What is a PEO – and How Can it Help Your Small Business?
This complete guide to professional employer organizations (PEOs) is a great way for your business to find and work with candidates that match the job requirements. This can be done at an affordable price by outsourcing their business-to-business relationship called “co-employment."
We’ll cover:
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What is a PEO?
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Why use PEO services?
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How PEOs work?
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PEO vs. Certified PEO or CPEO
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PEO Frequently Asked Questions (FAQs)
What is a Professional Employer Organization (PEO)?
A PEO is a Professional Employer Organization. It’s a company that provides HR outsourcing services to small businesses and many mid-sized businesses as well. These services can include payroll, access to benefits, workers' compensation, and even recruiting and staffing.
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A professional employer organization will typically partner with small businesses to become their administrative employer through an outsourcing model. This means that the PEOs typically handle all of the HR-related functions for the business. The business still has control over its employees and day-to-day operations – but the PEO takes on the administrative burden of human resource functions.
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This relationship is called "co-employment." The PEO becomes the co-employer of the business's employees – which allows them to offer their services to the business.
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Many PEOs can be national or international organizations. They can also be regional or local. There are even some that only serve a specific industry.
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PEOs vary in size, too. Some only have a few hundred clients, while others may have tens of thousands. The largest in the United States – TriNet – has over 26,000 clients and more than two million worksite employees.
Why do businesses use PEO services?
There are many reasons why companies use a co-employment service. The most common reason is to outsource the administrative burden of HR. This includes functions like payroll, benefits, and training.
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They can offer your business compliance support. They keep up with the latest employment laws and regulations – and make sure that their clients are in compliance. This can be a big help for client companies that don't have the resources to stay up-to-date on laws and regulations.
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Another reason small businesses use PEOs is to get access to a wider range of benefits. Typically, they can often negotiate better rates for their clients. This is because they have economies of scale – they're able to get better rates because they're pooling together the buying power of all of their clients.
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Even supporting a company with recruiting and staffing. They can identify candidates that match the business's needs – and support the client with its hiring process.
Benefits of a PEO: 17 Advantages of Utilizing a PEO for Your Small or Medium-sized Business
There are many benefits of contracting with a PEO. Here are 19 advantages for your small or medium-sized business:
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1. Access to better benefits plans. When you work with a PEO, you'll have access to better health insurance plans. This is because PEOs can pool their resources and get better rates from insurance providers.
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2. Ability to offer better retirement plans. When you work with a PEO, you'll be able to deploy a more comprehensive retirement package at a lower cost and fiduciary burden. This is because they have well-defined relationships with investment firms.
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3. Reduced liability exposure. When you work with a PEO, you'll have reduced liability exposure. This is because they will assume some of the liability for things like workplace injuries.
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4. Reduced workers' compensation costs. When you work with a PEO, you'll have reduced workers' comp. costs. This is because they will assume some of the risks for workplace injuries and have a larger pool of premiums to pull from.
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5. Access to human resources (HR) expertise. When you work with a PEO, you'll have access to human resources expertise and best practices which also benefits HR teams that are staffed. This is because they employ HR professionals who can help you with things like recruiting and employee relations.
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6. Access to employee benefits experts. When you work with a PEO, you'll have access to employee benefits experts. This is because they employ benefits specialists who can help you with things like HSAs and retirement plans.
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7. Access to payroll experts. When you work with a PEO, you'll have access to payroll experts. This is because they employ payroll specialists who can help you with things like taxes and compliance.
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8. Reduced administrative burdens. When you work with a PEO, you'll have reduced administrative burdens. This is because they will handle many of the administrative tasks related to running a small and mid-sized business, such as payroll benefits and HR outsourcing.
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9. Improved compliance with laws. When you work with a PEO, you'll have improved compliance with employment laws. This is because they will make sure that you're compliant with things like wage and hour laws.
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10. Improved employee morale and retention. When you work with a PEO, you'll have improved employee retention. This is because they will provide your employees with things like health insurance and retirement plans.
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11. Improved recruiting efforts. When you work with a PEO, you'll have improved recruiting efforts. This is because they will help you with things like job postings and candidate screening.
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12. Increased efficiency in HR processes. When you work with a PEO, you'll have increased efficiency in HR processes. This is because they will automate many of the HR tasks related to running a business.
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13. Cost savings on HR-related expenses. When you work with a PEO, you'll have cost savings on HR-related expenses. This is because they will handle many of the HR tasks associated with running a business, such as payroll and benefits administration.
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14. Flexibility in benefit offerings. When you work with a PEO, you'll have flexibility in benefit offerings. This is because they can customize a benefits package to meet your specific needs.
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15. Increased efficiency in payroll processes. When you work with a PEO, you'll have increased efficiency in payroll processes. This is because they will automate many of the payroll tasks associated with running a business.
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16. Access to data and analytics tools. When you work with a PEO, you'll have access to data and analytics tools. This is because they will provide you with things like HR data and analytics software.
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17. Customizable HR solutions. When you work with a PEO, you'll have customizable HR solutions. This is because they will work with you to create an HR solution that meets your specific needs.
PEO vs. Certified or CPEO
There are two types of PEOs: certified PEOs (CPEOs), non-certified PEOs.
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CPEOs are the most regulated type. They're subject to voluntary oversight by the Internal Revenue Service (IRS).
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Non-certified are not subject to as much regulation. They're not required to have a surety bond or workers' compensation insurance.
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What are the benefits of a CPEO?
The CPEO is responsible for paying taxes relating to their employees. If the company uses a non-certified PEO, it could be liable if there are unpaid federal employment tax liabilities related to late penalties and interest as well.
