help you maintain legal compliance. With laws and regulations constantly changing, this service alone can be a huge benefit to your company.
Violating labor and employment laws can cause a lot of problems, including fines, litigation, loss of company reputation and high employee turnover. With a PEO, you can rest assured your small business is abiding by all current laws and regulations.
PEOs can also help you stay legally compliant by offering required employee training courses – like those on harassment, or health and safety. Additionally, many PEOs offer in-person and online courses to help employees develop professionally. For example, they may offer e-learning courses about leadership, management, communication or teamwork.
PEOs can manage numerous HR tasks for your business that an in-house HR department might handle in a larger business. Here are some things that PEOs do and what they don’t do.
There are several highly rated PEO services available, but the best one for your business will depend on a variety of factors – like how many employees you have, what services you need and the size of your budget. Some PEOs offer their services a la carte, while others bundle them into one package. Keep in mind that some PEOs also have employee minimums, typically requiring you to have at least five employees. Here are some of the top PEOs to consider:
In many cases, outsourcing these tasks to a PEO is more cost-effective than hiring an in-house HR representative. If you have 10 employees, you would pay $15,000 annually at most for weekly PEO services. For comparison, human resources specialists make an average annual salary of $69,430 per year, according to the Bureau of Labor Statistics. HR assistants make upward of $43,000 annually, and will still cost more to hire them to work in house.
Even if you have more than 10 employees, PEO costs may still fall well within your budget. PEO companies may even discount their rates based on how many employees you have. For instance, instead of paying $1,500 annually for each employee, you may pay $1,000 per employee if you have more than 20 full-time staff members. The PEO may also allow you to enter a month-to-month contract with the option to freeze services when you don’t need them.
PEOs typically charge a per-employee fee or a percentage of your total monthly payroll.
Always shop around for PEO services. It’s not unusual to find one provider that charges $50 a month per employee and another that charges more than $100 a month for each staff member. When comparing costs, determine if one provider offers more services than the other to gauge your return on investment.
Both a PEO and an HRO provide centralized HR services. When you partner with a PEO, you sign a co-employment agreement. An HRO doesn’t act as a co-employer.
“For companies that prefer to keep some HR functions in-house, partnering with an HRO to handle a few distinct services, like payroll, makes sense,” Stefan said. “A company looking for a single-source provider to assume the vast majority of HR responsibilities will typically go with a PEO.”
Since PEOs have a stake in your business, they play a major role in establishing employee training requirements, safety protocols and other onboarding functions. HROs, however, don’t take over all HR functions of your business and don’t become involved in company policy.
HRO services provide flexibility, because you can choose the services you wish to assign to the independent company while remaining the decision-maker in HR management. Larger businesses tend to use this type of HR solution, since a human resources department is often already established and only needs help with some of the more tedious tasks.
PEOs assume all HR responsibilities and act as an extension of your business, requiring you to release all your HR data to the PEO. If you can’t afford an in-house HR department you can benefit from the comprehensive offerings of a PEO, making it a better option than hiring an HRO.
It’s common to associate staffing agencies with PEOs, but they are nothing like PEOs. A staffing agency provides businesses with temporary employees, while a PEO does not supply labor to employers. PEOs supply services and benefits to businesses and their existing workforce. A staffing agency leases new workers on a temporary or project-specific basis. After their work is completed, the leased workers return to the staffing agency for reassignment.
In terms of functionality, a staffing agency may or may not operate like a PEO, according to Brian Cairns, founder of ProStrategix Consulting.
“A staffing agency will likely have its own health insurance and HR plans,” he said. “However, by using a staffing agency, they do not automatically cover all your employees, just those who are staffed by the agency. If you have any employees of your own, they are not covered by the staffing agency’s HR plans, unless you enter a co-employment agreement with the agency.”
PEOs usually offer more comprehensive services than staffing agencies, and incorporate performance tracking, grievances and disciplinaries. It ultimately depends on your business structure and needs.
An employer of record (EOR) is the sole legal employer of employees, whereas a PEO operates through a co-employment model. This means that, while a PEO shares ownership and liabilities, the EOR assumes all liabilities for the workers.
An EOR oversees all timekeeping, payroll, workers’ compensation, unemployment claims, and employee benefits administration. With a PEO, you may have your choice of insurance coverage, but with an EOR, your employees would be covered under the EOR’s insurance.
Another difference is in hiring. With a PEO, you retain a lot of rights and responsibilities over who you hire and how. An EOR, on the other hand, takes full responsibility for hiring workers. An EOR is often provided by staffing agencies.
Skye Schooley contributed to the writing and reporting in this article. Some source interviews were conducted for a previous version of this article.