If you are an employee or owner of a small business or multiple entrepreneurial business operations, you may notice that the same luxuries afforded to multi-faceted, larger-scale organizations aren’t possible for every kind of business. Oftentimes, departments like human resources fall by the wayside for small business owners (and even some larger corporations) because of a lack of time, expertise, or resources to manage an HR department.
Still, a business needs to take advantage of the benefits available to them and match the standards set by other businesses in their fields. That’s where a professional employer organization (PEO) comes in. A PEO can take small, medium, or growing businesses and offer many of the same benefits and support that larger organizations enjoy.
When you use a PEO, you can find a valuable solution that allows smaller businesses to focus on strategic growth instead of allocating resources to time-consuming HR tasks. Throughout this article, we explore what a PEO is, the competitive benefits and HR support it provides, and why having PEO services in-house can bring you and your business much-needed peace of mind.
What is a professional employer organization (PEO)?
So, what is a PEO? A professional employer organization is a service that allows organizations to outsource essential functions in the human resources department. This includes HR-related tasks like payroll services, employee benefits, compensation, and regulatory compliance with federal and state employment laws.
While PEO benefits can be useful for organizations of all sizes and industries that can benefit from the benefits that PEOs offer regarding HR management solutions, PEOs are most beneficial to small businesses and startups.
Because money isn’t as abundant and time is divided between smaller staff and management teams, it’s much more difficult to run certain services in-house, like human resources. However, attempting to outsource HR services from multiple different vendors can often end up being more time-consuming and expensive for both the vendor and business than it’s worth.
Using a PEO can help to bypass these road bumps and use HR professionals’ needed expertise while allowing for time and cost savings. That’s why using a PEO service for HR management is so beneficial to smaller business owners.
How does a PEO work?
With remote and hybrid jobs more prevalent than ever, many small businesses struggle to enforce compliance across multiple miles and state lines. Without being able to offer the competitive benefits that larger corporations offer, keeping top talent on board can be a challenge.
When a PEO takes care of some of these benefit packages, employee turnover lessens, and the satisfaction of everyone involved increases. The National Association of Professional Employer Organizations (NAPEO) found that employee turnover lowers by 14 percent when a PEO is in place.
One element that’s unique to outsourcing a PEO is the idea of co-employment . Co-employment is a relationship in which a contract allows a small business and a PEO to share the weight of employment responsibilities. The PEO becomes the administrative employer while the business acts as the worksite employer.
Co-employment makes it a lot easier for a business owner to focus on the growth of the business and its big picture while the PEO takes care of the more tedious but necessary administrative tasks.
10 Advantages of a PEO for small businesses and startups
There is a multitude of benefits that a PEO brings. Working alongside a PEO helps lower the liabilities and expenses associated with your business, making PEO insurance financially supportive.
1. Employee benefits
PEOs cover a vast number of employees, allowing them to offer competitive prices for various benefits packages. Oftentimes the benefits of a PEO are of a higher quality than those offered by massive names in business.
2. Payroll
If your business is co-employed with an IRS-certified PEO, they can do much more than just take on the responsibility of handling the paychecks. These PEOs can report and remit payroll taxes on behalf of your organization. However, you can be held responsible for late fees, unpaid taxes, or accrued interest if they aren’t certified.
3. Employee handbooks
Typically, a PEO will help to create and upkeep an employee handbook for your organization. When well done, employee handbooks can help clearly define your business’s mechanics, maintain a concise vision, and prevent potential conflicts.
4. Workers’ compensation
PEOs can assist in workers’ compensation by implementing best practices for workplace safety to help mitigate risk and handle claims administration.
5. Compliance
Compliance in business occurs when an organization adheres to rules, regulations, and labor laws across the entirety of its team. This becomes harder to regulate with remote work, but a PEO can help. A PEO can help to regulate a long list of requirements that need to be met by an employer, including tax regulations, unemployment insurance, workers’ compensation, disability laws, and more.
6. Employee training and onboarding
With a PEO, you can provide up-front training for new employees on topics like compliance and skill-based subjects. This not puts your best foot forward for new hires and can help further your business’s development.
7. Employee performance
PEOs can implement effective performance reviews for employee advancement. They can also provide evaluations or coach upper management teams on how to better evaluate the staff for themselves and help create skill-based training programs to further your employees’ skill sets.