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The benefits of Certification include eliminating the wage-base restart for PEO customers that join or leave a CPEO during the year. This means you can make changes at any time and do not need to wait until January, saving thousands in taxes.
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Also, they must have a $1 million surety bond in place. This bond protects the company from losses caused by negligence or fraud.
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Additionally, their clients are able to continue claiming certain tax credits for which they would be entitled if there were no co-employment relationship.
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Not all PEOs are created equal.
How PEOs work?
Professional employer organizations typically charge their clients a fee. This fee is usually a percentage of the payroll. The average fee is between 2% and 4% of payroll.
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You'll also often seek they can also charge additional fees for specific services. For example, they may charge a fee for compliance assistance or employee recruiting.
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Typically they have two types of contracts: co-employment, and administrative services only (ASO).
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Co-employment is the most common type of contract. In this arrangement, the PEO becomes the employer of record for the workers. The business still has control over the day-to-day operations – but the PEO provides HR services like payroll, tax filing, and employee onboarding.
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ASO contracts are less common. In this arrangement, the PEO does not move into a joint employment relationship. The business is still responsible for HR functions – but the PEOs offer administrative support in a similar fashion without the advantages of a master health insurance policy.
PEO FAQ's
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Who employs the workers?
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In a professional employer organization (PEO) arrangement, the PEO is the employer of record for federal and state payroll tax purposes and is responsible for withholding, reporting, and paying payroll taxes. The client company retains direction and control over its worksite employees' job duties and working conditions. Although the PEO is the legal employer, they and the company share certain employer responsibilities under co-employment laws.
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What is co-employment?
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Under a partnership arrangement, the PEO and the worksite employer are considered joint employers of the worksite employees. This means that the PEO and the client company share certain employee-related risks and employer responsibilities under federal and state laws. The extent of each employer's liability will depend on the terms of the agreement between the PEO and the client company and the applicable state laws.
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How much does it cost to access a PEO?
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PEOs typically charge a fee for their services, which is generally calculated as a percentage of payroll or per employee per month (PEPM). The exact amount will vary depending on the size and complexity of your and whether you go with a per-employee model or percentage of payroll.
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What are the benefits of contracting a PEO?
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They can provide several benefits to small and medium-sized companies, including:
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Reduced costs associated with payroll taxes and human resources management and administration
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Access to better employee benefits programs
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Assistance with compliance with federal and state laws
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Improved employee morale and retention
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Increased efficiency and productivity
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Are there any disadvantages to partnering with a PEO?
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There are a few potential drawbacks to working PEOs, including:
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The need to share confidential information with them
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The loss of some control over your employees
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You may not get your money's worth if you don't tap into their services
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How do I choose the right PEO for my business?
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When choosing a PEO to help your business, it is essential to consider your specific needs and objectives. You should also ask for references from other businesses that have used the PEO's services and check their credentials with the Better Business Bureau.
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What should I look for in a PEO proposal?
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A good proposal will be tailored to your specific needs and objectives. It should also include detailed information on the services the provider offers and the fees involved.
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How long does it take to set up a PEO arrangement?
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Setting up a co-employment arrangement can take several weeks or even months. This is because they will need to obtain a ton of typically disparate data to set up payroll accounts with the appropriate state and federal agencies as well as your system for managing all of your employee-related needs.
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What documentation is required to set up a PEO arrangement?
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In addition to your business's federal tax identification number, a power of attorney, and a co-employment agreement. You will also need to provide the provider with information on your company's employees, including their names, dates of birth, addresses, Social Security numbers, and job titles. Most of these are files you'll have access to, but many of the providers will help you with pulling all of the information together, while some will rely solely on you.
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Do I need to inform my employees that I am utilizing a PEO?
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Yes. By law, you are required to notify your employees that you have contracted with a PEO to serve as their co-employer. This notice must be provided in writing and given to each employee no later than the first day of hire.
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How will using a PEO affect my employees?
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Using a PEO should have no adverse effect on your employees. They may even benefit from the arrangement, as they will get improved employee benefits and assistance with compliance with federal and state laws.
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Will my employees be eligible for union membership if I use a PEO?
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PEOs are generally not considered in labor organizations under the National Labor Relations Act. As such, your employees will not automatically become union members just because you use one. However, there is always the possibility that your employees could vote to unionize in the future.
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How can I find out more about PEOs?
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There are several ways to learn more about PEOs, including:
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Working with a PEO broker (like Mission)
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Contacting a local PEO
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Searching the Internet for information on PEOs
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What are the most important things to remember?
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There are a few things to keep in mind when considering a PEO for your business, including:
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Make sure you understand how the arrangement will affect your business
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Be sure to check for credentials
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Be prepared to provide them with confidential information about your business and employees
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Notify your employees that you have contracted with a PEO to support your company
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Where can I go for more information on PEOs?
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There are several resources available for client companies considering a PEO, including:
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The Small Business Administration
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The National Association of Professional Employer Organizations (NAPEO)
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State departments of labor
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A quality PEO broker/consultant (like Mission)
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Will I get my return on investment for my company?
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There is no guarantee that you will get your ROI from a professional employer organization. However, if you are able to find reputable and trustworthy PEOs, the arrangement could save time and money in the long run by reducing your payroll, tax, insurance, and administrative costs.
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In addition, this kind of model can help your business comply with complex federal, state, and local laws, which can avoid costly penalties.
Is PEO Right for My Company?
The PEO model is an extremely popular choice for owners of small and medium-sized businesses who want to focus more time on their key business initiatives and less on administrative and compliance-related tasks. If you think a PEO partnership might be right for your business, you can review: