Managing your business's human resources (HR) needs can be an enormous task, and it is often too much for one individual to do on their own. What's worse, if you don't have an experienced HR professional or team of professionals handling your HR, you are at a greater risk of violating labor and employment laws. If this sounds like you, you may want to consider outsourcing your HR functions to a professional employer organization – also known as a PEO.
What is a PEO?
A PEO provides HR and payroll services to businesses of all sizes. Through co-employment, a PEO becomes the manager of record for tax purposes and provides employee benefits packages under its own tax identification numbers. HR services that PEOs can provide include managing payroll and payroll taxes, administering health insurance benefits, managing workers' compensation insurance, allocating retirement packages – like 401(k) plans – establishing employee handbooks and HR policies, training and developing employees, and managing risk and compliance.
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What are PEO services?
PEO services are customizable tasks outsourced to a human resources company. They work best for small and midsize businesses without the budget or need for in-house HR personnel.
PEOs provide and centralize all HR services – including onboarding and employee exits. Some companies offer all-inclusive packages, while others allow you to pick and choose services.
These are some of the top HR services that a PEO company provides:
- HR consulting and administration
- Payroll processing
- Health insurance benefits
- Workers' compensation insurance
- Retirement savings plans
- Legal compliance
- Employee training and development
The scope of services and caliber of expertise vary among PEOs. The best provider for you depends on the HR and administrative functions your business is seeking. [Read related article: Expand Internationally by Leveraging Local PEO Services]
1. PEO HR consulting and administration
By centralizing your HR functions with a PEO, your business joins a larger employee base that can access low-cost benefits. Most PEOs provide HR services efficiently and replace the need for an in-house HR team. Companies can leverage a PEO to rely on a single provider to support their human resources, benefits administration and payroll processing.
As your business grows, it's important to utilize PEO services to address the changing needs of the company. HR outsourcing services (HROs) are gateways to scaling your company and operating with much greater efficiency. These services can bridge the gap between your vision for growing the business while managing the operations of a fully functioning HR department.
Compared to keeping the work in house, partnering with a PEO offers three main advantages, according to Samantha Reynolds, marketing manager for Helpside.
- More time: Partnering with a PEO means you spend less time on HR administrative tasks. PEOs process your payroll, pay your quarterly and annual employer taxes, issue W-2s, complete unemployment paperwork, track employee time off, negotiate with insurance carriers, train employees, conduct drug screenings and handle other time-consuming tasks that pull you away from the reason you went into business in the first place.
- Better access to resources: The nature of the PEO relationship grants your organization access to a variety of resources – including employee benefits, such as health, dental, vision, life insurance, disability insurance, 401(k) retirement plans and flexible spending accounts. These benefits usually come with enhanced coverage at a lower cost, since PEOs pool small businesses to increase their buying power.
- Expert advice: Most business owners are experts in their field. They may know everything there is to know about plumbing, advertising or dentistry, but they are likely not experts in human resources, payroll, benefits or risk management. A PEO hires skilled employees in each of these departments, providing your company with immediate access to expert advice whenever it is needed.
2. Payroll processing
PEO payroll allows your business to make single payments each payroll cycle for your employees. The payroll service calculates the number of hours worked and pay rate of each employee, and the PEO handles the rest. Using a payroll service simplifies what can be a difficult process, especially if yours is a new business. When you utilize a PEO payroll service, you'll acquire these benefits:
- Time savings: Payroll can be time-consuming. Calculating overtime, paid time off and employer taxes is an additional hurdle. The time you save by outsourcing payroll to a PEO can be put toward other areas as you seek to grow your business.
- Lower tax liability: With PEO payroll services, you're protected from tax liabilities. The payroll service can bring deduction and withholding notices to your attention. Tax compliance should be taken seriously, and with payroll support from your PEO solution, you can rest assured that the IRS won't suddenly come knocking at your door for misfiling or oversight.
