A professional employer organization (PEO) is different than the average human resource company. Partnering with a PEO can help make your company more attractive to job seekers because of the quality and experienced administrative services it provides. PEOs manage payroll, benefits and other HR tasks for you under a co-employment model. This means your employees are legally on a PEO's books but still under your management. This allows a PEO to offer your company quality health benefits with decent providers.
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Another benefit of PEOs is that they help you stay up to date with payroll tax functions. They are familiar with human resource and payroll problems, and offer workplace training, unemployment insurance, workers' compensation coverage, and other employee benefits. Although there are hundreds of PEOs to choose from, these are the services we believe are the best for various types of businesses.
What to Expect in 2020
Due to the steady growth of the PEO industry, which increased during the third quarter of 2019 according to the National Association of Professional Employer Organizations survey, we predict a stable retention rate or rise in the number of small businesses that partner with PEOs in 2020.
The PEO Model Act obligated PEOs to control their use of experience ratings for workers' compensation insurance. The CPEO program was created to monitor the number of PEOs the Internal Revenue Service certified that were eligible for better tax treatment. When the number of PEOs reached 700, only 30 were certified by the IRS. The increase and advancement of the PEO industry have, in the past, led to the enactment of regulations, so we anticipate additional regulatory changes in 2020.
One striking difference between PEOs and human resource outsourcing options is the benefits they provide under the co-employment model. As PEOs continue to grow, we predict these organizations will offer more niche-focused features and services that appeal to specific companies.
In the future, we expect PEOs to increase their business reach by adding elements that appeal to typically overlooked businesses in need of specific human resource and payroll services. For example, they may offer improved employee learning and development programs, which include interactive courses, digital books, or even live or virtual seminars.
PEOs offer two main forms of pricing: They either charge a per-employee fee or a percentage of your total payroll.
There are advantages and disadvantages to both types of pricing, and whether a PEO that charges you per employee or as a percentage of your payroll is right for you depends on your business, how many employees you have and the overall structure of the PEO plan.
There aren't any free trials with PEOs. Oasis Outsourcing was the only company that offered a plan that resembled a free trial, and it's in the form of a 90-day, money-back guarantee. During the initial phase of shopping for a PEO, ask the sales representative questions and iron out the details of service and how they relate to your business.
PEO contract length and structure vary by company. Some PEOs offer long-term contracts only while others don't require any contract at all. Cancellation policies also vary widely among companies and which plan you enroll in. Generally, you need to provide 30 to 60 days' notice before canceling your service. Some companies allow you to leave at any time for any reason; others charge you a fee for leaving.
Within each of our reviews, we've listed the cancellation policy of the PEO. It's critical, though, that you ask about the PEO's cancellation policy before you reach an agreement – you want the freedom and flexibility to cancel the service if you need to.
Below are additional crucial items to address with the PEO service you're considering hiring. You should go over this information – even though it may be available on the company's website – with a member of the PEO's sales team so you gain a complete understanding of the PEO's services.
- Additional fees. Ask the company upfront if there are any additional fees. Some companies charge for canceling service, for example. Make sure you thoroughly review the material the sales team gives you to spot any fees associated with service. If you're not sure, ask the sales representative. Also keep in mind that the cost structure, whether per employee or as a percentage of income, does not include additional costs for healthcare and other employee benefits plans.
- Employee minimums. Many of the PEOs we evaluated had an employee minimum; that is, they required a certain minimum number of employees – usually five or 10 – in order to qualify for their service. As you browse PEOs, keep in mind that you may need a minimum number of employees to qualify for the PEO offering. If you don't qualify, many companies offer ASO or HR outsourcing services, which may make sense for your business. Just be aware that while these services may be similar to the PEO model, it is a different agreement. Some companies also structure their services so a certain number of employees need to be enrolled in health benefits in order to qualify for service. Others require a minimum monthly salary requirement if your business is below a certain employee threshold. All of these companies have requirements and standards for the clients they take on. Make sure you understand what each company expects from you. If you fall below the PEO's employee minimum, for example, you don't want to have to cancel your services or pay an additional fee.
- Access to experts. Make sure the PEO you partner with provides you with a designated team of experts who can handle your HR, risk management, benefits and payroll needs. You want to partner with a company that provides specialists in each area, as well as a relationship manager who can help you use the services available to you to your full advantage. Sometimes the HR consultant doubles as a relationship manager, which is also a good option. The best companies have HR consultants who are certified by the Society for Human Resources Management (SHRM). SHRM certification ensures that your account coordinator is more than just a relationship manager.
