Professional Employer Organizations and How They Work
If you’re considering outsourcing human resources tasks, a strong option is Professional Employer Organizations (PEO). This option offers HR services to help you manage day-to-day operations and provide expertise in employee benefits and payroll administration.
Depending on the PEO and the contract, only a few or all HR functions can be outsourced. Some PEOs cover only basic HR tasks. Others add employee onboarding and handbooks, as well as data analytics and real-time insights. Other PEOs offer safety, safety consultation, worker’s compensation claims management, and other services.
What makes PEOs unique
You can enter into an employment relationship with a PEO that essentially leases your employees back to your firm. This is so you share many employee-related responsibilities and liabilities. The PEO serves as the employer of record for your staff. You report wages under the PEO’s federal employer identification number, but the day-to-day oversight of employees and operations remains with you, the employer.
Since PEOs tend to employ a significant number of employees, they have access to comprehensive benefits. This allows small businesses to offer more choices to their teams at more affordable prices. This includes health care plans, life and disability insurance, retirement plans (traditional 401K and/or roth), dependent care, flexible spending accounts, and commuter benefits.
Getting down to details
You still have control over what your employees are working on and whether they’re promoted or fired. Depending on the size of your organization a PEO won’t necessarily replace your internal HR personnel but will complement them, providing insights for workplace improvements and/or complex HR situations. Your employees will appear in the PEO provider’s books for legal and tax purposes. For many small and mid-sized businesses, a PEO provides a level of HR service that they could not otherwise afford to hire and provide a salary for.
PEOs perform various employee administrative tasks, typically helping with:
- Payroll and tax filing — processing payroll and, in some cases, paying local, state and federal employment taxes. Many integrate payroll with time and attendance, reducing duplicate data entry and errors.
- Benefits administration — a co-employment arrangement often comes with access to high-quality, cost-effective health insurance, as well as dental care, retirement benefits and other employee perks. The PEO will usually handle the employee enrollment for benefits and process claims for you.
- Compliance — many PEOs have compliance experts in payroll tax law and reporting requirements, unemployment insurance, hiring and HR compliance, and/or workers’ compensation to help protect your business from fines and penalties.
- Risk and safety — sometimes PEOs provide safety audits and training programs to help you limit worker’s compensation claims. They may assist with Occupational Safety and Health Administration inspections.
- Human resource support — a PEO has HR professionals who provide HR services and support. If you have an in-house HR person or team, the PEO partners with them strategically and administratively, aiding in drug testing programs and Family and Medical Leave Act administration and any high level investigation matters related to employees and your workplace.
- Talent management — some PEOs offer end-to-end talent services, including recruiting, strategic hiring, employee training and engagement, as well as performance management.
- Some PEOs offer data analytics and benchmarking services with insights into your workforce, like how much to pay with comparisons to the market, how to match skill sets with job openings, how to judge which departments need more employees and how you’re doing with turnover compared to peer companies. Such assistance can help realign your business practices, improving employee retention and reducing turnover.
You might turn to PEOs to support HR management and mitigate some liabilities associated with being an employer. For example, with some PEOs, you’ll have a legal defense benefit if you get sued by an employee.
PEOs can classify employees correctly, issue and file taxes, and ensure you adhere to equal employment opportunity laws. PEOs can also file paperwork, negotiate with benefits companies and keep up with labor laws. Not all PEOs are created equal. Find a company that specializes in the services you need at a price point you can afford. Talk to them about what you require and what they can provide so that you can work with them for the long term. Entering into a PEO relationship should often be looked at as a partnership rather than a strict vendor relationship.
Learn more from SHRM here.
Learn more about ManagedPAY here.