1. What Is A PEO?

In a nutshell, PEOs provide complete professional human resources management and administration, often including employee benefits and workers’ compensation, to smaller businesses.  PEOs are, in effect, outsourced HR departments for firms that do not have the expertise or the time to devote to the complex and critical business of human capital management.

NAPEO, the National Association of Professional Employer Organizations, offers the following definition:

2. How Does It Work?

The PEO and the client business create a contractual shared employment relationship called “co-employment”. Under the contract, both parties have employment obligations, responsibilities and liabilities. In general, the PEO takes care of human resources matters such as:

• Payroll;

• Payroll tax reporting and payment;

• State, federal and local employment law compliance;

• Employee benefits (including health insurance, retirement plans, life, disability, dental, etc.);

• Employment policies and procedures;

• Developing and maintaining employee handbooks and job descriptions;

• Recruitment;

• Hiring and termination policies and paperwork;

• Workers’ compensation; and

• Employee relations.

With these time-consuming (and non-revenue generating) tasks off their day-to-day to-do list, the owners and managers of the client company can focus on the strategic and operational aspects of their particular business.

4. What Are The Principal Reasons For Using A PEO?

Employers say they use PEOs to:

• allow them to devote more time to growing and managing their core business;

• obtain access to professional, up-to-date human resources expertise;

• ensure compliance with increasingly numerous and complex federal, state and local employment and payroll-tax laws and regulations;

• reduce employment-related liabilities;

• develop and implement clear, consistent employment policies and procedures;

• assist with recruitment and hiring practices and processes;

• offer better insurance and retirement benefits to employees, often at less cost;

• secure workers’ compensation insurance and obtain professional risk management services;

• improve employee job satisfaction; and

• attract and retain the best employees.

5. Do You Lose Control Of Your Business When You Contract With A PEO?

Not at all. In fact, partnering with a PEO helps company owners and managers spend more time on and, therefore, better control their core business operations.  PEOs do not take a financial position or any kind of ownership or direct management role in the businesses they serve. Functioning as the client’s human resources department, the PEO assumes general responsibility, with management’s direction, advice and consent, for employment-related matters. All operational activities remain the responsibility of the business owner and the company’s officers.

6. What Does It Cost?

As a general guideline, you can expect to pay between 2% and 5% of payroll, depending on your location, the size of your business and the services provided by the PEO. Savings from lower benefits and workers’ compensation premiums may offset a portion of the cost. And, increased productivity resulting from giving you and your staff more time to spend on your core business should more than justify the rest of the expenditure.

The average small business (under 25 employees) spends about 8.5% of payroll on its people management activities. Data from the Department of Labor and the Small Business Administration 1 indicate the following range of HR overhead costs for businesses of varying sizes:
 

Outsourcing human resources management to a PEO will usually result in lower costs with the added benefit of professional HR management including up-to-date compliance knowledge and practices. Many businesses become PEO clients primarily to save money. They often stay clients, however, because, once they use a PEO, they understand and value the important contribution professional HR management makes to the success of their companies. PEO client retention rates are often in the 90%+ range, testifying to the value employers see in the relationship. Among the clients who leave their original PEO, a significant number switch to another PEO.

7. Is A PEO The Same Thing As Employee Leasing?

No. Although PEOs evolved from the now largely defunct employee leasing business, they are not the same thing. The co-employment relationship inherent with PEOs is the fundamental difference. Instead of “leasing” your employees who contractually work for someone else, the PEO and its client share responsibilities and obligations for employment and management. For its clients, a PEO offers a substantial improvement over employee leasing in respect of both cost and control.

8. Can You Use A PEO If You Have Employees Who Are Subject To A Collective Bargaining Agreement?

Certainly. It doesn’t matter if you have union or non-union employees or both. The National Labor Relations Board has recognized co-employment relationships as valid. PEOs endorse and support employees’ rights to organize under state and federal laws.

9. What Kind Of Employee Benefits Does A PEO Provide?

Because a PEO is the employer of thousands of people, it can usually negotiate (and administer) better benefits at less cost than small companies can get on their own. PEO employee benefits can include:

• Health insurance;

• Retirement (401k / pension plans);

• Life insurance;

• Long and Short Term Disability insurance;

• Dental insurance;

• Flexible Spending Accounts;

• Employee Assistance Programs; and

• Employee Discounts.

Clients are not required to participate in all benefit programs available through the PEO.

10. Who Is Responsible For Payroll And Wage And Tax Payment And Reporting?

The PEO assumes responsibility and liability for payment of wages and all federal, state and local regulatory reporting, including unemployment taxes.

11. Who Is Responsible For Complying With Employment Laws And Regulations?

Both parties have some contractual obligations with respect to compliance but most of the work is handled by the PEO. Furthermore, the PEO provides the client with advice and help to meet its obligations. Examples of these laws at the federal level include: ADEA (Age Discrimination In Employment Act), FLMA (Family Leave & Medical Act); HIPAA (Health Insurance Portability & Accountability Act), Title VII of the 1964 Civil Rights Act, ADA (Americans With Disabilities Act), EPA (Equal Pay Act) and COBRA (Consolidated Omnibus Budget Reconciliation Act). In addition, there are a myriad of state and local laws to understand and comply with.

12. What About Workers’ Compensation?

In most states, the PEO is recognized as the employer of record, allowing it to purchase workers’ compensation coverage for its employees. As with employee benefits, being a larger entity with more employees usually allows the PEO to obtain workers’ compensation coverage at better rates. The PEO can also manage the administration of workers’ compensation claims.

13. How Widespread Are PEOs?

There are currently about 700 PEOs in existence. They are found in all 50 states. As in many industries, significant consolidation is taking place. Larger PEOs can offer more services and expertise and increased economies of scale resulting in lower costs to their clients. An increasing number of PEOs now operate nationally.

14. How Are PEOs Regulated?

Most states require licensing and registration of PEOs and regulate their operation. State laws often specifically recognize PEO as employers or co-employers for purposes of workers’ compensation, state unemployment tax and other employment-related matters. At the federal level, the IRS has accepted the right of PEOs to withhold and remit income and payroll taxes. Specific IRS guidance has also been issued related to the authority of PEOs to provide retirement benefits to workers.