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What Is a PEO? A Guide to Professional Employer Organizations

What is a PEO? Use this guide to learn more about the benefits of using a PEO in the year ahead.

As a business owner, you may think that comprehensive HR solutions and offering an impressive benefits package to help you retain top talent seem beyond your grasp, particularly when other areas of the business require your time and attention. That's why understanding what a professional employer organization (PEO) can offer and understanding the potential benefits of using one to outsource your HR functions may open a wider range of benefits to your team.

What Is a PEO and How Does It Work?

Businesses looking for HR help may wonder: What are PEO services? Professional Employer Organizations allow companies to outsource certain key human resource administrative functions like payroll, benefits, training, and gain guidance to assist with maintaining compliance with federal and state employment laws. Working with PEO services from Paychex can help you as a business owner and your management teams focus on the business.

The client company and the PEO enter into a contract typically known as a client service agreement (CSA) or Service Level Agreement (SLA). The CSA/ SLA addresses the relationship between the client employer and the PEO and generally includes the following:

  • The PEO acts as the administrative employer for certain administrative services and the client acts as the worksite employer. The PEO can offer support to a business’ in-house HR staff and teams.
  • The client company maintains the responsibility for hiring and managing the employees and for handling all other non-employee related aspects of the business operations (e.g., sales, marketing, customer service).
  • The professional employer organization is now responsible for processing employee wages, benefits, and withholdings and for remitting and reporting taxes to any applicable state and federal authorities for the duration of the CSA.
  • The PEO helps the client company maintain compliance by keeping track of complex employment laws and offering risk management strategies. This may include payroll tax laws and reporting requirements, workers’ compensation, and employee relations issues.
  • A dedicated HR professional may work with the client company to help the organization proactively address key areas of risk, helping ease any concerns around employee relations and accommodations, terminations, and other employee-workplace issues.
  • Certain responsibilities, such as development of an employee handbook, may be shared between the client company and the PEO as outlined in the CSA.

Is a PEO an Employee Leasing Provider?

Professional employer organizations may often be mistaken for an employee leasing provider. To understand the difference between employee leasing vs PEO, it helps to have a clear definition of what each employment arrangement entails. In a PEO arrangement, the PEO and the client company share certain administrative responsibilities for employees. The PEO is generally responsible for processing employee pay and payroll taxes and benefits administration. The PEO provides support to clients to assist in their compliance with applicable state and federal labor laws, regulations, and HR policies that cover the employees, but is not responsible for providing employees directly to a client company. The client company is still responsible for managing its employees and generally retains control over when to hire, fire, or promote its employees.

In an employee leasing arrangement, employees are temporarily leased to a client company by a third party, such as a staffing agency. The staffing agency manages these employees completely, including remitting payroll, hiring, firing, and delegating work assignments. The staffing agency and the client company have a staffing agreement that stipulates how many employees will be provided, how long they will be provided, what type of work will be done by the employees, and how much the client company will need to pay for the leased services.

Benefits of a PEO

While it may be difficult to trust certain aspects of your business operations to an external organization, business owners across the country are realizing PEO benefits. So why use a PEO? For time- and energy-strapped employers, working with a professional employer organization can free up a considerable amount of company resources that would otherwise be spent on payroll and other required, but time-consuming tasks.

Paychex HR consultant Jillienne Allgäuer, SPHR, SHRM-SCP, outlines some of the most important PEO benefits for business owners to consider: "A PEO can offer support with administrative services that span the entire employment life cycle. From assisting with recruiting and hiring, employee handbook development, 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."

Businesses can expect many valuable PEO advantages, including:

  • Time savings: Clients may find that having the PEO absorb the time commitment associated with general HR tasks allows them to focus on other core business operations.
  • Cost savings: The buying power that a PEO can offer regarding workers' compensation and health insurance are generally beyond what's available to small businesses.
  • Peace of mind: Business owners may feel at ease knowing they are not alone at any point throughout the employment life cycle.
  • Better benefit offerings for employees: Companies looking to offer competitive benefits packages gain access to Fortune 500-level benefits and professional administrative services.
  • Improved tracking and administrative functions: The PEO will generally conduct an in-depth HR assessment designed to minimize risk and maximize growth and development opportunities.
  • Business growth: According to NAPEO “Businesses in a PEO arrangement grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business.”

How To Select a PEO

Although PEOs offer multiple cost, time, and administrative savings, working with a PEO may not be right for every business. Even after determining that a PEO can benefit your company, it's important to select the PEO that offers the right combination of add-on services, range of benefits, and flexibility in service agreements. The PEO’s stability and reputation in the industry may also be important factors. Since a PEO can have a significant impact on the experience of your employees, consider these best practices to help choose the right PEO that can deliver on your most important needs.

Examine Accreditation, Auditing, and Performance

PEOs are a highly regulated industry, given that they handle sensitive employee data, complex documentation and tax forms, and a large volume of cash flow. Your first line of due diligence when choosing a PEO is to ensure it is as well-run as possible. You might consider the following to evaluate a PEO:

  • Are they a member of the National Association of Professional Employer Organizations (NAPEO)?
  • Are the PEO's financial statements and operations verified by an outside source? Wherever possible, ensure the PEO's financials are reviewed and approved by an objective auditor.

