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What is a PEO? HR Experts Explain

Human Resources

Business owners may be familiar with the idea of a professional employer organization (PEO) but don't fully grasp the extent to which partnering with one can improve the efficiency and productivity of their business. To shed light on how PEOs work, three experienced human resources generalists responded to employers' most frequently asked questions about PEOs.

How would you explain a PEO to someone not familiar with the term?

Natashia Lawrence, Paychex human resources consultant (NL): Partnering with a PEO creates a co-employment relationship where the employees of small to midsize companies gain access to benefits normally available only to Fortune 500 companies. A PEO is able to provide employee benefits such as employee assistance programs (EAP), discount programs, 401(k) plans, and group health insurance through their negotiating position gained from having a large business or employee count. Companies that partner with a PEO  usually experience lower group insurance costs, workers’ compensation discounts, and, in most cases, a lower state unemployment insurance (SUI) rate because their employees are listed under the PEO's federal ID number for payroll purposes.

Janelle Rodriguez, PHR, SHRM-CP, Paychex senior HR generalist (JR): The PEO offers a bundled services product designed to assist small- to medium-sized organizations such as startups or businesses going through a restructuring. Companies can take advantage of a myriad of valuable products and services to assist with managing the HR aspect of running a business.

What types of services does the PEO provide?

Jillienne Allgäuer, SPHR, SHRM-SCP, area manager of Paychex HR Services (JA): A PEO offers administrative services that span the entire employment life cycle. From assistance with recruiting and hiring, development of an employee handbook, cultivating an attractive benefits package, and ongoing management training, to consulting on employee coaching and dismissal processes and handling unemployment claims, a PEO can provide businesses both substantial administrative relief and valuable resources.

NL: The PEO processes payroll and is responsible for reporting payroll taxes to the appropriate agencies, managing unemployment claims, administering 401(k) and FSA plans, and dealing with injuries if the company opts for workers’ compensation insurance through the PEO. The PEO also provides training and guidance to assist companies with maintaining compliance with federal and state labor and employment laws.

JR: In addition to payroll processing, the PEO administers SUI, and provides HR consulting services, workers’ compensation (if subscribed), group health and benefits plans (if subscribed), and flexible spending accounts (FSA). The PEO also provides online access to employees' payroll reports, pay stubs and Forms W-2. A good PEO should also offer outstanding customer support.

What businesses are good candidates for a PEO?

JA: Businesses wanting to position themselves as employers of choice are prime candidates for a PEO. By incorporating recruitment and retention tools into the service platform, PEO clients have at their disposal group benefits and resources that can help attract and keep top-tier employees.

NL: PEOs are ideal for, but not limited to, small to midsize companies seeking a partner to assist with the administration of their benefits, payroll, workers’ comp, SUI, and HR. Many business owners can't afford to hire their own HR and payroll administrators, and need a reliable solution to assist with the administration of these personnel-related functions. The PEO meets this need without the financial burden associated with hiring additional employees.

What do your clients find most valuable with a PEO?

JA: Two of the benefits most frequently cited by clients are saved time and money. From a cost-savings perspective, the buying power that a PEO can offer regarding workers’ compensation and health insurance are generally beyond what's available to the business when quoted as a stand-alone group. Clients also find that having the PEO absorb the time commitment associated with many of the general HR administrative tasks allows them to focus on their core business, regardless of the field they are in.

NL: Clients often find it valuable that a PEO is with them through the employment life cycle. They feel at ease knowing they're not alone, from the moment they decide to fill a position to the moment the employee is terminated, all the way through to COBRA and unemployment. This takes some of the strain off business owners so they can focus on what they do best — running their business.

In which areas does a PEO model help businesses be more effective?

JA: From an HR standpoint, the infrastructure that a PEO can help build for the client improves effectiveness organization-wide by adding consistency and validity to employment practices. Additionally, many business owners express that the most challenging part of running their company is actually managing tasks associated with their employees, not their core business. When an issue involves an employee — whether it’s a question about benefits, a labor regulation, or even a direct deposit change — the business can improve efficiency by streamlining these questions back to their PEO point of contact for clarification or resolution.

NL: The PEO model helps businesses become more effective in their HR infrastructure, payroll, and the management of their employee benefits. Companies looking to offer a competitive benefits package to their employees are more inclined to partner with a PEO to gain access to Fortune 500-level benefits and professional administration services, which may place their company in a more attractive position to gain and retain top performers.

What is the role of an HR professional within a PEO?

JA: The HR professional functions as a client's trusted partner and advocate whose role is to both inform the client on current employment-related regulations and to educate them on how best to leverage the advantages, services, and benefit offerings available through the PEO. The HR professional can also become a champion for the client — proactively identifying areas of risk, exposure, or potential development for the business via a combination of knowledge of current labor policies and rapport built with the client over time.

NL: The role of the HR professional is to be a consultant and account manager to their clients. This person conducts an in-depth HR assessment to develop a proactive plan of action that reduces their client's exposure to unlawful labor practices that could potentially cost the company thousands of dollars. They serve as the main point of contact for all products and services used by their clients through the PEO. They also tailor how these services are delivered based on the client’s individual needs.

JR: An HR professional plays a valuable role in relationship management, building trust and confidence with clients, as well as comprehensive account management. Sometimes, we're just a sounding board for business owners to vent and share their everyday frustrations. It's safe to say we "double" as counselors, helping our clients deal with one HR challenge at a time!

Professional employer organization (PEO) services are sold and provided by Paychex Business Solutions, LLC (PBS) and its affiliates, which are registered and licensed to sell and provide PEO services, including in Florida. PBS FL license numbers are Paychex Business Solutions, LLC, GL7, PBS of Central Florida, LLC, GM14, PBS of America, LLC, GM46, Paychex PEO I, LLC, GM455, Paychex PEO II, LLC, GM456, Paychex PEO III, LLC, GL193, Paychex PEO IV, LLC, GM519 and Paychex PEO V, LLC, GM 522.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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