Handling employee benefits and other HR services in-house is extremely difficult for many small businesses.
There are many reasons, including being short-staffed and needing an internal Human Resources department, which is a reality for many small and medium-sized companies.
According to research by Secure Data Recovery, 88% of employees have worked at a small business without a dedicated HR team. Their study also found that not having an HR department made the workplace feel toxic, so it’s important to have HR functions in place.
Professional employer organizations (PEOs) offer a cost-effective solution to this problem.
Through co-employment agreements, PEOs outsource vital HR solutions like:
- Payroll processing
- Benefits administration
- Risk management
- Onboarding
- Workforce management
- Performance management
These are only a few HR services that PEOs offer, and they come at a fraction of the cost of hiring an internal HR department.
Besides the cost savings, working with a PEO can yield many benefits to employers.
NAPEO (National Association of Professional Employer Organizations) economists Laurie Bassi and Dan McMurrer conducted research into PEOs. They found that firms utilizing them boasted 40% better revenue growth, 14-16% lower turnover rates, and were 50% less likely to go out of business than firms who did not use a PEO.
Yet, working with a PEO can undoubtedly have its downsides, and you must ensure your organization truly needs one.
Stay tuned to learn if working with a PEO is the right move for your organization or not.
What is a professional employer organization (PEO)?
An easy way to remember what PEOs do is to think of them as HR outsourcing companies, which is what they are essentially.
While the name ‘professional employer organization‘ may imply that they outsource all employment services, they only provide HR solutions.
Each PEO is a standalone company offering unique services, which can differ from PEO to PEO.
For example, while some PEO companies only offer basic HR tasks like payroll services and compliance with tax laws, others provide more comprehensive service suites, including onboarding, health insurance, and administrative tasks.
A PEO works by entering into a co-employment relationship with one of its clients. From there, both parties agree on which tasks the PEO will outsource based on the client’s business needs. Agreements are also made concerning payment, communication, and integration with the client companies’ current workforce.
It’s important to understand that PEOs do not run your business, nor do they replace any of your current employees.
You must relay this to your staff the first time you let them know you’re considering working with a PEO. You’ll need your existing staff to be on board with the idea, and letting them know that their jobs aren’t in danger is a great way to get them to agree.
Also, remember to inform them of the many benefits of working with a PEO, including freeing them of any HR tasks they’re currently handling by themselves. With a PEO, your staff will have more time to focus on their core tasks and responsibilities, which they will likely appreciate (and bring them peace of mind).
What’s the difference between a PEO and a CPEO?
If you start researching PEO providers online, seeing CPEOs enter the mix will take a while.
What’s a CPEO?
It stands for certified PEO, meaning the organization has met the stringent requirements of the IRS (Internal Revenue Service).
If a company advertises as a PEO, they must be certified.
Why choose a CPEO over a regular PEO? There are several reasons why.
First, a CPEO provides certain tax benefits and financial protections that regular PEOs can’t. In particular, a CPEO bears the brunt of payroll tax responsibility to the IRS. Here’s what that means.
If you use a non-certified PEO and they fail to pay your taxes, the IRS will hold both you and the PEO responsible. This means they can pursue your unpaid taxes, even if you’ve already paid them to the PEO.
In this same scenario, if you were using a CPEO instead, the IRS could only pursue the unpaid taxes from them (assuming you’ve already paid them).
This extra layer of security is why some businesses choose to use CPEOs instead of regular PEOs.
The only problem is that CPEOs are few and far between.
Out of all the PEOs in the world, less than 10% are certified. This is undoubtedly due to the IRS’s strict requirements for certification, which are challenging to meet and maintain.
What are some standard services a professional employer organization provides?
Despite the difference in IRS certification, CPEOs and PEOs tend to provide the same types of HR services for outsourcing.
As stated before, PEO services differ from provider to provider, so you must do your homework online.
Here’s a look at basic HR tasks that most PEOs will provide regardless of their scale:
- Payroll services
- Compliance with tax and employment laws
- Tax management
- General HR management
Here are some more advanced services that some PEOs offer:
- Reviewing workers’ compensation claims
- Retirement plans
- Safety audits and training programs to help limit claims
- OSHA inspection assistance
- Writing employee handbooks
- Benefits administration like health and unemployment insurance
- Administrative services (bookkeeping, data entry, etc.)
It’s essential to read a service provider’s website to understand everything they offer before contacting them for a free demo or consultation. Pricing will also vary, so you should plan your budget before reviewing PEOs.
The last thing you want is to invest in a PEO that doesn’t provide the service you desperately need the most, such as tax compliance or employee benefits.
What professional employer organizations don’t do
Before we move on, you should know what PEOs can and can’t do for your business, as there tends to be little clarity in this area.
PEOs can only outsource HR services to your organization and nothing more. They need to be able to run your business for you or provide things like short-term employee leasing. They differ from traditional staffing companies in that they don’t provide labor to worksites.
