What is A PEO: Understanding the Role of Professional Employer Organizations 2023

What is a PEO?

A professional employer organization (PEO) is a third-party provider that offers a range of human resource (HR) services to small and medium-sized businesses. These services include payroll processing, employee benefits management, and compliance with state and federal labor laws. In this article, we will provide an overview of PEOs, explain how they work, and discuss the benefits of using a PEO. We will also offer guidance on how to choose a PEO and what to consider when making your selection.

What is a CPEO? 

A Certified Professional Employer Organization (CPEO) is a type of employer organization that has been certified by the Internal Revenue Service (IRS) as meeting certain requirements related to payroll and employment taxes. These requirements include having a certain level of bonding and insurance, and agreeing to comply with certain IRS regulations. CPEOs are authorized to take over certain employment tax responsibilities for their clients, including withholding and remitting payroll taxes, and providing certain employee benefits. This can provide benefits to both the employer and the employees, such as reducing administrative burdens and improving compliance with employment laws.

Why Should You Use a PEO?

At their core, PEOs act as co-employers with their client companies. This means that the PEO shares certain employer responsibilities, such as payroll processing and benefits management, with the client company. By pooling resources and expertise, PEOs are able to provide a wide range of services that would typically be out of reach for many small and medium-sized businesses. These services can include HR support, recruiting and retention assistance, and access to group purchasing power for employee benefits.

One of the key advantages of using a PEO is the reduction in administrative burden for HR and payroll tasks. With a PEO handling these responsibilities, business owners can focus on growing their businesses rather than getting bogged down in paperwork. Additionally, PEOs can help ensure compliance with state and federal labor laws, which can be a complicated and time-consuming process for businesses to navigate on their own.

Another significant benefit is the access to group purchasing power for employee benefits. This can mean access to health insurance, 401(k) plans and other employee benefits at rates that may be significantly lower than those available to smaller companies on their own.

How PEOs Can Help You

Below is a more detailed list of the ways in which a PEO can benefit you. Be aware that this list is by no means exhaustive and different PEOs may have different policies.

HR Administration and Compliance Support

1. Keeping businesses up-to-date on changes in employment laws and regulations: PEOs have teams of experts who stay informed on the latest developments in labor laws and regulations, and can help businesses stay compliant with these changes.
2. Providing guidance on compliance with specific laws and regulations: PEOs can provide guidance and support to businesses on compliance with laws such as the Affordable Care Act, the Family and Medical Leave Act, and state and federal labor laws.
3. Providing access to legal resources: PEOs often have teams of attorneys and other legal experts who can provide businesses with legal advice and representation in the event of an employment-related lawsuit or investigation.
4. Providing forms and other resources: PEOs can provide businesses with the necessary forms and other resources to comply with laws and regulations, such as employee handbooks and I-9 forms.
5. Assisting with audits and investigations: PEOs can help businesses prepare for and respond to audits and investigations by government agencies such as the Department of Labor or the IRS.
6. Providing training: PEOs can provide training to businesses and their employees on compliance with laws and regulations, such as OSHA regulations and other safety compliance.

Benefits Administration

1. Health insurance: PEOs can provide businesses with access to group health insurance plans for their employees, often at rates that are lower than what the business could negotiate on its own.
2. Retirement plans: PEOs can provide businesses with access to retirement plans such as 401(k)s and other defined contribution plans, and can assist with the administration of these plans.
3. Employee benefits: PEOs can provide businesses with access to other employee benefits such as vision and dental insurance, short-term and long-term disability insurance, and life insurance.
4. Payroll and taxes: PEOs can assist businesses with payroll and tax-related tasks, such as processing payroll and withholding and remitting payroll taxes.
5. Employee onboarding: PEOs can assist businesses with the process of onboarding new employees, including verifying their eligibility to work in the U.S., completing necessary paperwork, and providing them with information about company policies and procedures.
6. Employee self-service: PEOs can provide businesses with employee self-service portals that allow employees to access their pay stubs, benefits information, and other important information.
7. Human resources: PEOs can provide businesses with human resources support, including assistance with recruiting and staffing, performance management, and compliance with employment laws.
8. COBRA administration: PEOs can assist businesses with COBRA administration, which is the process of providing continued health coverage to employees who leave the company.

Payroll

1. Calculating and distributing employee paychecks
2. Withholding and paying taxes
3. Providing employee benefits
4. Compliance with state and federal employment laws
5. Providing workers’ compensation coverage
6. Handling unemployment claims.

