A professional employer organization (PEO) is a company that leases employees to another business. This way, they often share in the management and employee-related responsibilities and liabilities.
Here's what you need to know about hiring a PEO:
- PEOs offer a myriad of services from payroll or recruiting to compliance audits.
- PEOs offer solutions when you don't have time for HR challenges.
- PEOs work with you to develop service level expectations.
As any small business owner knows, there are approximately a million things that need your attention every day and a PEO can help. Everyone wears multiple hats to address everything from unique issues like the COVID pandemic to evergreen problems like how to handle human resources at a small company.
While figuring out how to handle the ongoing pandemic is still up in the air in many ways, getting a handle on HR is much less of a tall order (even if it doesn’t seem like it!). That’s thanks in large part to professional employer organizations or PEOs, for short.
Never heard of ‘em before or totally perplexed as to how they work? Here’s a crash course in all things PEO and how they can benefit your small (or even medium-sized!) business.
What is a PEO?
A professional employer organization is a company that leases employees to another business. This way, they often share in the management and employee-related responsibilities and liabilities. But, not all PEOs lease employees. Instead, some help with the employee-related business elements like:
- Paying wages
- Calculating employee taxes
- Offering guidance on compliance with regulations
The latter is how HR-focused PEOs such as TriNet operate. From processing payroll to administering benefits, a PEO takes the hassle of human resources off of smaller businesses’ plates. So, those that aren’t quite ready (or simply don’t want!) to handle HR on their own have an option.
After all, HR is a complicated industry that takes professionals years to become proficient. With everything else going on in your small business’s world, it makes total sense to outsource the complexity of HR to a company that is established and well-versed in the world of human resources.
How does a PEO work?
PEOs and other companies work together through contracts. The contract will establish what’s known as a co-employment relationship and outline what each company’s responsibilities are within the agreement.
Oftentimes, the contract will look something like this:
- The PEO client (i.e., your company) continues to manage and run its core business elements, usually as they relate to providing products or services to customers.
- The PEO assumes responsibility for all things HR-related — processing payroll and managing tax withholdings, administering employee benefits, and offering guidance on compliance with local, state, and federal regulations that govern your business.
It’s important to note that working with a PEO doesn’t change the ownership status of your business. You maintain complete ownership and control throughout, just without the hassles of HR admin and processes getting in the way.
Misconceptions about PEOs
When most people think of PEOs, they think of staffing agencies. HR-focused PEOs work differently than staffing agencies because their clients retain control of the employment relationship. The HR-focused PEO will simply take over HR processes to save you time.
But, just because they take over HR processes doesn’t mean that you can’t, or even shouldn’t have an HR manager on staff. Your HR employee can work hand in hand with the PEO you choose to manage HR at your business. This way, your HR employee and PEO can cover more ground together than your employee would be able to do on their own.
Using a PEO can actually be a particularly great solution for companies that already have an HR manager because the PEO can take over the time-consuming administrative processes like payroll and free up your human resources employees to focus on other areas of HR like company culture and performance management.
One other common misconception about PEOs is that some companies are too small to truly benefit from them. One of the main draws for engaging with a PEO early on in your business’s life is the ability to access benefits like health care options that only larger companies have access to.
The benefits of using a PEO
There are many benefits to working with a PEO, but they vary by each business and its individual needs. A company of 40 people has different HR needs and demands than a company with 150 employees.
However, there are some common threads to the benefits of using a PEO. Some of the most common ones are:
- Liability reduction. Many PEOs choose to offer workers’ compensation and Employment Practices Liability Insurance (EPLI). This can offer serious protections for you and your business should you find yourself with a lawsuit on your hands. Some also offer protection against any tax liabilities or penalties. That way, you’re not out of pocket if they mess something up. Overall, an established professional employer organization can offer small- and medium-sized businesses greater protection than they can typically afford on their own.
- Benefits administration. It takes a lot to manage benefits from health insurance to flexible time off and commuter benefits. That’s precious time that you could be spending focused on your KPIs for this quarter and beyond.
- Assistance with compliance and regulations. It takes a ton of time to just get your head around all of the local, state, and federal regulations that touch your business. That’s before you endeavor to ensure that you’re compliant with them, and then you have to maintain that compliance over time. A PEO can take this work off your plate, and, assuming you choose a reputable one that’s been around for a while, they’ll likely be much, much better at it anyway.
- Payroll, unemployment, workers’ compensation, and Family and Medical Leave Act (FMLA) administration. Whew, that’s a long list of things you have to handle when you think about it, huh? Beyond making sure that you have all of your ducks in a row when it comes to FMLA and workers’ compensation, a PEO will help with the administration of those programs and more. As anyone who has ever flubbed payroll knows, your employees will (understandably) be super upset when it happens, so why not engage a pro to make sure that’s never the case?
