What Is A PEO?

What Is A PEO?

A Professional Employment Organization, PEO for short, provides employee management solutions in two main ways. First, they can act as co-employer, or second, they can be the Employer On Record. The Employer On Record can be significant for elements of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the State Unemployment Tax Act (SUTA).

The flexible approach that PEOs provide will allow you to choose if they take on a few or all of the PEO services you need. The services consist of performance management, payroll, benefits administration, employee engagement, tax, risk management, compliance and other HR solutions.

Don’t get it twisted with employee leasing, which is different from PEO. Employee leasing involves a company supplying its workers to a client temporarily. Whereas on the other hand, PEO delivers administrative HR and compliance services to a client company and can also be the employer on record.

How A PEO Works

PEOs manage duties involved with the employment process, such as benefits administration, payroll, onboarding, and taxation on hiring employees. The PEO acts as the “Employer of Record” for insurance and tax purposes while taking responsibility for compliance. The client organization oversees daily employee-related duties, and the employees under the PEO communicate work duties and instructions with the client company. In some cases, PEOs also carry the name ‘co employers.’

The advantages of engaging with a great PEO are more pronounced with small companies that struggle with possessing HR expertise, capabilities, or top-notch systems. Coupled with the fact that they don’t have the luxury of spending a lot of time on transactional HR functions, they can’t really go wrong employing a PEO’s services.

What Are The Pros Of Engaging A PEO?

  • Time-saving and faster market entry – staff can typically be deployed as soon as possible, which is a big relief, especially for a new company in an unfamiliar space. As the PEO supports recruiting strategy, onboarding, compliance, and tax duties, a lot of time can be saved. At the same time, the client organization focuses on taking advantage of great opportunities as they come — definitely a win-win.
  • Potential lower costs – PEOs help organizations streamline as they grow and cut expenses, so they don’t have to hire this position. Also, the client organization gets good benefits deals from benefit brokers and avoids compliance penalties that can stem from ignorance.
  • Limited risks and general compliance – This has to be one of the most sought-after benefits client organizations look out for when engaging PEOs. PEOs work with their clients’ to get guidance on adhering to various compliance issues. They can migrate any risk and liability issues as long as they follow their PEOs guidelines on employment, compensation, and tax.
  • Enhanced Accreditation – In the world of PEO’s, there is a certification that PEOs can apply for called a certified PEO or CPEO. This certification means that the PEO has met the intense financial and reporting requirements set by the IRS. Certification ensures financial protections and tax benefits to clients of a certified PEO that clients of non-certified PEOs do not necessarily have. This can be a massive benefit within your business should you choose to go this route when selecting a provider.

What About Limitations?

When it comes to PEOs, the good outweighs the bad, as the whole idea of PEOs is to make life easier for small businesses. However, as a business owner, it is essential to look at both sides of the business model to make sure it’s the best decision.
Here are the cons:

  • Less flexibility in benefits – With certain PEO providers, clients will have to accept the service packages offered by PEOs as they are the direct links to the service providers. There’s no variety, and this is limiting. Some outsourcing companies offer PEO as a product; however, they also offer other levels of services such as Administrative Services Only (ASO), where clients don’t need to use their benefits packages. This can provide a new level of flexibility that can be very beneficial. They can offer more benefits for even the smallest organization, which can be a massive plus among the employee base.
  • Shared burdens – Though the PEO lifts some of the weight off the client company’s shoulders, liabilities still exist for the client company as this works as a co-employment relationship. This exposes the client company to mishaps that could happen down the line. Like the detective you are in your PEO selection process, doing your due diligence is vital by understanding their key offerings and establishing any liabilities present that could harm you down the line.
  • Impersonal relationship – How the PEO relates with the client company’s employees would likely seem impersonal many times. Depending on how big the business is, employees often communicate with a representative when issues arise, rather than a dedicated and familiar face. Knowing this relationship is critical, you will want to ensure that you set clear expectations of relation etiquette for your PEO and staff to ensure a trusting relationship on both ends. Specific outsourcing organizations take immense pride in providing the best relationship management practices. This can be a great value add as it feels less like working with an external party and more like an extension of your HR department.

PEO costs vary depending on the type of services required, terms of the agreement, organization’s risk level, credit rating, and location. PEOs are assets to organizations when used in conjunction with internal HR teams to offer cheaper solutions to transactional HR tasks. That extra layer of safety they provide in terms of ensuring regulatory compliance makes them all the more worthwhile.

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