- Standard HR services provided by PEOs include payroll, health insurance benefits, workers' compensation insurance and retirement packages like 401(k)s.
- PEOs generally provide a more comprehensive 401(k) offering compared to signing up for and managing one on your own.
- PEOs take over all HR responsibilities and act as an extension of your business, requiring you to release all your HR data to the PEO company.
What is a PEO?
A professional employer organization, or PEO, is an organization that provides human resources 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, reviewing health insurance benefits, managing workers' compensation insurance and allocating retirement packages like 401(k) plans.
Generally, PEOs offer several HR and administrative services designed to support the needs of a business. Don't mistake a PEO for an HRO, also known as human resources outsourcing, though. HROs are independent companies that may provide a portion of a business's HR needs, but they don't operate under the co-employment model that PEOs use.
Editor's note: Looking for the right PEO for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Finding a great PEO service calls for an evaluation of your business's size, needs, strengths and weaknesses. Understanding your business's needs can make choosing the right PEO service an easier decision.
PEO do's and don'ts
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.
PEOs do provide:
- HR and recruiting services
- Access to legal counsel
- Employee benefits
- Workplace compliance tools
- Health and safety policies
- Payroll services
- Function as an independent company or separate business entity
- Intervene and disassociate your business from its corporate responsibilities
- Retain all liability for the various services you agreed for them to manage
- Work exclusively with your business (as they have large clienteles)
What are PEO services?
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 employees.
PEOs provide and centralize all HR services, from onboarding to employee exits. Some companies provide 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:
- Health insurance benefits
- Workers' compensation insurance
- 401(k) plans and retirement packages
- Government compliance
- HR technology training
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]
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 $66,000 per year, according to the Bureau of Labor Statistics. HR assistants make upward of $42,000 annually and will still cost more to hire them to work in-house than outsourcing.
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.
Always comparison shop 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 per employee. When comparing costs, determine if one provider offers more services than the other to gauge your return on investment.
What's the difference between a PEO and an HRO?
Both a PEO and an HRO provide centralized HR services to a business of any size. When you partner with a PEO, you sign a co-employment agreement. An HRO doesn't act as a co-employer, according to Denise Stefan, president of Engage Insurance and executive with Engage PEO.
"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 told business.com. "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 the business, they play a major role in establishing employee training requirements, safety protocols and many other onboarding functions. HROs, on the other hand, don't take over all HR functions of your business and, thus, 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 as 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 HR 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. Small businesses and startups that can't afford an in-house HR department can benefit from the comprehensive offerings of a PEO, making it a better option than hiring an HRO.
What's the difference between a PEO and a staffing agency?
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, CEO of ProStrategix Consulting.
"A staffing agency will likely have its own health insurance and HR plans. However, by using a staffing agency, they do not automatically cover all your employees, just those who are staffed by the agency," Cairns said. "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, disciplinaries and many other HR tools. It ultimately depends on your business structure and needs.
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. Businesses 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 business. For today's small business owners, HROs are gateways to scaling the company and operating with much greater efficiency. These services can bridge the gap between a small business owner's 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 for business owners, according to Samantha Reynolds, communications coordinator for Helpside:
- More time. Partnering with a PEO means you spend less time on HR administrative tasks. PEOs process your payroll, pay your quarterly and annual employer taxes, issue W-2s, complete unemployment paperwork, track employee time off, negotiate with insurance carriers, train employees, conduct drug screenings, and handle other time-consuming tasks that pull you away from the reason you went into business in the first place.
- Better access to resources. The nature of the PEO relationship grants businesses access to a wide variety of resources, including employee benefits such as health, dental, vision, life insurance, disability insurance, 401(k) retirement plans, and flexible spending accounts. These benefits usually come with enhanced coverage at a lower cost since PEOs pool small businesses to increase their buying power.
- Expert advice. Most business owners are experts in their field. They may know everything there is to know about plumbing, advertising, or dentistry, but they are likely not experts in human resources, payroll, benefits or risk management. A PEO hires skilled employees in each of these departments, providing your business with immediate access to expert-level advice whenever it is needed.
PEO health insurance
A PEO can offer high-quality health insurance that's more affordable by leveraging its buying power, according to Stefan.