- Recruiting and hiring processes. Imagine all the time you could save if someone took all things recruiting and hiring-related off of your company’s plate? Especially for this mission-critical part of your business, having someone who knows what they’re doing can be a lifesaver, to say the least — particularly for small businesses that are just starting out.
Common concerns about switching to a PEO
Your business is your baby — for many, it’s been a labor of love to which they naturally become deeply attached. It can be challenging for many founders to let go of control over any aspect of their business, even when it becomes essential. So, naturally, there are some drawbacks to working with a PEO, such as:
- An outside influence on your company. From your company’s culture to how it handles time off requests and plenty in between, engaging with a PEO means you’re signing up for doing certain things their way. Not only can it be hard to let go of the control you’ve had since the beginning, but it can also be extra challenging if the way a PEO does things is at odds with the company culture you’ve worked so hard to create. That’s why it’s important to choose a reputable PEO and make sure that your contract is as comprehensive as possible. There’s no reason you can’t negotiate to make sure that their work is in line with your business’s culture and way of doing things.
- A big shift to bringing HR in-house. If you outsource your HR now but want to bring it in-house after your company grows and gets more established, you’re going to have a major shift on your hands. Of course, this can be largely mitigated by hiring the right HR professionals who can handle the transition.
- Security and privacy issues. Chances are that the PEO you work with will be in charge of handling employee information and a variety of sensitive paperwork and other matters. In today’s working world, this means that you’re relying on them for the safekeeping of essential material (think vaccination statuses, etc.). If this is a concern for you, be sure to vet the security and privacy practices of the PEOs you’re considering.
What do you do if your employees have concerns?
A lot of this will depend on how you present the decision to your workers. The specific contract terms you land on will also dictate what you communicate. But it’s understandable that employees will at least have some trepidation about the move; especially if your company’s culture is a strong selling point for your workers. The prospect of bringing another company into the mix can raise concerns.
Ultimately, it’s best to be prepared for pushback and be ready to respond to it with:
- An open door
How to pick the right PEO for you
Choosing the right PEO for your company is a major decision that shouldn’t be made lightly. The best thing you can do is to arm yourself with information.
Certain PEOs are accredited by either the Employer Services Assurance Corporation or the IRS (or both), which certifies PEOs as Certified Professional Employer Organizations, or CPEOs for short.
What do their customers think of their service levels?
After doing your research into who has legitimate accreditations and who doesn’t, the next thing to do is ask for client references. Any PEO worth its salt is going to have a long list of happy clients that they’re eager to share with you.
It’s also a good idea to go beyond a PEO-provided list by asking around your personal and professional networks. Find out if anyone has been working with a PEO they recommend. First-hand referrals are almost always the best way to go. This is especially true if you want to find a PEO that has experience in your business’s line of work.
Next, you want to ensure that any PEO you’re considering is able to deliver what you’re looking for. If that’s health care benefits administration, be sure that the PEOs you’re considering offer health care coverage in the geographic area (or areas) where your company operates.
Speaking of health care coverage, it’s also important to make sure that any PEO you’re looking at has experience working with businesses in your state and, ideally, your municipality if possible. Depending on where your business is located, there can be a ton of state and local regulations to contend with. Working with a PEO that has experience in your state and city can go a long way.
Plus, we all know that COVID has ushered in an era of remote work. So, one thing you should ask when interviewing potential PEOs today is how they manage HR with employees and teams scattered across the country and even globally.
Price matters but shouldn’t be your only deciding factor
Now let’s get into the nitty-gritty. One deciding factor when it comes to choosing a PEO for your business is cost. In general, PEOs charge either a flat rate per employee or a percentage of a business’s payroll.
As you can imagine, the flat fee is a much more predictable expense. The payroll percentage rate can change from cycle to cycle thanks to:
- New hires, etc.
You’ll also want to talk through how every PEO you’re considering handles transitions. Make sure you consider both the front end and the back end of their services. Ask questions such as:
- How long does it take them to get up and running?
- What kind of documents will they need?
- What kind of paperwork will be required?
The goal is to understand exactly what a transition will require in general. But you also need to know what you on the client-side are on the hook for so you can prepare.
You’ll also want to ask about the PEO’s transition process at the end of a contract. If you ever get to the point that you decide to bring your HR operations in-house, it’s important to know what to expect out of that process, too.
What’s your biggest 2022 HR challenge that you’d like to resolve
Answer to see the results
When choosing the right PEO, it’s about what works for you
Just like most things small business-related, there is no one size fits all answer for whether or not to use a PEO; or which one to choose. Instead, in order to make the best decision possible, you have to analyze and understand your individual business’s:
- Growth projections
Luckily, it’s never too early or late to hire a PEO to handle HR for your business. The right time to hire a PEO for HR is whenever the right time is for you and your business.