What PEOs Don’t Do

1. PEOs do not make hiring decisions: PEOs do not make decisions about who to hire or fire. Businesses are still responsible for recruiting, interviewing, and hiring employees.
2. PEOs do not manage the day-to-day operations of a business: While PEOs can help with HR tasks, they do not manage the day-to-day operations of a business. Business owners are still responsible for running their company and making strategic decisions.
3. PEOs do not provide legal advice: PEOs can help businesses comply with state and federal laws, but they do not provide legal advice. Businesses should consult with a lawyer for legal advice.
4. PEOs do not set the policies and procedures for a business: PEOs can help businesses create and implement HR policies and procedures, but they do not set the policies and procedures for a business. Business owners are still responsible for setting the policies and procedures for their company.
5. PEOs do not provide tax or financial advice: PEOs can help businesses with payroll and taxes, but they do not provide tax or financial advice. Businesses should consult with a tax professional or financial advisor for tax and financial advice.

Note that PEOs services can vary from company to company and what one PEO does not offer, another may. It’s important to check with the PEO you’re interested in to understand their offering. Overall, PEOs can offer significant benefits to small and medium-sized businesses. Business owners should carefully consult with a lawyer or HR professional before making a decision.

Important Considerations

While PEOs can offer significant benefits to businesses, an ounce of caution will ensure you reap the greatest benefits possible. When choosing a PEO, it is important to conduct thorough research and due diligence. Start by identifying the specific services you need, and then make a list of PEO providers that offer those services. Next, ask for references and speak with other businesses that have used the PEO’s services. Be sure to also ask about the PEO’s compliance track record, and any additional benefits that the PEO provider may offer. 

Depending on its terms, using the wrong PEO can mean a loss of control over certain aspects of your business. PEOs handle a wide range of HR responsibilities, including payroll, employee benefits, and compliance with state and federal laws which can save your business a great deal of time and energy. PEOs offer pre-packaged solutions that may not meet the specific needs of a business. This can be a problem for businesses that have unique HR requirements or need to comply with specific industry regulations. While this can be a relief for business owners, be certain of which aspects you would rather handle internally and your specific needs so that you can find a PEO that meets them.

Another facet to consider is the cost of using a PEO. PEOs typically charge a percentage of payroll as their fee, which can add up quickly for businesses with a large number of employees. Additionally, PEOs may require businesses to pay upfront fees or commit to a long-term contract. It’s important to understand the fees of each organization and be prepared to negotiate your contract accordingly. Furthermore, while PEOs can be costly, they can also save your business money by reducing HR costs and streamlining employee benefits. These savings may include reduced costs for employee benefits, workers’ compensation, and compliance with state and federal regulations. Be sure to consider the potential savings when evaluating the cost of using a PEO. 

PEO vs Payroll Services vs Employee Leasing?

When conducting research, it’s also essential to distinguish the different terms that have often been confused for a PEO. Many businesses and even state legislatures will refer to PEOs as an employee leasing company when this, in fact, does not accurately reflect the business model. PEOs are also often confused with payroll services. These terms sound like they offer similar services but there are distinctions. PEOs, employee leasing, and payroll services are all companies that can help small and medium-sized businesses with payroll and related HR tasks, but they offer different services and have different business models.

PEOs work as a “co-employer” with the business, allowing them to share the responsibilities and liabilities of being an employer. On the other hand, payroll service is a company that specializes in processing payroll for businesses. They handle tasks such as calculating payroll taxes, issuing paychecks, and making direct deposit payments to employees. A payroll service may also offer additional services such as time and attendance tracking and employee self-service portals.

Another key difference is that a PEO typically charges a percentage of payroll as their fee, while payroll services often have a flat monthly or annual fee. Finally, employee leasing involves a business leasing its employees to another company, known as a leasing company, which then becomes the employer of record.

PEOs offer more services than both employee leasing businesses and payroll services. Payroll services typically only focus on payroll processing, so businesses will have to handle other HR tasks such as employee benefits and compliance with state and federal laws. Businesses should consider their specific needs and evaluate which type of service is the best fit for their organization.

Employee leasing companies typically only handle payroll and employee benefits. Therefore, a PEO may be more suitable for a business that wants to reduce the cost of employee benefits and streamline HR tasks, to have access to a team of HR experts who can provide guidance and support, and to reduce the administrative burden of managing employees and help them focus on growing their business. 

Conclusion

In conclusion, a PEO can provide a range of valuable services to small and medium-sized businesses, including payroll processing, employee benefits management, and compliance assistance. By using a PEO, business owners can reduce their administrative burden and focus on growing their companies. Additionally, PEOs can provide access to group purchasing power for employee benefits, which can result in cost savings for businesses.When selecting a PEO, it is important to conduct thorough research and due diligence to find the right provider for your business needs.