"Some PEOs create a private exchange for clients who are trying to keep the cost of offering health benefits manageable," Stefan said. "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 medium-size businesses than ever are looking to offer healthcare benefits in 2020. The Trump Administration broadened small business options for buying government-approved healthcare under the Affordable Care Act (ACA). The expansion of health reimbursement arrangements (HRAs) will be very interesting on the regulatory and political front, according to Colin Rogers, senior vice president and general manager of Benefits Solutions at Zenefits.
"Today, many small businesses purchase ACA-based plans, which allows them to avoid penalties with regard to the ACA regulation," said Rogers. "Now, according to this new guidance that goes into effect in 2020, small businesses will be able to fund an HRA account and have their employees use those funds to buy specific plans, which will count toward ACA credits."
Rogers believes that this regulation could produce new product innovations and provide broader healthcare coverage for small businesses.
PEO payroll allows businesses to make single payments each payroll cycle for their employees. The number of hours and pay rate of each employee is calculated by the payroll service and the rest is handled by the PEO. Using a payroll service simplifies what can be a difficult process, especially for a new business. When businesses use a PEO payroll service, they:
- Save time. Payroll can be time-consuming. Calculating overtime, paid time off and employer taxes is an additional hurdle for business owners. The time you save by outsourcing payroll to a PEO can be put toward other areas as you seek to grow your business.
- Reduce their tax liability. With PEO payroll services, you're protected from tax liabilities. The payroll service can bring deduction and withholding notices to your attention. Tax compliance should be taken seriously, and with payroll support from your PEO solution, you can rest easier knowing that the IRS won't suddenly come knocking at your door because of a misfiling or oversight.
- Boost their employee retention rate. Satisfied employees save you money, produce better work and boost morale in the workplace. One way to demoralize employees is to lose or issue late paychecks. Employees expect to be paid on time and are more likely to stay with your business when payroll processing isn't a concern.
PEO workers' compensation
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, founder 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 a few cons.
PEO workers' compensation pros:
- Businesses that use a PEO for workers' compensation insurance gain access to that PEO's modification rate when bidding for jobs. Some jobs require that a business have a modification rate below a certain threshold in order to even bid on a project.
- Most PEOs offer safety training and procedural strategies to help lower companies' workers' compensation claims. These benefits can lead to a healthier workforce, reduced costs and more efficient processes.
- Since a PEO is handling your payroll and HR, they can bill you for your workers' comp insurance each payroll cycle. You do not need to pay upfront, nor do you need to undergo an audit at the end of the year to file a "true up" report. This allows for both time savings and advantages in budgeting.
PEO workers' compensation cons:
- It's important to partner with a PEO that registers your payroll and claims experience. If you partner with one that doesn't, it could be difficult to find workers' compensation insurance outside of a PEO, as it will look as if your business has no experience for which carriers provide you with favorable ratings.
- The PEO can drop you from its program if you have many large claims. While this could happen with any carrier, remember that you'll be relying on your PEO for other solutions, such as payroll, human resources and other employee benefits. If you are given notice by your PEO, you will need to transition to a competitor or shop quickly for unbundled replacement services.
PEO retirement plan
The Department of Labor issued a final rule designed to increase the availability of multiple employer defined contribution plans (MEPs) in 2019. The final rule provides clarity on the types of "bona fide" groups of employers, as well as 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," Weitz said.
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, your business can save 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)," said Bowles. "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."
Roloson believes that while there are pros to a PEO 401(k), there are a few cons.
PEO 401(k) pros:
- For small companies that might not be able to invest in a 401(k) for employees, a PEO can be an affordable way to have an offering that employees can use to save toward retirement.
- The PEO will take over fiduciary liability and sign all necessary compliance forms. This can protect you from a legal aspect, and allows you to know that the 401(k) offering being delivered to your employees is being monitored and is up to date with any compliance changes.
PEO 401(k) cons:
- If you change PEOs, you cannot take your 401(k) with you. When making this change, your employees will go through a blackout period, and this transition can be very tedious, especially if you make more than one change over a five-year period.
- While PEOs allow for easy access to a retirement plan, the plan cannot be tailored to your company's specific needs. These plans are generally set up the same way, come with little access to financial advisors and have very basic technology.
PEO services can boost employee satisfaction by consolidating all employment-related vendors into one service. With multiple vendors, software platforms, and healthcare costs, it becomes difficult for a small business to keep up with their 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.
PEOs ultimately remove the need to hire an HR department and serve as a good option for small businesses that can't afford the cost of in-house HR staff. [For more information on PEO services and to see our recommendations, read our review of the best PEO service providers of 2020.]