What is a PEO?
A Professional Employer Organization (PEO) is an organization that provides joint-employment relationships with an employer by leasing employees to that employer. Traditionally, PEO companies would also provide comprehensive Human Resource solutions to small and medium-sized businesses. Professional Employer services include payrolling, employment benefits recommendation, tax administration, and regulatory compliance assistance.
This arrangement allows the PEO to co-manage and share the employee-related concerns and responsibilities including the compensation and benefits, payroll administration, and employment taxes. While the agreement is in effect, you continue to retain your management control on your employees’ work.
Aside from the significant support that they can provide, it is also a PEO’s job to get better deals on health-care and other employee compensation packages, therefore, giving substantial savings to your company.
Benefits of Co-managing with PEOs
As an ally of your company, the PEO firm your company partnered with offers a number of advantages. These PEO benefits are further detailed below:
1. Perfect for Departments of One (DOOs)
Small businesses start with capital and guts without the technical know-how of managing a business successfully. The best PEO firms should know how to help these small businesses grow and learn more about business development and surviving the market. With the co-management arrangement, such businesses are rid of the ignorance on the said concern, thus saving them a lot of time and money.
2. Mitigates and Facilitates for Economic Risks
As the global pandemic continues to surge, the plummeting of global stock markets by 10% has created a riskier environment, and the PEOs are here to make you understand such risks and act on them accordingly.
Governments and financial institutions are on the hunt for the best solutions and policies they can provide to halt the freefall of markets. This frenzied state has created many regulatory changes that could potentially swamp your company with legal and ethical matters. PEO associations are positioned to arm your company with such information and enable you to react accordingly.
A case in point is the Paycheck Protection Program (PPP) that was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Forged to give qualified companies forgivable loans that would cover business expenses like rent and utilities, it was riddled with confusing elements that would make it impossible for businesses to receive this significant aid. In such cases, the PEO organizations provide the most up-to-the-minute information to guide their clients and then provide the necessary documentation that would do your business twice as likely to get approved. In fact, the PEO applied loans got an overwhelmingly successful approval rate of 97.8%.
The Paycheck Protection Program is only one of the many dilemmas encountered by small to medium-sized businesses that will likely not be patched and addressed if it were not for the PEO employment initiative.
3. Provides Exemplary Payroll and Benefits Administration
Entering your payroll without the necessary knowledge to process them can result in a lot of damages to your employees’ benefit contributions. Pre-taxing your employees is not only unacceptable but could be illegal as well. This is common knowledge to a certified PEO and gives you only a glimpse of their potential to help your company grow.
Your PEO is there to make sure that committing mistakes due to ignorance never happens with their expertise. This level of efficiency shall also improve your employees’ overall job satisfaction, which would significantly improve their production.
With the lightning speed of recruiting nowadays, it has become increasingly challenging to find the right candidates for the job. And with all the other concerns you need to focus on, you might not have the time or the skills to get this done. Your PEO is more than capable of increasing your pool of employees minus the resources needed to achieve this. On top of that, this can consequently drive down the cost of your company’s healthcare and insurance.
Having stated the glowing benefits of hiring PEOs, there can also be some disadvantages of using a PEO, especially regarding your company’s vision of how you want things to be handled, versus your PEO ways. To illustrate further, the employment process, for example, should ideally provide a warm welcome to their future employees. Still, the PEO might be less welcoming and more focused on getting the job done.
These issues can be easily solved by the proper and constant communication of such concerns with your PEO, who is usually very receptive in these situations. You might also want to do a very thorough research on the best kind of PEO for you because certain PEOs would be more aligned with your company’s values and work ethics. It would also be a good idea to make sure that the one you choose is accredited or affiliated with their governing bodies, in other words, a certified PEO.
In a time of crisis, your company should be able to get everything it needs to survive and eventually thrive once more. And your PEO is your best bet to do just that.
More than just these benefits as mentioned above, and advantages of hiring a Professional Employer Organization is the intangible privilege of working with an ally that can be as committed as you are toward the shared vision you want for your partnership. While it may be possible for you and your partner PEO to have awry goals, this should not be a hindrance for you to trust in the benefits of co-managing with a PEO. Misplaced ideas can always be patched by reaffirming these ideas through constant communication and collaboration. Nonetheless, this is not a heavy enough reason for you to be discouraged in partnering with a PEO. In fact, the advantages, by far, outweigh the drawbacks, especially in times of crises. (READ: EOR vs PEO: Which does your business need?)
