What Is a PEO

What Is a PEO: Pros and Cons of Professional Employer Organization

The Professional Employer Organization (PEO) is an institution that takes care of HR services for small and medium-sized businesses. When you hire PEO services, it means that you can delegate various employee administration tasks to the PEO you’ve chosen.

Anja Simic
Written by Anja Simic
September 28, 2021
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According to the National Association Of Professional Employer Organizations (NAPEO), as of now, PEOs serve between 156,000 and 180,000 small and mid-size businesses.

They also claim that the average client company that teams up with PEO consists of 19 employees — but more and more enterprises are starting to see the galore of benefits that PEOs provide, no matter the number of employees.

This is why we decided to write down everything you need to know about the Professional Employer Organizations and show you how to delegate the administrative tasks to HR professionals so you can stay compliant at all times.

By the end of this article, you will know:

  • The definition of the Professional Employer Organization (PEO)
  • What is a co-employment model
  • What kind of services does PEO provide
  • What kind of services you shouldn’t expect from PEO
  • What are the benefits of using the PEO services
  • Differences between PEO and Employee Leasing company
  • What is the certified Professional Employer Organization (CPEO)
  • What are the differences between PEO and CPEO

What is a PEO?

The Professional Employer Organization (PEO) is an institution that takes care of HR services for small and medium-sized businesses.

When you hire PEO services, it means that you can delegate various employee administration tasks to the PEO you’ve chosen. These tasks would otherwise fall under employer responsibilities. This way, employers stay in charge of decision-making related to job function and employee management, while outsourcing payroll, tax filing, workers' compensation insurance, other benefits administration, etc. to human resources outside the client company. Some PEOs also offer performance management support if needed.

The PEO industry is recognized as employers across the United States, and many of the states have specific rules and regulations regarding the way PEO works.

How does PEO work?

Co-employment relationship: PEO, employee, a client company

When a client company makes a contract with PEO, it creates a co-employment model which also involves a worksite employee of the client company. In a nutshell — PEO is a co-employer that provides services for both the workers and the client company.

It’s important to note that business owners retain complete ownership and control over their enterprise at all times. The exact scope of tasks and liabilities business transfers to PEO resides in the contract called Client Service Agreement (CSA).

PEOs and the IRS

Section 3511 of The IRS Code gives PEOs the right to withhold and remit federal income and unemployment taxes for the client company employees. IRS also gives PEOs the authority over providing retirement benefits.

PEOs and employer services assurance corporation (ESAC)

PEOs get recognized and awarded with an ESAC certificate if they prove to be ethical, financially stable, and comply with the regulations.‍

What services does a PEO provide?

Each PEO varies in the array of services it offers. Below are some of the usual services PEO provides to businesses:

  • Payroll processing — PEO will handle workers’ compensation (workers' comp), compliance and payroll taxes, record keeping, in addition to management reports, PTO accruals, online pay stubs, garnishment, and deduction administration; it also issues W-2 Form — PEO client companies provide the funds for the PEOs to pay employment taxes and file employment tax returns for the client using the PEO’s EIN.
  • Tax filing — PEOs have employees which specialize in law, and keep an eye on changes in the law that might affect the client company; this way, business owners can be sure that all the taxes are properly collected, reported, and deposited with the authorities — including employment taxes.
  • Employee nenefits — health care (medical, dental, vision coverage), disability, personal accident, and life insurance, retirement plan, commuter benefits, adoption assistance
  • Employee education — courses, training, workshops, and access to knowledge bases that help your employees hone their skills and become stronger company assets
  • Recruiting and talent services — PEOs can help you find skilled employees who are a perfect fit for your company; moreover, they plan out the whole recruiting process from a job description, posting, and interviews
  • HR support — PEO can also help your existing, internal HR team manage the administration; their support may come in various shapes, some of them being employee onboarding/ termination, drug testing, employment verification, etc.

Some only cover the basics, while others handle more than just HR administrative tasks.

For example, PEO can provide data analytics enriched with HR expertise; it can help raise employee retention (and satisfaction) and spark business growth.

Keep in mind: PEO services limitations

As a business owner, you retain the management control and need to cover administrative fees, taxes, payrolls, and benefits yourself.