- Plan structure. One final thing to pay attention to is how the company structures its plan. Some PEOs offer a one-size-fits-all solution, so you'll receive all your features for the same monthly fee. Others offer services that you can add and remove to tailor the plan to your small business's needs. There are advantages and disadvantages to both. A one-size-fits-all solution means you can grow into all the features without changing the pay structure, while an a la carte option is more customized to your business.
Co-Employment: How Do PEOs Work?
PEOs operate under a co-employment model, where your employees will appear on the PEO's books for legal and tax purposes. This allows PEOs to act as massive corporations with hundreds of thousands of employees. The co-employment model means these companies can negotiate contracts with employee benefits providers for more favorable insurance rates on workers' compensation insurance and unemployment insurance. It also means they have the power and scope to build and leverage powerful time and attendance and payroll technology for small businesses.
Once you sign on with a PEO, you'll work closely with customer success managers and other team members to build out the services you need for your small business. Many of the companies we reviewed offer a la carte services, where companies can sign up for individual services instead of full bundles.
As your business grows, your PEO will adjust to your needs and work with you. Working with a PEO under the co-employment model is essentially partnering with a team of specialists to build out the administrative and back-end processes of your organization. If it makes sense for your business financially, these organizations can take a lot of the stress (and handle most of the legwork) out of running your business so you can focus on more important needs.
More than 150,000 small businesses partner with PEOs across the country to get high-quality benefits and proper HR support to keep their businesses running smoothly. There are more than 800 PEO services companies serving and operating in all 50 states. A PEO must adhere to both state and federal regulations, so some companies are divided up by region or even state.
As you search for a PEO, keep your own state and region in mind – some PEOs are only qualified to serve small businesses in some states. Most of the companies we reviewed are qualified to offer coverage in all 50 states. If you're curious about whether a PEO operates in your state or not, you can look it up in the National Association of Professional Employer Organizations' directory.
We compiled a list of almost 60 PEO services after analyzing industry trends, considering companies featured on other review sites, reviewing top industry players and searching NAPEO's (the National Association of Professional Employer Organizations) website.
After analyzing their small business services, establishing whether they were national PEOs, reviewing their accreditation and NAPEO membership, and grading their online presence, we whittled the list down to 35 companies.
From the list of 35, we conducted further research and chose 12 companies that stood out as industry leaders. We picked these 12 companies by diving deep into their services and reviewing their HR, payroll, benefits, and risk management offerings. We also established the types of training resources and customer reviews the company had.
From the list of 12 companies we selected, we chose five that stood out as best picks for customer service, small business, startups, very small businesses and midsize businesses. We then reviewed each company's pricing structure, contract requirements, online and mobile access, the services the PEO offered, and standout features.
Of the five best picks we determined, we dug even deeper, evaluating the customer service and features the plans offer. We contacted our finalists by phone, speaking as small business owners. We inquired about the PEO's plan structure, pricing and cancellation policy. The five companies withstood each round of our testing and stood out in all of our interactions with them.
Common PEO Service Questions & Answers
Certainly Health insurance. You could consider Dental, Life, Disability, short and long-term. If you want to be different there is prepaid legal coverages. Depending on the age of the group there could be other coverages like long-term care also. The Health and Dental are the most common.
I work with hundreds of startups in the Boston area. TriNet is a preferred vendor due to the fact that we aggregate our entire client base, which makes up over 240,000 employees, giving us buying power with our carriers and the ability to price below the open market. We provide payroll, HR, workers comp and benefits to all of our clients under one umbrella. You are able to contribute any $ amount for benefits that the company is willing, but the employees will also have a full suite of...
There is no magic number when looking at hiring HR. You will experience pressure points that will let you know when it is needed. Some of these pressure points might be that you need employee manuals or handbooks that define the companies policies and procedures. Other pressure points might be a wrongful termination suit, pay inequity, harrassment claims. If you are in a growth mode you will want something or a process that is scalable. I have several clients that have hired my services...
I think people that choose one of the big guys do so because they are a known quantity. The smaller companies don't have as many reviews, and in some cases, can't provide all the services that are needed. They don't know what they are missing, as many clients go back & forth from ADP to Paychex because of problems. Our cloud based solution combines a powerful payroll & a web-based HR application along with the convenience of services typically offered by payroll outsourcing providers. ...
Also remember that benefits are not just insurance. I've worked at companies that do random prize draws, group dinners out, offer free services (like help quitting smoking, inexpensive daycare) or college tuition assistance. Free coffee is good, too.
Bravo that you're thinking this through! Gusto/Zenpayroll is a great option but does need to be monitored by a trained payroll eye, I've found two mistakes already with year-end filings with clients that I manage with them. I am happy with them otherwise, though, it's a great solution. Your tax accountant can advise you on reasonable salaries as well as draw structures that won't overdraw the basis and trigger capital gain. I've written a blog post in this same...