- Higher employee retention: Satisfied employees save you money, produce better work and boost morale in the workplace. One way to demoralize employees is to lose or issue late paychecks. Employees expect to be paid on time and are more likely to stay with your business when payroll processing isn't a concern.
3. Health insurance benefits
A PEO can offer high-quality health insurance that's more affordable by leveraging its buying power, according to Denise Stefan, president of Engage Insurance and executive with Engage PEO.
"Some PEOs create a private exchange for clients who are trying to keep the cost of offering health benefits manageable," Stefan told business.com. "The client is able to define a set dollar amount to purchase certain benefits and then direct employees to the private exchange. There, employees shop for a health plan and other benefits based upon what the employer organization has selected as options."
Stefan believes that if a PEO holds a master policy contract with multiple carriers, claims are aggregated for all employees enrolled in the policy for each renewal.
4. Workers' compensation insurance
As a co-employer, the PEO pays wages and taxes, and may be liable for maintaining workers' compensation coverage, according to the National Association of Professional Employer Organizations (NAPEO).
NAPEO says that PEOs create safer work environments when they are the workers' compensation policyholders. Preventative safety measures – such as pre-employment drug testing, safety and training procedures, claims management of injuries, and back-to-work programs – increase employee safety in the workplace.
New businesses can benefit from PEO workers' compensation, according to Michael Roloson, director of PEO Focus. Since PEOs are the employer of record for their clients, PEO workers' comp can offer your business better rates by using their purchasing power to decrease insurance costs. Roloson believes that while there are pros to PEO workers' compensation, there are also a few cons.
Here are some pros of PEO workers' compensation insurance:
- Lower modification rate: Businesses that use a PEO for workers' compensation insurance gain access to that PEO's modification rate when bidding for jobs. Some jobs require that your company holds a modification rate below a certain threshold to even bid on a project.
- Safety training: Most PEOs offer safety training and procedural strategies to help lower your workers' compensation claims. These benefits can lead to a healthier workforce, reduced costs and more efficient processes.
- Easy billing: Since a PEO is handling your payroll and HR, they can bill you for your workers' comp insurance each payroll cycle. You do not need to pay upfront, nor do you need to undergo an audit at the end of the year to file a "true up" report. This allows for both time savings and advantages in budgeting.
These are some cons of obtaining workers' compensation insurance through your PEO:
- Some PEOs don't register your payroll. It's important to partner with a PEO that registers your payroll and claims experience. If you partner with one that doesn't, it could be difficult to find workers' compensation insurance outside of a PEO, as it will look as if your business has no experience for which carriers provide you with favorable ratings.
- There's the risk of cancellation. The PEO can drop you from its program if you have many large claims. While this could happen with any carrier, remember that you'll be relying on your PEO for other solutions – such as payroll, human resources and other employee benefits. If you are given notice by your PEO, you will need to transition to a competitor or shop quickly for unbundled replacement services.
5. Retirement packages
The Department of Labor issued a final rule designed to increase the availability of multiple-employer plans (MEPs) in 2019. The final rule provides clarity on the types of "bona fide" groups of employers – and PEOs – that can sponsor retirement plans.
This final rule, along with the Small Business Efficiency Act, demonstrates the federal government's recognition of PEO and small business relationships.
Most PEO retirement plans are hosted on software platforms designed to allow your employees to manage their retirement plans through the web or a mobile device. This alleviates the need for your business to create and manage the retirement benefits for the entire company.
While there may be great benefits and support of PEO retirement plans, as with any service, it has its drawbacks.
If your business separates from the PEO, a new retirement plan must be implemented. An attorney must be involved in the change, which may warrant legal fees.
The downside of relying on PEO retirement plans is the loss of control over decision-making, according to Jared Weitz, founder and CEO of United Capital Source. "You are putting your trust and reliance into an alternative organization, so be prepared not to always see eye to eye."
6. PEO 401(k) plans
The most popular type of retirement plan is the 401(k), and PEOs generally provide a more comprehensive 401(k) offering than what your small business could otherwise offer on its own. When outsourcing 401(k) management to a third party, you can save both time and money.