Frequently Asked Questions
What does a Professional Employer Organization do?
A Professional Employer Organization, or a PEO provides administrative services to small to medium-sized businesses. These services include payrolling, employment benefits recommendation, tax administration, and assistance in regulatory compliance. Most importantly, a PEO aids companies in their employee-related concerns by providing comprehensive Human Resource solutions.
What are the pros and cons of a PEO?
Hiring a Professional Employer Organization comes with a list of both pros and cons. The pros include the following:
- Shared Responsibility. The PEO shares risk and liability issues with you. It is now the job of both of you to manage tasks such as payrolling, detailing employment benefits, and compensation reporting.
- Lower Benefit Rates. PEOs can help you negotiate lower insurance costs because they manage multiple small businesses, increasing their pool of employees and benefit options.
- Payroll Processing Assistance. PEOs can also aid your business in processing payroll. This helps your Human Resource department eliminate a significant amount of paperwork, therefore, increasing their efficiency and productivity. However, PEOs do not necessarily have complete access to the payroll details, so it is still your responsibility to provide these.
- Reduced Costs. Hiring a PEO helps eliminate the need for hiring more staff to handle tasks like payroll processing. This will potentially reduce overhead, considering the payment you provide the PEO is significantly lower than when you hire more teams instead.
- Access to Human Resource Services. HR tasks like training, onboarding, recruiting, and overall staff development can be provided by PEOs to businesses. This is beneficial for smaller companies that aim to attract top talent.
However, hiring a PEO also has its cons. These include the following:
- Divided Control. Since your employees are now co-managed and co-employed by the PEO, you will need to renounce a significant portion of the control to them. This can also reduce the employees’ morale and productivity, especially when they realize that they have been leased to a PEO.
- Higher Price. Most PEOs are advertised and marketed as a more affordable option for small to medium-sized businesses. This may not be true all the time as some PEOs tend to be more expensive as a particular business grows. PEOs also charge businesses any one of the following:
- A percentage of the payroll.
- A flat fee per paycheck.
- A flat minimum amount per pay period.
What do international PEO companies do?
An international Professional Employer Organization employs individuals into your company even when your company does not have the same location as the PEO. Most companies hire PEOs so they can have the freedom to operate locally without the need to manage the burden from the legal administration of a subsidiary.
What are the habits of the top 10 PEO companies in the world?
When going through a list of PEO companies to hire for your company, you must look into different aspects to assess whether a PEO suits your company’s interests. The best PEO companies share common interests in the following facets of a Professional Employer Organization:
- Customer Selection. A PEO must discuss among their executive team who their target clients should be. They should also seek feedback from the sales and operations teams before finalizing the target clientele.
- Business Model. The internal capabilities of the PEO must be congruent with the external partnerships.
- Value Proposition. The value proposition of the PEO must be well-acknowledged by everyone in the organization. This must also target better service to the target clientele.
- Talent. The administration must address talent gaps within the PEO through training and mentoring.
- Technology. The PEO’s current technology and capabilities must ensure that they are best suited to serve their client segments.
- Sales Engine. The market strategy of the PEO must yield the desired results for revenue growth.
- Cash Flow from Operations. The objectives set by the executive team must be anchored to increase the level of cash flow from operations.
- Controls. The PEO must designate the appropriate internal stakeholders to take charge of the company controls. Prompt separation of control is necessary and no one in the organization should have the key to all controls.
- Strategic Intent. Business analyses such as the SWOT, OTSW, and competitive analysis must be done to ensure that there is a clearly defined strategic intent.
- Scale. The PEO must address the key factors that indicate when the business should scale.
- Executive Leadership. The PEO’s executive leadership must always try to improve its leadership development and succession planning.
- Exit Strategy. A defined exit strategy is necessary to help keep the executive team focused and prepared when the organization desires an exit.
What does a PEO offer?
A typical PEO service offering may include human resource consulting, safety and risk mitigation services, payroll processing, employer payroll tax filing, workers' compensation insurance, health benefits, employers' practice and liability insurance (EPLI), retirement vehicles (401(k)), and regulatory compliance assistance.
How much do PEO companies charge?
How PEOs charge depends on a number of factors, including the brand and service of the PEO itself. Normally, PEOs usually charge between $900 to $1500 per employee each year for flat fees alone.
How much does an employer of record cost?
An employer of record’s initial setup can cost from $15 000 to $20 000 on average, but this amount varies widely globally.