Everything You Need to Know About PEOs

By: on February 5, 2018

Running a small business is difficult. You’re busy perfecting a new product or service, securing necessary funding, trying to make a name for yourself in a crowded marketplace, and on top of all that, you have people to manage.

You may have arrived at a crucial crossroads: You have too many employees to reasonably be doing HR yourself, but not enough to justify hiring (and paying) a dedicated HR department.

Which is why you may be considering outsourcing your HR needs to something called a “professional employer organization,” or a PEO for short. You’re not alone.

According to a study by the National Association of Professional Employer Organizations (NAPEO), as many as 16 percent of small businesses with less than 100 employees use a PEO.

What exactly is a PEO? Is a PEO right for you? This guide will help you find out.

What is a PEO?

A professional employer organization (PEO) is a business that can be hired to perform HR tasks for your company. Through a marriage of software and service, Lecie Steinbaum, chief operating officer of Cornerstone Employer Solutions, says PEOs provide small businesses, “the complete infrastructure they need to employ people.”

Although it will vary from provider to provider, PEOs typically offer services like:

  • Benefits administration
  • Compliance and risk management
  • Employee handbooks
  • Employee training
  • Onboarding and offboarding
  • Payroll processing and tax filing
  • Performance management
  • Recruiting
  • Time & attendance
  • Workers’ compensation

PEOs can also be referred to as “employee leasing companies,” “staff leasing companies” or “human resources outsourcing (HRO) companies.”

What’s the difference between a PEO and an ASO?

Besides PEOs, there are also companies called “administrative services organizations,” or ASOs. They offer similar services to PEOs, but with one key difference.

When you hire a PEO, you enter a relationship known as “co-employment.” No, this doesn’t mean your PEO will start showing up to meetings and barking orders at workers.

What co-employment does mean is that the PEO becomes the employer of record: it’s their name and employer identification number (EIN) that shows up on W-2s, paychecks and other important documents instead of (or alongside) yours.

This is crucial, because it means that not only do PEOs handle your HR administration, but they also become liable if anything goes wrong. If your company pays the wrong employment taxes, the government can go after the PEO. Your employees can sue the PEO too.

With an ASO, on the other hand, you do not enter a co-employment relationship. They still handle your HR needs, but you remain the employer of record.

Because they have skin in the game, so to speak, PEOs have an extra incentive to perform their duties without error. On the other hand, PEOs are generally more expensive than ASOs. You’ll have to weigh your situation and your budget carefully to decide which one is right for you.

What are some of the top PEOs?

There are close to 1,000 different PEOs around the country, which doesn’t make it easy when it comes to deciding which one is the right one for your business. Here are some of the more popular options to get you started:

What are some PEO pros and cons?

Outsourcing your HR needs to a PEO can provide numerous benefits to your organization—especially if you lack the knowledge or resources needed to fully accommodate your workers. At the same time, there are downsides with a PEO you should be aware of.

Here are the most significant pros and cons with PEOs:

Pros Cons
Better insurance options at lower rates

Because PEOs enjoy the economies of scale of a large enterprise, they’re able to offer more comprehensive insurance packages at lower rates to clients.

No internal HR help desk

If you don’t have any internal HR staff, your employees have to direct their questions to the PEO, who might have limited hours or fail to deliver good HR service.

Mitigated liability

Besides ensuring your company is compliant with laws and regulations, the co-employment relationship with a PEO ensures they take on risk if something goes wrong.

PEOs are expensive

Though a PEO may be more affordable than hiring in-house HR staff initially, that won’t necessarily be the case as you add more workers or tack on additional services.

More time to focus on other needs

With tedious HR tasks off your plate, you can get back to investing that time and energy into other areas that can grow and better your business.

Change management

PEOs may ask for payment upfront to start, disrupting payroll cash flow. Employees may also dislike being part of a new organization and being forced to follow their rules.

Are there some businesses that would benefit from a PEO more than others?

Let’s get an important point out of the way first: PEOs work for any industry. Whether you’re a manufacturer, an accounting firm, a doctor’s office or a retail store, a PEO is a very viable option. In fact, some PEOs have industry-specific solutions more tailored to those business needs.

With that out of the way, there are definitely situations where a company would benefit more from a PEO than others:

  • If you have more than five employees but less than 100. Most PEOs won’t work with companies with less than five workers. Conversely, after 100 employees, a PEO typically becomes more cost-prohibitive compared to an internal HR department. The average size of a company that uses a PEO is typically 20 to 25 employees, according to Steinbaum.
  • If you want better insurance options and rates. Small businesses don’t get a ton of options when it comes to insurance plans, and their size prohibits them from getting good rates from brokers. PEOs can fix this by providing the plans and rates typically associated with a large enterprise to their clients.
  • If you’re growing and you’re concerned about compliance. Things like the Family and Medical Leave Act (FMLA) and the Affordable Care Act (ACA) kick in at the 50 employee mark. If you have no HR expertise on staff and are worried about complying with these new requirements, a PEO is a great option.
  • If you need relief. You started a business because you had a great idea or wanted to realize a dream, not necessarily because you wanted to manage people. And that’s okay! If you or someone in your company is wearing multiple hats and is wearing thin, consider a PEO to offload some of the stress.

What are things I should look for when evaluating PEOs?

The services that are offered and their associated cost is just one piece of the puzzle when it comes to evaluating different PEOs. Here are a few other things to look for during your research:

  • Do they offer local support? If you have a bad enough HR emergency, you’ll be glad to have a PEO that can send someone to your office.
  • Do they align with what you’re already doing? “Ask questions about your specific processes to make sure the PEO will accomodate them,” Steinbaum says.
  • What payroll software do they use? PEOs require you use their payroll software. Major PEO vendors like ADP or Paychex will use their own software, but smaller companies will rely on commercially-available systems. Do a demo to make sure you like the PEO’s system, read user reviews and ensure any other platforms you have—an accounting system, time and attendance software—easily integrate with it.

Are there any alternatives to PEOs?

If you don’t feel comfortable outsourcing your HR needs to a PEO or ASO, but you also can’t afford to hire full-time HR staff either, your best option is to invest in HR software.

There are plenty of affordable systems out there geared towards small businesses to help even the HR-illiterate run payroll, manage benefits, track attendance, handle recruiting and more in-house.

If this sounds more to your liking than a PEO, here are some recommended next steps:

  • Compare systems on our HR software page. Read real user reviews and product descriptions. Use our filters for things like business size, cost and industry to find the right system for your needs.
  • Call 855-998-8505. If you don’t want to do the research yourself, don’t worry. Talk to one of our HR advisors and tell them your needs and they’ll actually recommend five best-fit products. This is a free, no-obligation consultation.

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