Professional employment organizations (PEO)

A PEO is a firm that provides comprehensive HR solutions for small to mid-sized businesses. Partnering with a PEO allows these businesses to outsource a range of functions, including payroll administration, employee benefits, HR tasks, and compliance with local and federal regulations.

At the heart of the PEO arrangement is a co-employment relationship. This means the PEO co-hires the client’s employees and becomes their administrative employer, while the client company remains the “worksite” employer, retaining control over day-to-day operations and management of employees.

Services provided by a PEO

Engaging with a PEO allows companies, especially smaller ones, to cost-effectively outsource many of their human resource tasks and focus on their core operations. The services a PEO provides typically include:

• Payroll administration. PEOs handle all aspects of payroll, from calculating pay based on hours worked to withholding taxes, managing deductions, and distributing paychecks. They also handle payroll-related tax filings and ensure compliance with local, state, and federal regulations.
• Employee benefits management. PEOs can manage and administer a wide range of employee benefits. Due to their economies of scale, they can often negotiate better terms for health insurance, dental and vision coverage, retirement plans (like 401(k)s), life insurance, and other benefits.
• HR compliance and consultation. PEOs help businesses stay compliant with ever-changing labor laws and employment regulations. This includes assistance with workplace posters, employment practices, and employee handbooks.
• Workers’ compensation and risk management. PEOs provide workers’ compensation coverage, manage claims, and offer risk management tools to reduce workplace hazards and potential liabilities. They also assist with OSHA compliance.
• Recruitment and talent management. Some PEOs offer support in recruiting and talent management, helping businesses find, hire, onboard, and train new employees. They may also assist with performance reviews and employee development programs.
• Employee training and development. PEOs can offer training programs on topics ranging from workplace safety and sexual harassment prevention to leadership development and skills training.
• Employee relations and dispute resolution. PEOs provide guidance on employee relations issues, helping resolve conflicts and ensuring a harmonious workplace environment.
• Termination and unemployment. In the event of employee terminations, PEOs can assist with exit interviews, handle unemployment claims, and ensure that terminations are done in compliance with the law.
• Reporting and analytics. Many PEOs offer robust reporting tools, giving businesses insights into HR metrics, payroll data, benefit utilization, and more.
• Time and attendance management. PEOs often provide systems to track employee hours, manage time-off requests, and ensure accurate and compliant timekeeping.

Understanding PEO’s co-employment

Businesses, from accountants to tech startups, can collaborate with PEOs. In this partnership, both the PEO and the business split the roles and responsibilities of employment. This division is detailed in a PEO agreement. While the business continues its usual operations, the PEO handles HR-related tasks, like payroll. This arrangement simplifies compliance for businesses and reduces risks.

PEO pricing

The pricing models vary between PEOs, but they generally fall into a few common categories. One of the most common pricing structures is a percentage of the company’s total payroll. For instance, a PEO might charge 3% of the total monthly payroll. So, if the monthly payroll is $100,000, the PEO’s fee would be $3,000.

Some PEOs charge on a per-employee basis. The cost might be a fixed monthly fee for each employee on the payroll, such as $100/month per employee. This model is more predictable than the percentage-based one, especially for companies with higher average wages.

Other PEOs opt for a flat administrative fee plus the actual cost of services used. For instance, a PEO might charge a flat fee of $1,000 per month plus the actual costs of benefits, workers’ compensation, etc.

As businesses scale up their workforce, some PEOs offer tiered pricing or volume discounts. The per-employee rate might decrease as the number of employees increases.

PEO pros and cons

While PEOs offer numerous advantages, especially in administrative relief and access to expertise, they might not be the right fit for every business. Here’s a quick recap of PEO’s advantages and disadvantages.

Pros

• Cost savings. PEOs can often negotiate better rates for health insurance, workers’ compensation, and other benefits due to their purchasing power, resulting in potential cost savings for businesses.
• HR expertise. PEOs provide businesses with access to HR experts, ensuring compliance with local, state, and federal regulations, reducing the risk of legal issues or penalties.
• Administrative relief. Outsourcing HR tasks, payroll, and benefits administration can free up time for business owners to focus on core business operations.
• Access to better benefits. PEOs can offer a wider range of benefits than a small business might be able to provide on its own, helping to attract and retain top talent.
• Risk management. PEOs help manage risks related to employment, ensuring businesses are compliant with employment laws and regulations. They can also assist with workplace safety programs to reduce accidents and workers’ compensation claims.
• Scalability. PEOs allow businesses to scale their HR operations more easily, adapting to the changing needs as the business grows or contracts.

Cons

• Loss of control. While partnering with a PEO, some businesses may feel they have lost some control over certain HR functions or decision-making processes.
• Cost concerns. Even though PEOs can lead to cost savings in some areas, the fees associated might be a concern for some businesses. It’s essential to weigh the benefits against the costs.
• Contractual commitments. Some PEOs might require long-term contracts, limiting a company’s flexibility if their needs change.
• Potential cultural impact. With an external organization handling HR, there might be concerns about maintaining the company’s unique culture and values.
• Data security. Sharing employee data with an external organization always carries some risk. It’s crucial to ensure that the PEO has robust data security measures in place.
• Potential misalignment. If a PEO’s offerings don’t align well with a company’s specific needs or the business operates in a highly specialized sector, the partnership might not be as beneficial.

Note! In the US, PEOs can get accreditation. The IRS oversees the CPEO program, and ESAC offers independent third-party accreditation. Many PEOs in the US are NAPEO members.

PEO vs EOR (Employers of Record)

While PEOs share employment responsibilities, EORs take complete charge as employers, especially on an international scale. PEOs aid in HR and payroll for local workers. In contrast, EORs handle all employment aspects, including legalities, for global hires. EORs, like MWDN, operate in numerous countries, allowing businesses to hire globally without diving deep into local labor laws.

If you have a local team, a PEO can amplify your HR operations and ensure you comply with local laws. For international hiring, consider an EOR. If you need flexibility in both local and international hiring, services like MWDN might be your best bet.