- A PEO is a company that provides HR, payroll, and employee benefits services to businesses. A PEO assists businesses by taking the burden of compliance and administrative tasks away.
- Once a PEO has been selected, the client company must sign a co-employment agreement. This agreement outlines the roles and responsibilities of both the employer and the PEO.
- A key benefit that a PEO provides is taking care of the paperwork and red tape associated with HR. This helps to reduce the administrative burden on a business, thus freeing up time and resources that can be better spent elsewhere.
If you’re a business that is seeking to grow your talent pool, there are multiple options for you to choose from: managing the hiring yourself or recruitment process outsourcing are two options. An Increasing number are turning towards a third option — engaging a PEO (Professional Employment Organization).
PEOs provide businesses with a fast and reliable way to find qualified candidates and grow their operations. In this article, we answer the question “what is a PEO?”. We also identify how a PEO works, and the ways it can benefit your business.
Why would a business use a PEO?
A PEO (Professional Employer Organization) is a company that provides HR, payroll, and employee benefits services to businesses. A PEO assists businesses by taking the burden of compliance and administrative tasks away. In turn, this frees time for owners and managers to focus on running and growing their businesses.
A PEO can also often provide access to better HR resources and employee benefits than most small businesses could afford on their own: For example, a PEO might offer access to a comprehensive health insurance plan, a retirement savings plan, and other perks that would be out of reach for most small businesses. Ultimately, a PEO can be a valuable partner for businesses that want to focus on their core products or services.
The more specific pros and cons of engaging a PEO, we consider below.
What are the PEO pros and cons?
Pros of Engaging a PEO
Business owners and managers face many responsibilities in their roles. Not only do they have to worry about production and sales, but they also have numerous HR responsibilities that come with dealing with employees. This is where a PEO can become a valuable partner for a business. The benefits of outsourcing these tasks to a PEO include:
- Cost and time savings. Perhaps the most important benefit is that a PEO can take care of the paperwork and red tape associated with HR and payroll. This helps to reduce the administrative burden on a business, thus freeing up time and resources that can be better spent elsewhere
- Better employee benefits. A PEO can also help to improve employee morale by providing access to high-quality benefits and resources which, in turn, help the business to attract and retain top talent. In short, PEOs, due to economies of scale, can often manage employee benefits better than individual businesses can.
- Compliance. As the Employer of Record, the PEO takes over responsibility and liability with respect to employment tax withholding and deductions/employee contributions. In addition, PEOs can provide expert guidance on compliance with employment laws and regulations, helping to protect businesses from costly fines and penalties.
- Reduced chance of payroll error. Understandably, payroll mistakes are one of the biggest concerns for employees: A missed pay check may mean the difference between bills being paid or going in arrears. As payroll specialists, PEOs have the infrastructure and expertise to process payroll with minimal errors.
- Access additional HR and people capability services. Smaller businesses are unlikely to have specialists in HR strategy, analytics, recruitment or visas. Often PEOs have staff on hand to advise on these matters and can easily provide assistance to their clients.
Cons of engaging a PEO
While the benefits are substantial, there are also some disadvantages, or perceived disadvantages of using a PEO. These include:
- Transferring control. When a client company engages a PEO to provide services, they are trusting that company to take on some of the employer responsibility, and to perform the task well. Even though PEO arrangements are backed up by solid contractual provisions setting out the consequences of breach, all risk cannot be eliminated.
- Employer confusion. Employees will work in one location for one set of supervisors, but receive their pay checks from someone else. This can be confusing for employees psychologically, but can also increase the chance of employment disputes: It might open up arguments about which company is responsible for what.
- Standardized benefits. While the benefits offered by PEOs are often better than those offered by other companies, there may be little room to tailor benefits packages. In some cases, that may mean client companies are unable to provide the exact benefits that they would like to.
- Data risk. In a PEO arrangement, the PEO uses employee personal data to process payroll. There is a risk that this data could be inadvertently released to the wrong parties due to a data breach or hacking.
It is important that any curious business mitigate the risk of these perceived cons of PEO. This can be achieved through a combination of consistent employee messaging, as well as optimizing the PEO agreement.
Employees need to be provided with clear information about the PEO, what their role is, and what to do when problems arise.
The PEO agreement should:
- Clearly set out the responsibilities of the client company and the PEO
- Set out significant consequences for material breach by the PEO
- Recognize data protection responsibilities (and where the EU General Data Protection Regulation (GDPR) applies, include a data processing agreement).
Why use a PEO — Experts from Justworks give their perspective
When is a PEO right for your business?
The decision whether to use a PEO or not can be critical to the success of a business. Questions to ask include:
- What are the business’s specific needs? As observed above, one benefit of PEO is that it can provide better health insurance for many employees. On the other hand, that can come at the expense of tailored benefits packages. Whether a PEO is right for you will depend partially on the benefits package your employees expect, as well as the industry standard.
- What size is the company? PEOs can work for businesses of all sizes, but are often most beneficial for small to medium-sized enteprises (SMEs) and startups, rather than large companies. As large companies often have their own payroll and HR functions, the benefits can be more marginal.
- What are the company’s goals? Depending on the growth strategy of the company, engaging a PEO could become either more or less profitable over time.
The next step is to look at each individual PEO’s offerings: What type of services do they provide? Do they have experience in the business’s industry? Do the PEO’s services fit with their company’s needs?
To confirm your first impressions, it is good business practice to look at PEO reviews, or even talk directly to other businesses that have used a PEO. This ensures they receive honest feedback about another company’s experience.
Why use a PEO? Our take
There are a range of PEO benefits including saving money, time and allowing a business to better focus on its core activities. While there are some potential disadvantages of using a PEO, these can be mitigated through PEO agreements and carefully vetting potential business partners.
The benefits of using a PEO include, but are not limited to:
- Saving time and money
- Ensuring tax and labor compliance
- Improving employee benefits
- Reducing the chance of payroll error
- Access to additional HR services.
The potential drawbacks or cons of using a PEO include:
- Reduced control
- Confusion among employees as to who the employer is
- Reduced choice in employee benefits
- Risk of data breach.
PEOs generally charge their clients either (a) as a percentage of gross payroll costs/payroll costs or (b), as a fixed amount per month per employee.
These costs costs can differ radically depending on the precise services provided by the PEO, and the state and country of location.
On a per employee basis, 1000-2000 a year would be common in the United States. As a percentage of payroll, anywhere from 2 to 15 percent is common.