What is a Professional Employer Organization?

Running A Business

It’s common for employers to link up with an outside partner to support tasks like payroll, benefits administration and employee paperwork to save time and money, and so they can focus on more substantive work. Of those who do, many choose to work with a PEO.

But what exactly is a PEO and how do they work? In this article, we’ll break down the jargon and explain what you need to know.

What is a PEO?

A PEO is a Professional Employer Organization. It's a full-service model, or one-stop-shop for all your people solutions like payroll, benefits, HR and more. It provides bundled and affordable services through a unique relationship with you as an employer called “co-employment.”

What is co-employment?

Co-employment is just a fancy term for the legal arrangement that lets employers share certain responsibilities (and risks) with an outside partner.

With co-employment, your employees actually have two employers:

  1. Your business or organization, and
  2. The Professional Employer Organization

While the PEO is responsible for administrative HR tasks, and shares some of the risks of being an employer, you retain responsibility and control over what people do every day, including hiring, firing, and organizational decisions.

What can a PEO help me with?

A co-employment relationship allows a PEO to legally take on certain employer responsibilities that other models of partnership cannot.

That means a PEO can provide a wider range of services than a typical consultant or vendor, including:

  • Benefits: A PEO can actually provide healthcare plans to your employees, as well as handle enrollment, claims, and benefits administration. It can offer other insurances too, like Workers’ Compensation and Temporary Disability Insurance (TDI).
  • Payroll: A PEO will take care of processing payments to both salaried and hourly employees, as well as handle things like direct deposits and one-time payments. And, as a co-employer, your PEO is legally able to file things like federal and state payroll taxes for you.
  • Compliance: Things like classifying employees, record-keeping, filing taxes (FICA, FUTA, and SUTA) and ensuring wage and hour practices are in-line with local, state, and federal laws can take a lot of time—and there can be heavy fines if you make a mistake. A PEO can take over these compliance tasks and make sure they’re done right. At the same time, a PEO can fill any talent gaps your organization might have by offering a deep bench of experts you can call when you have a question.
  • Managing the Employee Lifecycle: From hiring and onboarding new hires to wrapping things up when an employee leaves the company, a PEO can help you manage each stage of an employee’s time with you. The right partner can keep things flowing smoothly throughout the entire lifecycle.

What are the benefits of partnering with a PEO?

With a PEO, employers can attract and retain top talent by offering corporate-level benefits for an affordable price, including high-quality medical, dental, and vision coverage, Flexible Spending Account (FSA) plans, 401(k) plans, and life insurance.

They can also take the pain out of payday, and give employees confidence that payroll is being handled right. Finally, employers who work with a PEO don’t have to think about keeping up with government regulations or worry about compliance, because they know all those responsibilities are being handled.

By joining forces with a PEO, employers can free up time and resources to focus on their core mission and invest in their teams too. Partnering can also have a direct effect on your bottom line, too. In fact, small businesses that use PEOs are 50% more likely to stay in business after their first year and report 14% lower employee turnover compared to small businesses overall.

What Should I Look For In A PEO?

  • Location: Employer laws vary from state to state, so it’s important to find a PEO that is familiar with local regulations and experienced at complying with them.
  • Expertise: Look for a PEO with specialized, in-house expertise that can serve as a knowledge base for tough-to-answer HR questions.
  • Size: How many worksite employees does the PEO serve? The more people it manages, the greater its buying power for things like healthcare benefits. Which means more affordable rates for you.
  • Quality Assurance: Look for a PEO that's accredited by ESAC, or the Employer Services Assurance Corporation. ESAC is an independent, non-profit organization that's the official accreditation and financial assurance organization for the PEO industry.

Whether it’s the ease of handling all your employer responsibilities in a one-stop-shop, or the attraction of better employee benefits at a lower price, PEOs can offer many advantages to employers of all sizes. Is partnering with a PEO the right choice for your business or organization? Ask yourself these three questions to find out. 

Want to learn more? Download our free ebook to learn more about the benefits of PEOs in Hawaii.

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