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Modern workplaces are fine-tuning their processes to become more employee-centric. With resource management taking center stage, companies, especially small and midsize businesses (SMBs), can be found taking on more and more HR responsibilities. Handling employee processes can be not only time-consuming but also costly. And SMBs may not always have the resources and budget to judiciously navigate their HR concerns.
In such scenarios, professional employer organizations (PEOs) can fill the gaps for SMBs. PEOs are outsourcing firms that offer HR services, such as payroll, benefits, and statutory compliance. Contrary to popular belief, outsourcing their HR functions can be quite profitable for SMBs. The expected annual median revenue growth of SMBs partnering with PEOs is 40% higher than that of non-PEO SMBs.
There are many PEO service providers on the market, and choosing a vendor that will suit your business requirements could be tricky. To help you get started, we’ve created this buyers guide to help you understand the options available for your business.
In this guide, we’ll cover:
- What is a PEO?
- Common offerings of PEOs
- What type of client are you?
- Benefits and potential issues
- Considerations when choosing a PEO service provider
What is a PEO?
A PEO is an HR outsourcing company that partners with SMBs under a co-employment model. In this model, HR responsibilities are shared by the business owner and the PEO. While business owners retain management rights over their employees, PEOs assume an administrative role for handling functions such as payroll, benefits, regulatory compliance, taxes, and training and development.
Common offerings of PEOs
Partner PEOs offer a wide range of features to handle either a specific HR process or the complete HR function for SMBs. Here’s a list of common offerings you should take into account when selecting a PEO service provider.
|Payroll management||Make payments to full-time and part-time employees (hourly and salary). Some PEOs also include vendors and contractors in the payroll function.|
|Compliance management||Adhere to compliance standards for tax reporting, new hire reporting, employee compensation, employment practices liability insurance (EPLI), and unemployment insurance filing.|
|Applicant tracking||Streamline the complete recruitment process, from creation and posting of job ads to selecting candidates.|
|Benefits administration||Manage benefits-related processes, such as benefits onboarding and claims. Also administer medical, dental, and vision coverage to employees.|
|Safety management||Implement policies and programs to improve workplace safety and reduce employee claims for accidents and safety-related issues.|
What type of client are you?
Based on the kind of PEO services required, there are two broad categories of clients: specific HR service clients and comprehensive HR service clients. We’ll look at both types below.
Specific HR service clients: Some SMBs have a tight budget and limited resources. Therefore, they require assistance with particular HR processes. Such clients outsource only the specified process to a PEO and use their available resources to focus on other critical business activities. These types of clients also tend to have more control of their overall HR function.
Comprehensive HR service clients: The HR function entails extensive responsibilities, from recruitment and payroll to retention and offboarding. For some SMBs, trying to manage these processes on their own could lead to ignoring their primary line of business. Such clients prefer outsourcing their complete HR function to a PEO who handles it on their behalf.
Benefits and potential issues
There are pros as well as cons to using PEO services, and as a business owner, you’ll need to weigh both to find the right fit for your needs.
Mentioned below are the key benefits of using PEO services.
Cost savings: Partnering with PEOs can help reduce the overall costs associated with managing HR processes, such as employee onboarding, payroll processing, and benefits administration. Since these processes are completely handled by partner PEOs, the need to hire dedicated resources or purchase specialized software is eliminated. This reduces your revenue expenditure and results in overall cost savings.
Improved HR compliance: Employment laws and regulations change regularly. They also vary significantly based on region and industry. Inability to ensure compliance can result in hefty penalties from federal, state, and even local agencies. PEO services can help tackle compliance hurdles by offering access to qualified advisors who will keep you up to date with regulatory requirements.
Efficient recruiting: Recruitment is an extensive and costly process. Job ad posting, prospecting, interviewing, background checks, and selection are all part of recruitment and require significant bandwidth and resources. Thus, hiring the wrong candidate can be expensive for your business. With PEO services, you receive complete recruitment assistance. After assessing all business requirements, your partner PEO will design a bespoke recruitment plan and create a pipeline of potential candidates to help you hire the right candidate.
Some potential issues that you may face while using PEO services include the following:
Reduced control over employee benefits: PEOs are third-party service providers, and when they handle benefits administration, you give up some control over the specifics of the benefits your employees receive. If your PEO changes its benefits vendor, employee benefits will change accordingly. Such instances could lead to dissatisfaction among employees, which might impact productivity.
Data security concerns: Since PEOs have complete access to employee records, data misuse is a key concern. Although PEOs are legally obligated to keep their clients’ data secure, you should also exercise due diligence while verifying your preferred service provider’s data compliance track record before making a decision. This will help ensure your employees’ information is protected against data theft.
Considerations when choosing a PEO service provider
Thoroughly assessing your business needs is a good practice before entering into a PEO partnership. It’s essential that you vet all available details and consider how future workflows will be impacted. Here are a few key considerations that you need to take into account when choosing a PEO service provider.
Existing track record: Since partnering PEOs take over a majority of HR operations, it’s essential to research their market credibility and industry track record, i.e., which companies are currently using the services, and how do existing clients feel about the service they’re receiving. Before zeroing in on a vendor, take your time to evaluate all relevant options. The easiest way to do this is to read reviews on trusted sources by current customers.
Customer support: Not all PEOs offer the same level of support. Some may charge extra for a more comprehensive support plan or only offer support during specific hours or via specific channels. Others may offer minimal, no, or only condition-based support under their service agreement.