A PEO makes providing 401(k) plans to employees incredibly simple, according to Bryan Bowles, founder and CEO of Transactly.
"Not only do they simplify the payroll aspect of providing a 401(k), but also the various fiduciary obligations inherent with a 401(k)," Bowles said. "The overwhelming amount of diligence required by an employer in providing a 401(k) deterred us from providing a plan prior to using a PEO service."
These are some of the advantages of PEO 401(k) plans:
- You can offer affordable options. If your small company cannot invest in a 401(k) for your employees, a PEO can be an affordable way to allow your colleagues to save toward retirement.
- The PEO is responsible for compliance. The PEO will take over fiduciary liability and sign all necessary compliance forms. This can protect you from a legal aspect, and gives you the peace of mind knowing the 401(k) that's delivered to your employees is monitored and compliant.
Roloson said there are also downsides to relying on a PEO for 401(k) options. Here are a couple cons:
- Nontransferable choices: If you change PEOs, you cannot take your 401(k) with you. When you make this change, your employees will go through a blackout period, and this transition can be very tedious, especially if you make more than one change over a five-year period.
- Unalterable plans: While PEOs allow easy access to a retirement plan, the plan cannot be tailored to your company's specific needs. These plans are generally set up the same way, come with little access to financial advisors, and have very basic technology.
PEO services can boost employee satisfaction by consolidating all employment-related vendors into one service. With multiple vendors, software platforms and healthcare costs, it could become difficult for your small business to keep up with its HR duties. PEOs minimize stress and outsource services, including HR, health insurance, workers' compensation management and retirement plans like 401(k)s. The benefits associated with PEOs can reduce employee turnover rates and enhance onboarding.
7. Legal compliance
One of the biggest services a PEO can offer is guidance on labor and employment laws. Since PEOs are well versed on federal, state and industry-specific laws, partnering with them can help you maintain legal compliance. With laws and regulations constantly changing, this service alone can be a huge benefit to your company.
Violating labor and employment laws can cause a lot of problems, including fines, litigation, loss of company reputation and high employee turnover. With a PEO, you can rest assured your small business is abiding by all current laws and regulations.
8. Employee training and development
PEOs can also help you stay legally compliant by offering required employee training courses – like those on harassment, or health and safety. Additionally, many PEOs offer in-person and online courses to help employees develop professionally. For example, they may offer e-learning courses about leadership, management, communication or teamwork.
What are PEO do's and don'ts?
PEOs can manage numerous HR tasks for your business that an in-house HR department might handle in a larger business. Here are some things that PEOs do and what they don't do.
PEOs do provide these services:
- HR and recruiting services
- Access to legal counsel
- Employee benefits
- Workplace compliance tools
- Health and safety policies
- Payroll services
- Employee training
PEOs don't help you in these aspects:
- Functioning as an independent company or separate business entity
- Intervening and disassociating your business from its corporate responsibilities
- Retaining all liability for the various services you agreed for them to manage
- Working exclusively with your business, as they have large clienteles
What are the best PEO services?
There are several highly rated PEO services available, but the best one for your business will depend on a variety of factors – like how many employees you have, what services you need and the size of your budget. Some PEOs offer their services a la carte, while others bundle them into one package. Keep in mind that some PEOs also have employee minimums, typically requiring you to have at least five employees. Here are some of the top PEOs to consider:
- Justworks: If technology is key to your business, Justworks is a great PEO partner. The cloud-hosted platform is simple to use, and the company offers HR consultants who can provide tailored guidance. Justworks is one of the few PEOs we reviewed that lists its pricing online. This can be beneficial for a strict budget. Read our Justworks review to learn more.
- Rippling: Companies looking for a PEO that can easily scale will want to check out Rippling. You can access Rippling's regular workforce platform, or you can pair it with Rippling's PEO model for a comprehensive co-employment service. The cloud-hosted platform is ideal for both in-office and remote employees. Read our Rippling PEO review to learn more.