8. Retirement plans
PEOs can offer various retirement plans that allow employees to contribute different amounts to their 401k each pay period. Some organizations might match that amount as well, doubling the employee’s contribution each time. A PEO can also help save part of an employee’s salary towards retirement.
9. Recruiting
A PEO can help to expand the range and success of your job postings when hiring new employees. The PEO will draft powerful job descriptions that can reach farther than your business would be able to on its own, resulting in a wider pool of qualified candidates.
10. Business growth
As mentioned above, a PEO takes on many of the time-consuming administrative tasks, which allows the business owner to collect their focus on more pressing or big-picture matters. This could be the vision or mission of the organization, money-making tactics to grow revenue, or more effective ways to grow client relationships. All of these items allow the business to flourish in ways that would be more challenging otherwise.
Drawbacks: 4 Disadvantages of a PEO
While PEOs are packed full of administrative benefits for you and your employees, it’s important to note that there are some lines PEOs won’t cross when it comes to business territory. The tasks outside of a PEOs scope of work include things like marketing and sales services. They won’t make operational decisions on behalf of your organization either, as they only manage employee-related administrative tasks.
Here are a few other examples of PEO drawbacks.
1. Less flexibility
Because the PEO is in charge of certain delegations, some choices are out of the hands of employees or even business owners. For example, if the staff favors the insurance or healthcare provider currently working with the organization, but the PEO decides it’s better to move to a different one, there isn’t much to be said on the matter.
2. PEO fees
A PEO will charge fees based on how rapidly an organization brings in new hires. If your small business or startup tends to expand in short bursts of time, be ready for the fees the PEO will bring with it.
3. Compliance risks
As with any partnership, there are risks involved with allowing another party to make decisions and carry out tasks on your behalf. Where a PEO is in charge of various tax and salary-related elements, you run the risk of being held liable for missed payments, interest, and unpaid taxes.
4. Organizations’ financial health
PEOs tend to favor working with businesses with a healthy and consistent financial record. They won’t look kindly on organizations with any criminal financial history or a history of sketchy dealings. If your business has struggled with finances in the past, finding a PEO might be more of a challenge.
Employee benefits: What can a PEO-sponsored plan include?
PEOs can give small business access to different benefit plans that would be unaffordable otherwise. These include:
- Health insurance plans
- Life insurance
- Retirement savings plans
- Dental care
- Vision care
- Disability coverage
- Commuter benefits
- And group discounts on products and services.
If you want to provide a benefits package to your employees but are out of ideas on how to make it attainable, a PEO might be a smart financial investment.
Employee health: The difference between a PEO and a PPO
A PEO is not to be confused with Preferred Provider Organization (PPO). Where a PEO is helpful with a wide variety of administrative and HR responsibilities, a PPO is meant to provide a more flexible experience when searching for healthcare services. A PPO is a network of healthcare providers that don’t dictate what you can choose, while a PEO focuses on human resources services.
When you use a PPO, you don’t need a primary care provider and can receive various non-emergency benefits. However, you should expect to pay more per coverage plan for the added flexibility.
PEO vs. HR outsourcing: Which one is better?
Human Resources Outsourcing (HRO) works similarly to PEO, but they have a few key differences. Where a PEO takes on partnered employer status to you and your business and helps to bear the responsibility of your employee’s HR needs, an HRO works as an independent contract provider that offers a variety of HR functions.
When deciding which to go with, it’s important to ask yourself what the biggest needs are for your size of business and employee pool. If you need an entity to lift the weight of dogmatic but important tasks from your shoulders so that you can finally grow your startup into something with vision and direction, then the PEO would be a beneficial asset.
If you want to delegate HR tasks to an entity but still keep your hand on the operations, an HRO might be the better option.
How to choose the right PEO for your business
In order to choose the right PEO for your business, you should consider determining factors such as pricing and the PEO’s financial, client retention, and compliance records. A PEO usually operates under one of two pricing models.
It either works with a fixed monthly fee per employee you’ve hired or costs a percentage of payroll plus added taxes and workers’ compensation fees. Be careful of any hidden fees associated with it as well by asking beforehand what bells and whistles come from behind the curtain before signing on with a particular PEO. Also, ensure that the PEO you choose comes with all the services you need to manage your business properly. Nothing is worse than signing the check over only to discover that a vital portion of their responsibility is completely missing.
The importance of managing human resources effectively for risk management and navigating employment issues is one that can’t be emphasized enough. Payroll processing, benefits administration, and compensation management solutions help businesses focus on driving growth.
