PEO stands for Professional Employer Organization.
Sound confusing? The name is a bit vague. Simply put, it’s a company that offers certain HR and business functions for small and mid-size businesses (SMBs).
What does a PEO do?
PEOs manage payroll, taxes, employee benefits, compliance, and other administrative tasks so you can focus on growing your small business.
An important thing to note is that a PEO is different from using HR software services. The main point of difference is the amount of control you have. While using HR software certainly makes managing HR from a non-HR pro position easier, none of the liability is taken off of you. It’s still 100% your job to know, understand, and follow all local, state, and federal laws. However, with that responsibility comes control. You’re free to organize and carry out your HR processes as you see fit.
This becomes a different story if you go the PEO route.
How does a PEO work?
If you decide to work with a PEO, you’ll enter into what’s called a co-employment model. This means that the PEO you sign with will become the employer of record — you’ll likely file taxes under the PEO’s ID numbers. However, the PEO will also take on some of the legal liability.
Of course, with taking on that liability, there are rules. Many will want you to not only follow, but formally adopt, their policies and procedures. This can even go as far as using their employee handbook. The fine print usually says something about the PEO only assuming liability if you’ve used and followed their policies, procedures, and guidelines. This is obviously seceding control to an entity outside of yourself and your business.
The next thing to consider is PEO payment methods. Every PEO is different, but there are 2 common ways that they go about charging for their services. The first one is taking a percentage of your company’s payroll each pay period. This percentage is often based off of your total payroll as well as all taxes, workers compensation, and other liability insurances. There is also usually an additional administrative fee on top of this percentage.
The other way PEOs get paid is by taking a per-employee-per month fee. Rather than an administrative fee, this option usually includes a startup fee upfront. While this is certainly a fee you can negotiate, it often doesn’t include additional services like cutting extra checks or installing upgraded features.
What is the relationship between a PEO and employees like?
Naturally, any good small business owner will wonder what impact partnering with a PEO will have on their employees. In a co-employment situation, your employees will technically be employed by 2 companies: your business and the PEO.
However, you’ll retain control over the hiring and firing of your employees and other day-to-day business operation decisions just like you’ve always been, so it will probably feel like little has changed to your employees depending on the specifics of your situation.
How do I know if a PEO is right for me?
Like most small business decisions, the choice is yours and there’s no right or wrong answer for everyone and each individual PEO is different. You have to filter the pros and cons through your specific situation and make the choice that’s best for you.