- TriNet: This PEO specializes in a variety of industries, so it is ideal for those who want a tailored solution. In addition to a great PEO plan, TriNet clients can access a user-friendly mobile app, which is ideal for businesses that have employees on the go. Read our TriNet review for more information.
How much do PEOs cost?
In many cases, outsourcing these tasks to a PEO is more cost-effective than hiring an in-house HR representative. If you have 10 employees, you would pay $15,000 annually at most for weekly PEO services. For comparison, human resources specialists make an average annual salary of $69,430 per year, according to the Bureau of Labor Statistics. HR assistants make upward of $43,000 annually, and will still cost more to hire them to work in house.
Even if you have more than 10 employees, PEO costs may still fall well within your budget. PEO companies may even discount their rates based on how many employees you have. For instance, instead of paying $1,500 annually for each employee, you may pay $1,000 per employee if you have more than 20 full-time staff members. The PEO may also allow you to enter a month-to-month contract with the option to freeze services when you don't need them.
Always shop around for PEO services. It's not unusual to find one provider that charges $50 a month per employee and another that charges more than $100 a month for each staff member. When comparing costs, determine if one provider offers more services than the other to gauge your return on investment.
What's the difference between a PEO and an HRO?
Both a PEO and an HRO provide centralized HR services. When you partner with a PEO, you sign a co-employment agreement. An HRO doesn't act as a co-employer.
"For companies that prefer to keep some HR functions in-house, partnering with an HRO to handle a few distinct services, like payroll, makes sense," Stefan said. "A company looking for a single-source provider to assume the vast majority of HR responsibilities will typically go with a PEO."
Since PEOs have a stake in your business, they play a major role in establishing employee training requirements, safety protocols and other onboarding functions. HROs, however, don't take over all HR functions of your business and don't become involved in company policy.
HRO services provide flexibility, because you can choose the services you wish to assign to the independent company while remaining the decision-maker in HR management. Larger businesses tend to use this type of HR solution, since a human resources department is often already established and only needs help with some of the more tedious tasks.
PEOs assume all HR responsibilities and act as an extension of your business, requiring you to release all your HR data to the PEO. If you can't afford an in-house HR department you can benefit from the comprehensive offerings of a PEO, making it a better option than hiring an HRO.
What's the difference between a PEO and a staffing agency?
It's common to associate staffing agencies with PEOs, but they are nothing like PEOs. A staffing agency provides businesses with temporary employees, while a PEO does not supply labor to employers. PEOs supply services and benefits to businesses and their existing workforce. A staffing agency leases new workers on a temporary or project-specific basis. After their work is completed, the leased workers return to the staffing agency for reassignment.
In terms of functionality, a staffing agency may or may not operate like a PEO, according to Brian Cairns, founder of ProStrategix Consulting.
"A staffing agency will likely have its own health insurance and HR plans," he said. "However, by using a staffing agency, they do not automatically cover all your employees, just those who are staffed by the agency. If you have any employees of your own, they are not covered by the staffing agency's HR plans, unless you enter a co-employment agreement with the agency."
PEOs usually offer more comprehensive services than staffing agencies, and incorporate performance tracking, grievances and disciplinaries. It ultimately depends on your business structure and needs.
What's the difference between a PEO and an EOR?
An employer of record (EOR) is the sole legal employer of employees, whereas a PEO operates through a co-employment model. This means that, while a PEO shares ownership and liabilities, the EOR assumes all liabilities for the workers.
An EOR oversees all timekeeping, payroll, workers' compensation, unemployment claims and employee benefits administration. With a PEO, you may have your choice of insurance coverage, but with an EOR, your employees would be covered under the EOR's insurance.
Another difference is in hiring. With a PEO, you retain a lot of rights and responsibilities over who you hire and how. An EOR, on the other hand, takes full responsibility for hiring workers. An EOR is often provided by staffing agencies.
Skye Schooley contributed to the writing and reporting in this article. Some source interviews were conducted for a previous version of this article.