What Is A PEO (Professional Employer Organization)?

We won’t sugarcoat it: Running your own small business is hard work. 

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In fact, one study conducted by Bank of America found that 41% of small business owners say managing their business is their top personal stressor. It makes sense — you need to worry about everything from getting new customers to payroll processing.

Another aspect of business ownership that can have you biting your nails? Human resources.

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Research from the Society for Human Resource Management states that a whopping 54% of small businesses handle employment matters themselves. If the business owner isn’t taking care of those HR tasks, they’re delegating them to an in-house employee who typically lacks the necessary experience.

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What’s the best way forward here? Do you take on those responsibilities yourself — despite the fact you’re juggling dozens of other things? Do you continue to let an inexperienced employee take their best crack at it?

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A PEO can swoop in and take a lot of stress out of this aspect of business ownership. 

What Is A PEO? 

A PEO stands for a professional employer organization. A PEO is an outsourced company that small or mid-sized businesses will hire to provide HR services — rather than trying to muddle through those tasks themselves. 

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If your business were to work with a PEO, it’s important to note that they typically use a co-employment legal arrangement. We’ll talk in detail about what this means a little later.

What Are The Typical PEO Services?

Considering outsourcing some of your HR functions to a PEO? Tasks they can help you with include, but certainly aren’t limited to:

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• Managing payroll and payroll taxes
• Overseeing employee benefits and your benefits package (including health insurance, unemployment insurance, retirement plans, workers’ compensation insurance, and more)
• Handling tax administration and tax filings
• Ensuring regulatory compliance
• Completing other human resource functions like new hire onboarding, drug testing, and the creation of employee handbooks

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Needless to say, there’s a lot that a PEO can take off your plate as the business owner. 

So Wait...What Is Co-Employment? 

A PEO can be a great human resources partner for small businesses. But, you need to be aware that they truly are your partner. As mentioned, PEOs work with businesses using a co-employment arrangement. 

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You and your business still serve as the primary employer, and you retain control over things like your employees' roles and responsibilities, as well as management over your staff. However, the PEO will assume control over the employment responsibilities that you assign to them in your contract agreement. In your contract with a PEO, you’ll typically be referred to as the “client company,” and the PEO is your co-employer. 

While you have authority over the PEO, they will step in and act as an employer as well, hence the term “co-employment.” Both you and the PEO have legal responsibilities for your employees.

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Take note that a PEO relationship is different from an Employer of Record (EOR). When you use an EOR, they formally become the sole legal employer of your staff and take on all liabilities and responsibilities for those employees.

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Why do PEOs opt for co-employment? As the National Association of Professional Employer Organizations (NAPEO) explains, this gives them the legal authority to:

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• Reserve a right of direction over employees
• Remit wages and withholdings
• Issue Form W-2s
• Report, collect, and deposit employee taxes

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It might sound a little nerve-wracking to have a PEO step in as an employer for your staff. But, this arrangement offers numerous benefits, which we’ll cover in the next section. 

What Small Businesses Should Know About PEO Companies: Pros And Cons

Is a PEO the right choice for your business? Ultimately, you’re the only one who can make that call. Let’s dig into a few benefits and drawbacks of working with a PEO so you can figure out what’s best for you. 

Pros Of Working With A PEO

There are numerous advantages you can experience when enlisting the services of a PEO, such as:

• Business Growth: When you spend less time on HR and administrative tasks, you have more time to focus on business development. The NAPEO states that small businesses that work with a PEO grow 7-9% faster than small businesses who don’t work with a PEO.‍

• Improved Employee Retention: When employees are happy with their benefits and management, they’re more likely to stick around. The NAPEO also states that businesses who work with a PEO have employee turnover rates that are 10-14% lower.‍

• Better Benefits: PEOs are generally large organizations, which means they have access to big-business benefits you likely don’t have access to as a small business. You’ll be able to offer your employees better benefit packages — including retirement savings plans, insurance options, and more. Plus, the PEO will take care of your benefits administration.
  

• Compliance: From the Occupational Safety and Health Act (OSHA) and workers’ compensation insurance to the Fair Labor Standards Act (FLSA) and other labor laws, there’s a slew of red tape and regulations you need to comply with. PEOs offer compliance assistance. Additionally, they assume some of the risk through your co-employment relationship.
  

• Less Stress: Combine all of the above, and there’s less stress and hassle weighing on you as the business owner. You can rest easy knowing you have an experienced partner and a team of HR professionals handling your human resources tasks. 

Cons Of Working With A PEO 

While a PEO can offer a lot of peace of mind to business owners, there are a few potential drawbacks you should consider, including:

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• Less Control: Because the PEO is serving as an employer of your staff, you’re relinquishing some control of your employment processes, decisions, and people. That can be anxiety-inducing for a lot of business owners.‍

• Company Culture: This means the PEO might also influence your team and company culture — and not always in a good way. If your employees have a negative impression or resist the control of your PEO, that can send your team’s morale into a nosedive.‍

• Cost: Working with a PEO isn’t free, and this relationship can add up to a fairly hefty expense on your balance sheet. Working with an in-house employee might be more cost-effective, despite the fact they don’t have the necessary experience. 

How Much Does A PEO Cost? 

As a business owner, you care about the bottom line. So, let’s talk about that cost piece of the puzzle a little more.

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Exactly how much you need to spend to work with a PEO will depend on your specific relationship, what tasks you delegate, and more. 

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PEOs generally charge business owners using one of two methods:

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• Flat fee calculated per employee, per year
• Fee calculated as a percentage of the company’s overall payroll per year

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Again, using either of those methods, costs can vary. A flat fee is typically between $900 and $1,500 per employee each year. If the PEO charges a percentage, it’s usually 3-10% of the company’s overall payroll. 

Stressing Over HR Tasks? You Don’t Have To

If you frequently find yourself tearing your hair out over employment regulations, your benefits offerings, and staff paperwork, a PEO can definitely help take some stress off your plate.

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Just be aware that you’ll be relinquishing some control over your staff, which can be slightly nerve-wracking for business owners who are used to running the show.

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Only you can decide what’s the best fit for your business and employees. If you aren’t quite ready to take the leap with a PEO, try Hourly to track employee time, easily run your payroll, and find top-notch workers’ comp insurance. Start your free trial today.