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Should I Use a PEO Service for my Startup Business?

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Commonly known as a PEO, a professional employer organization functions as a highly-experienced human resources department for small and mid-sized businesses. They are also especially popular with startups looking to attract the best talent available, don't have the resources to staff an HR department, or both.

What Happens when You Sign with a PEO?

When you sign with a PEO, you enter into a client service agreement (CSA) that turns you and the service into co-employers. The PEO becomes the employer of record, with responsibilities contingent on the services you select.

You become the worksite employer, responsible for your employees' daily duties and day-to-day management. In addition, you provide your employees the tools they need to do their jobs, such as a workstation and computer. You maintain control over all other aspects of your business, including sales, production, and marketing.

Partnering with a PEO gives you the benefits of a large company, even if you employ only a handful of people. This is because professional employer organizations function as the employer of record for every company with which they partner, meaning they have hundreds and sometimes thousands of employees. That gives PEOs the buying (and negotiating) power of a large company, making it possible for even small companies to offer comprehensive benefits packages that include retirement plans, flexible spending accounts, tuition reimbursement, and more.

What Are the Responsibilities of the PEO?

The PEO's responsibilities vary according to the CSA and range from simply handling payroll and your benefits program to managing every function that normally falls to an HR department. Most client service agreements include, at a minimum, payroll processing and benefits packages.

In addition to distributing paychecks, payroll processing should include tracking time worked, paid time off accrual, holiday time, regulatory compliance, scheduling, records management, wage garnishments, W-2s, and online paystubs.

As stated, the benefits packages offered by PEOs typically include top shelf options that go beyond the standard health, vision, and dental plans. Life and disability insurance, employee discount programs, retirement savings plans, and more are commonly included in PEO benefits programs.

Standard CSAs also usually include workers' compensation insurance, as well as managing claims made against the policy and ensuring OSHA compliance. When employees are ready to return to work, your PEO also helps design a return-to-work program.

If you choose a more robust partnership, your PEO may also manage the entire recruitment process (or only a portion of it), from writing job descriptions through to onboarding new employees and even terminations. They also offer training programs, including leadership development programs if your goal is promoting from within the company.

How Much Does it Cost to Hire a PEO Service?

The cost of hiring a PEO varies greatly according to the CSA, the PEO's rates, your area or industry, and much more. However, there are some pricing guidelines you can use to help you determine whether you should use a PEO.

Most PEOs use one of two pricing structures: a per-employee flat fee or as a percentage of your payroll. The per-employee fee ranges from around $40 per month, per employee to around $160 per month, per employee. For budgeting purposes, this is usually the preferred method.

If the PEO charges a percentage of your payroll, that number varies from around 2 percent to around 12 percent. For the most part, you pay a lower percentage if your employees are salaried rather than hourly.

The Pros and Cons of Using a PEO Service

There are a number of pros to partnering with a PEO, including:

  • Attract top talent with a full-bodied, comprehensive benefits package.
  • Focus on what you do best to grow your business quickly.
  • Reduce risk with a team of employment law experts ensuring you remain compliant (and taking responsibility for any errors).
  • Save staffing costs by not employing your own HR department.

Of course, there are also a number of cons. These include:

  • As co-employers, you must consult with the PEO before making HR-related changes, including hiring and terminations. On the one hand, this keeps you from unintentionally breaking any labor laws. On the other, you lose some of your autonomy.
  • Hiring a PEO does not relieve you of all HR-related paperwork and responsibilities, although this varies according to the level of service you choose.
  • If you use the Affordable Care Act SHOP Exchange to provide employee benefits, you want to compare the benefits and costs of each option.

There is no single answer as to whether you should use a PEO service. Only you can decide whether the pros outweigh the cons. Get quotes from multiple providers and compare your options carefully to make the best choice for your startup.

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