Get Compliance Support

Failing to comply with all applicable state and federal tax and employment laws can have time-consuming and costly consequences for your business. That's why working with a PEO provider that has compliance expertise is integral. A PEO should have the knowledge to help you with your compliance concerns and the ability to support you as you develop systems and processes that make compliance easier, from monitoring changes to meeting critical compliance deadlines.

Gain Access to a Range of Benefits

Another important area to consider is what benefits the PEO offers. A major reason companies choose to work with PEOs is to obtain access to a larger pool of benefits options. Take the time to learn what programs the PEO offers, how those programs compare with your current offerings, and what the costs will be. Consider any value-add services offered by the PEO, such as pet insurance or employee assistance programs, that can help you recruit or retain high quality employees.

Evaluate Client and Professional References

Ideally, you want to work with a PEO provider that has an established track record working with businesses like yours. Factors to consider could include your industry, company size, or specific goals and business challenges. Look for case studies that can demonstrate how they'll solve your challenges — then speak to customers, references, and business partners to get an outside perspective on their performance. By getting another opinion, you'll be able to better verify the information you've gathered on your own and have a better understanding of what to expect before entering into a PEO services agreement.

Do PEOs Provide Employee Benefits?

As mentioned above, a company's employees may gain access to benefits normally available only to large companies when they leverage a PEO. This can include health insurance, disability insurance, employee assistance and discount programs, 401(k) plans, and others. Beyond these, the PEO also provides online access to employees' payroll reports, pay stubs, and W-2 forms without requiring the client company to purchase and set up the infrastructure to provide these services to its employees.

Companies that work with a PEO usually experience lower group health insurance costs, since PEOs can negotiate excellent rates with insurance companies with its larger employee count. In certain states, PEOs can offer a lower state unemployment insurance (SUI) rate because its employees are listed under the PEO's ID number for payroll purposes.

How Many Businesses Use a PEO?

PEOs in the United States provide services to 173,000 small and mid-sized businesses, employing 4 million people, according to a 2021 NAPEO survey. NAPEO also reported that the typical PEO has 19 worksite employees per client employer.

What’s the Difference Between a PEO and HR Software?

The PEO allows your company to outsource key HR functions such as payroll, benefits and employee training, as well as providing guidance for maintaining compliance with federal and state labor employment laws. Software only provides a platform for you to manage all of these activities on your own.

How Are PEO Services Delivered?

Knowing that every business has unique needs, a PEO can provide customized HR services to help guide your day-to-day strategy and growth initiatives. You may also be supported by subject matter experts with guidance on recruitment, workplace safety, benefits and workers’ compensation when you need it.

How Does a PEO Help Control HR Costs?

A PEO's economy of scale helps you to lower employment costs and increase the bottom line. You can maintain a simple in-house HR infrastructure or none at all by relying on the PEO, thereby reducing hiring overhead. A PEO provides critical assistance with employer compliance, as well as time savings, by handling routine and redundant activities.

How Much Does a PEO Cost?

The PEO cost is determined by several factors, including the size of the business, which services will be outsourced, and the number and type of employees on the payroll. PEOs typically charge either a flat fee per employee or a percentage of the total payroll.

To evaluate expected PEO costs, calculate the yearly expenses using both pricing models. Many PEOs are willing to be flexible on pricing arrangements when starting a new contract, so it can be helpful to know which option makes the most financial sense for your business.

How Much Can I Save With a PEO?

NAPEO suggests that companies using a PEO grow faster than their peers, are more likely to stay in business, and have less employee attrition. Additional NAPEO research reported that the annual return on investment for cost savings alone is 27.2%. This means that for every $1,000 spent on PEO services, a client can save an average of $1,272, yielding a cost savings of $272 for every $1,000 spent.

What Is the Difference Between a PEO, ASO, and HRO?

A PEO is only one type of HR outsourcing. Other options are also available, all of which can help you manage your business more effectively. Knowing the differences between them is important when evaluating your options. Most notably, outsourcing options have specific levels of services and support.

  • PEO: A total HR solution where the PEO acts as the administrative employer for certain services such as processing employee wages, benefits, and payroll taxes. The client employer is the worksite employer and is responsible for hiring and managing employees and handling all non-employee-related business operations.
  • ASO: An administrative services organization model where certain HR-related tasks are outsourced to a third party, but the employer retains administrative employer status.
  • HRO: Human resources outsourcing provides businesses with the flexibility to outsource a few or many HR tasks to a third-party provider. This can include services such as hiring and recruiting assistance, access to state-of-the-art HR technology, expert guidance from an HR professional, or any combination of solutions.

Free Up Time and Resources With a PEO

Choosing the right professional employer organization can take your human resources efforts and responsibilities to the next level — resulting in increased retention, better benefits, and significant cost savings for your business.

Learn more about Paychex PEO Services which provide various options to help you meet your business needs. This investment can reap significant rewards for your small business moving forward and free you up to focus on continued business growth in the future.

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Paychex PEO Services provide various options to help you meet your business needs.

* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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