PEO 101: What are they and is it right for your company?

A Professional Employer Organization (PEO) is a people outsourcing firm that provides employee payroll and benefits services for businesses.  The PEO acts as a statutory employer which means that they administer payroll, taxes, and benefits for your employees.  As the employer, you control who you will hire and how much to pay them as well as which benefits are offered to your employees.  It is truly a contractual arrangement, as the company and the PEO co-employ the workers.

PEO’s specialize in HR compliance.  This can include everything from having an employee handbook to processing a worker’s comp claim.  PEO’s have an HR expert for every major compliance area, so rather than needing to outsource questions or issues to an attorney or other HR specialist, you can get the expertise from your PEO support team.

Additionally, if you are hiring in multiple states, a PEO can save you hours of time on paperwork and state filings.  Most small businesses don’t have a dedicated payroll department, and so the compliance aspect of the payroll filings will either fall to the accountant or the payroll processor.  Expertise is required to understand the nuance of filings in each state, so the PEO offers an assurance of state compliance.

Also, because your employees become co-employed with the PEO, the company is entitled to receive the purchasing power of a much larger organization for benefits – including medical, dental, vision, life insurance, disability insurance, employee assistance plans, etc.  Some PEO’s even offer help with setting up a 401k for a minimal fee as well.

Other benefits

As PEO’s have grown in popularity, their offerings have also grown, and many are now offering recruiting and hiring services as well as tools for employee performance reviews and goal tracking.  One PEO even has IT support. These add-on offerings can be bundled in the price, but they can also be added on later a la carte as they become more important to the organization.

The benefits of a PEO are not just for the employer, as employees gain as well.  Typically, the benefits package is a much more robust and varied offering than what a small company can offer.  If your employee loves Kaiser or an HMO, that offering is likely to exist at a PEO.  Because the overall cost of the medical insurance package is lower, employees’ percentage contributions to health plans (and often co-pays) are typically lower as well.  Finally, complex issues for employees like FMLA leaves are handled by the dedicated HR team, verifying that the process is handled quickly, discreetly, and in compliance with state laws. 

In today’s work-from-anywhere world, the PEO can have upside for as few as 10 employees.  Compliance and processing issues for individual states can be complicated, and the penalties for incorrect filings can often be as large as the filings themselves.

On the benefits side, small group insurance rates are in effect until 75 employees.  Small group insurance means that each individual and their dependents are priced out, rather than giving a standard group price for a specific type of coverage.  Depending on your mix of individuals working, this can be prohibitively expensive, especially when you go for a renewal.

PEO’s biggest critics site loss of control.  Paperwork and filings must be done the way the PEO wants, which means protection for your company and them, but often at the cost of additional work by the onsite team. Experience feels like the administrator of the plan takes on most of the burden of compliance, so be sure that whoever is responsible plans for the extra work.  

Additionally, local knowledge by an HR member or an HR team is not built-up on site, delaying the knowledge gain on-site until the PEO is discontinued.  Occasionally you run into employee resistance when the employee has had a bad prior experience with a PEO, although this seems to be less frequent these days.  And as always, you can have a weak PEO support team– due diligence and early intervention is key to minimizing this risk.

If you don’t have someone calling you from one of these companies already, it would be surprising, as their sales team searches state listings for small businesses.  Typically, the bidding process is as simple as giving a list of titles, location, and employee costs including salary and benefits.  They will come back with an estimate of costs which is typically a salary plus a flat percentage.  The percentage will be inclusive of employer taxes, benefits and the HR services that the PEO provides.

Websites for these companies’ site average cost savings on benefits.  If you are considering switching, getting several competing quotes at the same time will allow you to make sure you are getting the best deal possible.   While price is a factor, other Items to take into consideration are the HRIS system, the integration timeline and complexity, employee and employer support, and employee offerings just to name a few.

These PEO’s are the biggest players in the industry: