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Since their conception in the 1990s, professional employer organizations (PEO) have helped small businesses level the playing field and compete with larger companies. How? By allowing smaller organizations streamline operations and attract top talent with comprehensive benefits packages. These are the main advantages of hiring a PEO service.
How Does a PEO Work?
A PEO specializes in all of the functions typically handled by a human resources department. And, the more complex employee laws become, the more popular outsourcing these functions has become.
When you sign a client service agreement (CSA), the PEO becomes the co-employer of your employees. The responsibilities break down this way:
- You, as the worksite employer, retain control over every other aspect of your business – sales, production, marketing, etc. In addition, you are responsible for the daily management of your employees and their duties, as well as for providing the tools and equipment necessary to perform those duties. Finally, you determine which HR functions you want your PEO to perform (outlined in the CSA).
- The PEO becomes the employer of record, whose responsibilities vary according to the CSA. At a minimum, this typically includes handling payroll (including taxes), your benefits program, and regulatory compliance. Your agreement may also include common administrative functions, such as recruitment and developing employee handbooks.
The Benefits of Using a PEO Service
Smaller businesses, in particular, benefit from the expertise offered by a PEO. Most have fewer resources, in terms of both time and money, to devote to staffing and maintaining a full HR department. They also typically lack the ability to offer the robust benefits packages that large companies use to attract the best employees.
Outsourcing Your HR Functions
Properly managing your human resources is a time-consuming task. It also requires extensive, working knowledge of federal and state employee regulations.
The full benefit of this depends entirely on the agreement you sign with the PEO. However, at a minimum, most companies choose to have the professional employer organization manage payroll and compliance, as mistakes in these areas are both common and easy to make. They're also expensive to remedy.
The PEO assumes responsibility for any errors regarding payroll, taxes, and compliance with labor laws (again, assuming you choose this level of service in your CSA). These organizations have in-depth knowledge of both compliance requirements and the system governing these regulations. In addition, you can partner with a PEO that specializes in your industry.
Finally, managing these functions is time-consuming, and time is something that many small businesses do not have a lot of. Outsourcing allows you to focus your energies on those aspects of your business that require your expertise.
Benefits Program Savings
The main reason small companies (those employing fewer than 50 people) can't offer the same level of benefits that larger companies do is simply that they don't have their buying power. When you partner with a PEO, this is no longer true. That is because the PEO becomes the employer or record, just as they do with every other company they partner with. This is what gives PEOs the buying power of large organizations.
When you have the buying power of hundreds or even thousands of employees, you're able to offer your staff extensive benefits packages. In addition to health, vision, and dental plans, most PEOs' benefits programs include retirement savings plans, life and disability insurance, employee discount programs, flexible spending accounts, tuition reimbursement, and more. These are the comprehensive benefits packages that attract top talent.
As the employer of record, your PEO also handles workers' compensation insurance, including any claims made against it.
Additional PEO Benefits
Depending on the CSA you sign, you get even more benefits. For example, you may choose to have the PEO manage every step of the hiring process, including:
- Writing job descriptions
- Recruiting new employees
- Screening job applicants
- Performing background checks
- Onboarding new employees
- Creating employee handbooks and other resources
They also offer performance management services, including appraisals, pay structures, and performance improvement protocols. The PEO will also create leadership development programs if one of your goals is developing talent from within the organization.
Potential Disadvantages of Partnering with a PEO
There are potential disadvantages to a PEO. Only you can decide whether they outweigh the pros. These include:
- You may pay for unneeded/unwanted services, since most PEOs offer their services in bundles.
- You must make employee decisions jointly with the PEO, which takes away some of your autonomy.
- You must offer health insurance through the PEO, which means you lose the ability to use the ACA SHOP Exchange.
- You still have some HR responsibilities, no matter how comprehensive your CSA.