A professional employer organization, or PEO, is a business-to-business (B2B) services company that technically hires workers from multiple other organizations and is in charge of all major HR-related functions. Also called an ‘employee leasing company,’ a PEO typically helps small businesses manage benefits access, payroll-related taxes, recruiting, risk management, training, and other HR or administrative functions essential to the proper operation of a business. PEOs often combine employees from multiple organizations into one big pool, and this helps them increase their purchasing power. According to the National Association of Professional Employer Organizations (NAPEO), small businesses that work with PEOs grow 7 to 9% faster, enjoy employee turnover rates that are 10 to 14 percent lower, and are 50% less likely to go out of business.
Types of PEOs
Among the different types of PEOs that exist are Joint-Employment PEOs, Administrative Services Organizations (ASO), Pass-Through Agencies, Financial Intermediaries, International PEOs, and Umbrella Companies in the case of the United Kingdom. In total, there are 907 PEOs in the United States that service 175,000 small and mid-sized businesses that have between 10 and 99 employees.
How a PEO Can Assist Your Company
It’s also important to note that PEOs are not responsible for managing a company’s employees and operations, and are also not tax or legal advisors. PEOs can assist with filings and forms, but it’s small businesses who are ultimately expected to know about state and federal laws.
Here are some of the functions a PEO can assist with:
PEOs typically assist with access to standard employee benefits like medical, dental, and vision insurance and can often help provide better rates for these types of coverage. PEOs also oversee the administrative side of benefits, including onboarding and processing claims.
PEOs also assist with the administration of payments to both full-time and part-time workers (salaried and hourly), and occasionally also help contractors and vendors. Among the things PEOs help administer are automated deposits and one-off payments.
Some of the employer-related compliance necessities PEOs can help with concern employee tax forms, payroll taxes, and reporting documents. Among the other types of compliance support, PEOs offer new hire reporting, W-2 and 1099 filings, workers’ compensation, unemployment insurance filings, and Employment Practices Liability Insurance (EPLI).
PEOs can also often grant extra perks to customers like access to 401(k), wellness programs, commuter benefits (transportation costs), and discounted gym memberships. These perks often lead to employees being healthier and happier.
How Does a PEO Work?
PEOs perform these functions and help provide access to benefits through a practice known as ‘co-employment.’ This refers to a binding agreement between a PEO and a client about the sharing and allocation of certain types of tasks. As part of this contract, a company is responsible for managing its employees and for overseeing daily operations. This division of duties can help companies gradually reduce costs while increasing output.
Benefits of PEOs
Small businesses can benefit from PEOs in four main ways:
Saving Costs on Benefits
Since PEOs’ co-employees are grouped with a client’s workers to create one big company, a given PEO can grant workers access to medical coverage and rates similar to those of a large organization.
Saving Costs Through Hiring
Given that PEOs are in charge of HR functions and of handling employer-related paperwork, many organizations can often postpone hiring new employees to take care of this type of support internally.
PEOs can also help protect small businesses against risks like payroll-related mistakes or compliance errors. According to a Business Insider report from 2015, more than 33% of small businesses receive fines each year for payroll-related errors. This is a clear example of why it’s important to make sure all paperwork is completed and filed correctly.
Businesses are always looking to deliver products and services in the most efficient way possible, and PEOs can often help with this and alleviate small businesses with less personnel by handling tasks related to HR functions, benefits administration, and payroll support.
Average Cost of a PEO
PEOs can either charge a rate per employee or a percentage of total gross payroll. Thus, the monthly fee can depend on the total number of employees a company has.
Seeking Help With Employee Benefits Administration
Speak to the experienced professionals at BenefitCorp to learn more about how your small business can receive help with administration of employee benefits like retirement plans. Founded in 1995 and based in both Dallas and Denver, BenefitCorp also provides support related to insurance, payroll, and HR functions for both small and large clients. BenefitCorp works with both businesses and individuals and provides consultations over the phone and in person.