PEO is an employer of record for tax purposes only, and it cannot make independent decisions tied to the client's business — this includes working hours, schedules, and salaries. Additionally, PEO doesn’t intervene with sales, marketing, and distribution.

When you decide to sign a contract with PEO, you have no responsibility for its workers.

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What are the pros and cons of a PEO?

The pros of a PEO

The most visible benefit is taking over the administrative tasks, while you can focus your resources on business development.

Company safety and risk management, however, represent the most important aspect of PEO. Experts cover everything from tax laws, unemployment insurance, and reporting, to hiring — and make sure the company is compliant with existing federal and state laws at all times. To mitigate the risks, PEOs also provide safety training programs and assist with OSHA inspections, and take care of the Employment Practices Liability Insurance (EPLI).

Keep in mind that doing business with PEO isn’t the same as just outsourcing the HR task to an outside HR company. Unlike outsourcing, the co-employment you have with PEO makes it possible to share the responsibilities and provide your employees with generous benefits. HR outsourcing only manages existing benefits.

PEOs aren’t only useful to businesses, relieving the responsibilities and HR workload; they benefit the employees as well. Without PEOs, small businesses cannot afford to provide their employees with top-quality benefits. Health insurance, 401k plans, education, and many more benefits packages are only available through PEO; otherwise, they’d be reserved only for huge companies.

The cons of a PEO

When you choose a PEO, you will buy into all the service packages one PEO offers. As PEOs often make partnerships with other providers for health insurance, that means that you will have less flexibility for your employees. You will be limited to the health insurance providers your selected PEO offers.

PEO pricing is not always straightforward. Depending on the business model you are either charged a fixed fee per employee or a percentage of the salary. It can sometimes be had to assess the ROI and see whether or not the PEO services are worth it for your industry, type of employment. etc.

Since you have a co-employment relationship with the PEO, both you and the PEO provider have all liabilities. Although they lift some of the weight when it comes to administrative tasks and running payroll, you are in it together- exposing you to potential issues and mistaken that could happen.

Lastly, the PEO relationship with your employees might feel less personal at times. Depending on the volume of their business, your employees will probably communicate and address issues with a representative, rather than having a dedicated person.

Differences between PEO and employee leasing company

The main difference between PEO and Employee Leasing Company (ELC) lies in their relationship with the workers and their job permanence.

PEOs only provide services for client companies and existing workers of that company. Once the contract between PEO and the client company is terminated, employees stay with the company, but their ties with PEO cease to exist. They usually don’t provide the company with a supply of new employees.

On the other hand, employee leasing companies provide the company with new workers, usually for temporary projects. After these employees complete the work for the company, they head back to the ELC which assigned them with these short-term jobs.

Temporary Staffing Service is also worth mentioning — similar to ELC, they provide client companies with additional staff. Temporary Staffing Service recruits the workers for companies in special situations, such as seasonal shortages, temporary shortages of employees with specific skills, or when full-time employees are absent.

What is the Certified Professional Employer Organization (CPEO)?

Essentially, CPEO is a PEO that has met the IRS’s requirements regarding finances, reporting, and legal requirements as well; therefore, they’re more trusted.

There’s not a great number of certified PEOs out there, but signing a contract with one has some perks.

As CPEOs are the employers of record, they are solely responsible for federal tax liability and penalties. With CPEOs, there’s no risk of double-taxation — and they can pay the federal taxes on the company's behalf. IRS-certified PEOs need to post a bond of up to $1 million each year, and guarantee the payment of their federal employment tax liabilities; additionally, there’s no wage “restart” for federal tax purposes in case you decide to abandon or sign a contract with a CPEO in the middle of the year.

How to choose a PEO service for your company?

The rules for searching for the right PEO and HR professionals on the market do not differ from other rules for making strategic partnerships.

Pick the PEO that has a good reputation and good track record, which is financially stable, provides the services that match your needs and is certified by the IRS or ESAC.

Key takeaways

PEOs offer companies of all sizes a cost-effective way to handle HR administration. Business owners can join them to the in-house HR team, or let PEO take care of it on its own. Working with certified PEOs guarantees regulatory compliance, and that adds an extra layer of safety.

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