What Is a Professional Employer Organization?

Perhaps you have heard of Professional Employer Organizations (PEOs), but may not fully comprehend what this term entails. Here, if you are an employee seeking answers about PEOs in the workplace or a business owner looking for ways to streamline HR processes, this resource provides insight into this fascinating concept of Professional Employer Organizations (PEOs).

Here, we will explore what these organizations are and how they operate in today’s dynamic business landscape. Read on to discover the benefits PEOs offer to businesses and find out why you should work with a PEO and employee leasing company.

PEO Meaning: What Is a PEO?

PEO stands for a professional employer organization. Also called an employee leasing company, it’s a human resources organization that growing businesses hire to do a variety of administrative tasks like payroll, taxes, regulatory compliance assistance, employee benefits, etc.

In effect, PEOs can be considered co-employers or arrangements combining the employees of a few companies to offer reduced paperwork and lower costs. Moreover, they can help increase efficiency by providing more favorable workers compensation coverage as well as better health insurance and retirement packages.

Research has found that small businesses working with PEOs grow 7-9% faster while having 10-14% lower employee turnover. Overall cost savings alone account for about 27 percent of return on investment (ROI). There are over 800 organizations like this operating within the US alone serving over 170,000 companies and employing approximately three million employees.

PEO vs Payroll Company: What’s the Difference?

A PEO and a payroll company serve distinct functions in the realm of HR and employee management. While both provide payroll services, a PEO offers a broader range of HR-related functions compared to a payroll company.

Unlike professional employer organizations that share employer responsibilities by offering a comprehensive suite of PEO services beyond payroll, payroll companies focus primarily on payroll processing, handling tasks like calculating wages, taxes, and issuing paychecks.

PEO vs Temp Agency: What Is the Difference?

Many people also confuse temp agencies (temporary employment) with PEO because some of their services provided are quite similar. There’s a significant difference between them, though.
Consider PEOs as co-employers that take on administrative functions on behalf of their clients. Temporary staffing agencies on the other hand are temporary staffing solutions designed to fill temporary roles for companies in short-term jobs or special project overload situations.

Related: PEO vs employee leasing

How Does a PEO Work?

Both the professional employer organization and business share specific employer responsibilities in their co-employment relationship. As a co-employer, the professional employer organization typically pays payroll taxes while processing withholds and maintaining compensation coverage for workers.

That allows businesses to focus on their regular operations, such as providing services and/or products to customers. They are still responsible for decisions on which workers to terminate or hire. In addition to being a co-employer, the PEO can also act as the tax-related and legal employer for client companies.

The professional employer organization also negotiates less expensive yet more expansive benefits, unemployment insurance tax rates, and workers’ compensation. Even though PEOs handle all of these tasks, this does not imply that you give them full control or ownership of your business. The professional employer organization you use won’t:

• Help you with marketing, product, or sales distribution
• Independently decide on matters pertaining to your business
• Dictate pay schedules, rates, or hours

Related: Leased employee definition

Why Would a Company Use a PEO?

Now that you know what PEO means and how it functions, you also want to know whether working with such an organization can be advantageous for your business. Here’s what PEOs can do for you:

• Benefits administration ‒ Co-employment arrangements generally come with budget-friendly, high-quality health insurance and dental care in addition to retirement benefits as well as other perks for employees. For these benefits, most PEOs handle employee enrollment while processing claims for clients.
• Payroll and tax filing ‒ Aside from processing payroll, PEOs also pay employment taxes in some cases, not only local but also state and federal too. To reduce errors and duplicate data entry, payroll can be integrated with attendance and time.
• Compliance ‒ If you want your business to be protected from penalties and fines, you should use a PEO. Their compliance experts have expertise in unemployment insurance, HR administration and compliance, and employment laws. They are also supposed to meet reporting requirements and payroll tax regulations.
• Human resource support ‒ The majority of PEOs have human resource professionals who offer HR services. Many companies already have a team or an in-house expert in this field. In that case, PEOs may partner with them in strategic and administrative ways.
• Risk and safety ‒ Some PEOs offer training programs and safety audits (besides workers’ compensation) to client companies to help them limit claims. Sometimes they provide assistance with OSHA inspections as well.

Things to Consider Before Starting to Use a PEO

• Hiring a professional employment organization (PEO) can be invaluable for most businesses, yet every organization must take some important considerations into account prior to using one.
• Pricing PEO services depends heavily upon the number of employees and percentage of overall payroll for a company.
• Professional Employer Organizations (PEOs) typically do not partner with companies with less than 10 employees; ideal numbers range between 18 and 80. Working with a PEO means handing off some or all administrative responsibilities of your business to us.
• Structure and length of contracts will differ between organizations. Should you decide to cancel, however, fees may apply when cancelling.
• Not every professional employer organization (PEO) offers all the same services; additionally, PEO services vary widely.

Tips on How to Choose a PEO

Let’s say you have considered everything mentioned above and decided to use a PEO. If so, consider the following tips to select the ideal PEO for your business:

• Look for a PEO that can meet the needs of both your employees and your business.
• Check if a PEO boasts fiscal stability and has a strong track record.
• Work with a PEO that has compliance expertise and provide comprehensive support.
• Supply references and read reviews from their clients, especially ones in your industry.
• Make sure a PEO offers coverage and services where you’re doing business.

Related: What is a certified peo

What Types of Businesses Benefit From PEOs?

As stated by the National Association of Professional Employer Organizations (NAPEO), their typical clients are small businesses with about 20 employees. It comes as no surprise given that professional employer organizations are geared toward small and mid sized businesses.

That’s not to say large companies can’t partner with a PEO. Professional employer organizations can be a good fit for just about any industry, including:

• Dealers and securities brokers
• Real estate management
• Engineering and computer services
• Healthcare
• Manufacturing
• Legal services
• Auditing, accounting, and bookkeeping
• Management consulting
• HVAC and plumbing
• Wholesale
• Insurance
• Nonprofits

Summary

Professional Employer Organizations (PEOs) offer a comprehensive solution for businesses seeking to streamline their human resources, payroll, and compliance functions. By partnering with a PEO, companies can focus on their core operations while entrusting HR-related tasks to experts. This eventually results in increased efficiency and reduced administrative burdens.

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