January 4, 2021

What is a PEO?

What is a PEO?

The PEO acronym stands for Professional Employment Organization. When you join a PEO, they become the employer of record and you enter a co-employment relationship. The PEO essentially becomes the employer for your employees. They can typically manage your payroll, benefits, compliance, tax filings, and most HR administration. You, as the business owner, then get to focus on running your business by outsourcing these tasks.

What are the benefits of joining a PEO?

Time savings, you get to focus on your business
You didn’t start your business to spend your time running payroll, finding and managing benefits, or researching complex employment regulations. Using a PEO lets you focus on your business, while the PEO handles all of the “back office” work. That way when the end for the week comes, you’re not focused on running payroll, you’re focused on growing your business.

Access to better benefits and workers’ compensation
Typically employees get access to better benefits and workers’ compensation rates when part of a PEO. These rates aren’t typically available to small businesses with only a handful of employees. So instead of your small business trying to negotiate insurance rates for a handful of employees (which won’t go well), you get grouped together with the other employees in the PEO, so they can negotiate with a much larger group. (Negotiating benefits for hundreds or thousands of employees is much easier.)

No need to hire HR administrators
Because a PEO will handle most of the administration when it comes to hiring and terminating employees, preparing and submitting required tax documents, staying up to date with state and federal regulations and compliance laws, and administering benefits like open enrollment and qualifying life events, you don’t need to hire, train, and manage your own HR team.

Stay compliant
A PEO will handle complex tax laws and compliance regulations. For example, do you know the difference between an exempt and nonexempt employee and how that affects your local overtime laws? It’s probably not something you really want to spend your time researching. However, PEOs are experts at employment related compliance. Additionally, they are legally liable for any taxes and regulations they are responsible for, so it’s in their best interest to make sure you stay compliant. This allows you to focus on building your business rather than spending your time keeping up with complex compliance laws.

What are the disadvantages of joining a PEO?

Lack of control
Technically your employees are actually the PEOs employees. They are essentially leased back to you. This means you lose a lot of control over the choices that the PEO makes and could affect your team. For example, you don’t get to choose benefits or the brokers for things like worker’s compensation, you don’t pick the software your employees use for things like payroll (which is typically a relic of the 80s), and you don’t hire or manage the HR team interacting with your employees.

Additional Regulations
Because your employees are actually employees of the PEO along with hundreds of other employees, you’re responsible for the regulations that come along with being part of a larger organization (like the Family and Medical Leave Act and the Affordable Care Act). The PEO would most likely help guide you through this, but it’s something to keep in mind when evaluating costs.

Less individual support
The PEO is supporting hundreds and maybe thousands of employees, which makes it harder to create a great experience for your employees. So if you or one of your employees needs something, it will probably be a very different experience than if you had HR experts in your office that are dedicated to your team.

What are alternatives to a PEO?

The three most popular options for outsourcing your HR administration are:

An ASO and HRO are both very similar to a PEO, but they won’t become your businesses’ employer of record so your employees stay your employees. They’d be more like your external team of HR experts. However, that means you’d file taxes under your own FEIN and are 100% liable for any mistakes or compliance issues. Your company also wouldn’t be joining a large pool of other employees so you’d have to find and negotiate your own benefits. However, the ASO or HRO should make all of these tasks easier and probably do most of the work for you.

At the end of the day, all three options will keep you from spending your time Googling complex tax laws and regulations. If you want to outsource your HR so that you can focus on your business, you should look into all three to see what will work best for you and your business.

Disclaimer: Any articles written on this website, including this article, are not to be taken as legal or HR advice. Employment laws are constantly changing and vary by location and industry. You should consult a lawyer or HR expert for guidance. Need HR advice? We can help!

📸 Photo by Toa Heftiba on Unsplash

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