Instead, a PEO will knock out your HR tasks at their location. They’ll remain in touch with you to provide updates on their progress, but they’re self-contained.
Other services PEOs do not provide include:
- Sales
- Marketing
- IT
- Customer service
- Production
- Research and development
You must work with different outsourcing providers if your business requires these services. If you need assistance with anything related to HR, then a PEO is what you need. Otherwise, you’ll find companies that outsource things like sales and marketing elsewhere.
The benefits of using a professional employer organization
Since you know what a PEO will and won’t do for your organization, let’s dive into the benefits they can provide.
Small-to-medium-sized enterprises (SMEs) love to use PEOs because:
- They’re extremely cost-effective
- They free up lots of time
- PEOs improve the employee experience
- You gain access to existing expertise
These are all significant benefits, so let’s closely examine each one.
PEOs are cost-effective
One of the biggest reasons small businesses choose to use PEOs is the cost of hiring in-house HR professionals.
According to Indeed.com, the average cost to recruit and onboard one employee ranges from $4,000 to $20,000, which doesn’t include salary and benefits.
Moreover, that’s the cost of hiring just one employee, so you can imagine how expensive it is to create an in-house HR department from scratch.
One HR professional’s annual salary will cost you roughly $85,000, not including benefits or recruitment costs. Remember that only one employee can specialize in one area of HR (like payroll).
PEO costs are typically calculated using a flat rate for each employee, which ranges from $900 to $1,500.
If your small business has 60 employees, you can expect to pay approximately $60,000 yearly for a PEO capable of outsourcing virtually all your HR tasks.
Not only is that $15,000 cheaper than hiring just one employee, but it accounts for a full year of work spanning multiple HR specialties (like payroll, onboarding, benefits, etc.).
They save lots of time
If your small business does not have an official HR or accounting team, essential tasks like payroll and taxes are assigned to other staff members.
Outsourcing your HR to a PEO means your staff will save time on tasks outside their primary job descriptions.
This will provide a boost to your productivity, which is a plus.
PEOs improve the employee experience
Due to their lack of resources, small businesses often need help providing perks like health insurance and other benefits.
PEOs grant them the ability to offer attractive employee benefits, making it easier to recruit top talent. Certain PEOs also provide performance and workforce management services that can help improve employee engagement and job satisfaction.
You gain access to existing expertise
Things like legal compliance, filing taxes, and managing benefits require experience and knowledge, which many small business owners don’t.
Working with PEOs gives them access to their expertise in these critical areas. For example, there’s a lot to know about complying with specific federal and state tax laws, and it can be easy for a novice to make a mistake.
PEOs often employ tax experts with countless years of experience. This helps contribute to their clients’ peace of mind since they know their taxes are in good hands (instead of trying to work things out themselves).
Potential drawbacks of working with a PEO
Sometimes, there are better options than working with a PEO for certain businesses.
This is especially true for companies that only do their homework after selecting a PEO. As a result, they wind up with a PEO that can’t perform the tasks they need, or they make a poor choice and hire an incompetent PEO.
Always seek third-party reviews and testimonials for a PEO provider before deciding. You can also find multiple options to compare and contrast services and pricing.
Besides, here’s a look at other possible drawbacks of working with a PEO.
Compliance isn’t 100% guaranteed (especially without a CPEO)
As stated previously, a certified PEO boasts tax protections that regular PEOs don’t have.
If you’re working with a PEO and they make a mistake on your taxes (or fail to file them), the IRS can pursue you for the owed revenue.
Even with a CPEO, there still needs to be a guarantee that they will remember something or make a mistake that leads to costly consequences for your business.
You have less control over your employee experience
When you work with a PEO, you’re basically forced to use their preferred benefits providers due to their established relationships.
As a result, you’ll need more control and flexibility over your employee experience.
Let’s say you want to provide dental and vision insurance for your employees. You bring this up to your PEO, but the insurance carriers they work with don’t offer dental or vision insurance, so there’s little you can do about it.
If you prefer having total control over your employee experience, you may be better off hiring an internal HR department instead of working with a PEO.
The input may not equal the output
As with any service, there’s a chance it charges too much for the work it provides. Once again, this is why it’s critical to choose the right provider.
Make the wrong choice, and you may end up with a PEO that charges you an arm and a leg but needs to do more work to justify the fee.
When working with a PEO, you should set up a way to monitor their progress before signing any agreement to avoid being taken advantage of.
Final takeaways: Working with a professional employer organization
In conclusion, PEOs work well for most small businesses, but they are only sometimes the right choice.
You should be able to consult with your team to find out whether your HR needs warrant entering into a co-employment agreement with a PEO.
Adopting a PEO is wise if your staff is drowning in administrative tasks and HR work when they should focus on other things. Conversely, you may not need to change if your small team hums along just fine while doing additional HR work.
More Resources:
PTO request policy: A comprehensive guide for employers
Stack ranking for performance management: Does it have merit?
Top considerations for your company mobile phone policy
