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How Does a PEO Arrangement / Employee Leasing Work? What Services Does a PEO Service Provide?

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A professional employer organization, more commonly known as a PEO, offers small and medium sized businesses highly specialized HR support. The PEO's expertise includes payroll, recruitment, employee benefit programs, and regulatory compliance.

Partnering with a PEO is a popular option for smaller organizations that are interested in attracting top talen but lack the resources to offer the stellar benefits packages that top talent expects.

PEOs are also a convenient option for smaller and growing organizations that need to focus on core business functions or don't have the resources to outfit a dedicated HR team. With a PEO, you get an experienced human resources department without staffing one of your own.

How Does a PEO Work?

In effect, a professional employer organization becomes a partner in your business. That doesn't mean it has a voice in business decision or direction. Instead, the PEO becomes the co-employer of every member of your staff. You remain the worksite employer while the PEO becomes the employer of record.

Sometimes known as employee leasing, the co-employer relationship results upon signing the client service agreement (CSA) with your chosen PEO. The client company (you) retains control over every other aspect of the business. The only shared responsibility is over the employees and you retain control over their workload and duties, as well as daily management of same.

What Are the PEO's Responsibilities?

This varies according to the CSA. However, the minimum PEO responsibilities typically include payroll and managing payroll taxes – issuing W-2s, managing withholdings, and collecting and depositing payroll taxes.

Most companies also expect the PEO to manage benefit programs. The greater buying power of a PEO is a key reason many smaller and growing companies turn to them in the first place. PEOs enjoy this buying power because they are the employer of record for every employee of every organization they partner with. This is what allows them to provide benefit packages that are far beyond the means of most smaller companies.

Finally, most PEO agreements include regulatory compliance.

What Are Your Responsibilities?

The business or non-profit maintains sole control over every other aspect of the organization. These responsibilities should be outlined in the CSA along with those of the PEO.

Examples of your responsibilities include:

  • Generating revenue
  • Sales
  • Production
  • Daily operations

You also retain responsibility over some employee functions, such as providing staff with the tools and equipment required to perform their jobs. Finally, there are responsibilities shared by the worksite employee and PEO, such as OSHA compliance. Again, each entity's responsibilities are outlined in the CSA.

What Services Does a PEO Provide?

The services provided vary according the CSA and the PEO itself. However, as a general rule, if it's a function normally managed by HR, it can be a part of your CSA. Just know that, the more responsibilities given to the PEO, the higher the cost.

Of course, if you already outsource some of your HR functions, such as payroll, you may find cost savings with a one-stop HR shop like a professional employment organization. Following are the most common PEO services.

Benefits packages

The negotiation power of PEOs allows them to offer stellar benefits packages, from the standard health/dental/vision plans to more robust options that include retirement savings, life and disability insurance, flexible spending accounts, employee discount programs, and tuition reimbursement.

HR administrative tasks

Beyond payroll and taxes, administrative functions your PEO can handle include the entire employee hire process, from recruitment all the way through to onboarding (and even termination). In addition, your PEO can design employee handbooks and trainings, including leadership development programs.

Payroll processing

Payroll management includes managing the entire process: time worked, distributing pay, online paystubs, scheduling, accrual of PTO, holiday pay, W-2s, statutory compliance (both state and federal), garnishments, records management, and reporting.

Performance management programs

If part of your CSA, your PEO works with you to develop a comprehensive performance management program. Determine your recognition program, protocols around performance improvement, and a regular appraisal schedule. The PEO even trains supervisors on effective coaching.

Strategic planning

Your PEO will work with you to design a plan to grow your team to mirror the growth of your company.

Workers' compensation insurance

Your PEO typically offers workers' compensation insurance and manages claims your employees make against the policy. It also helps reduce workers' comp claims by performing safety reviews of the workplace and designing return-to-work programs in the event an employee is injured on the job.

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