Is a PEO Right for Your Business?

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Are you buried under a stack of benefits paperwork? Drowning in expense reports and legal notices? As a small business owner, you’re required to keep a lot of balls in the air—and inevitably, one or two may fall. If managing a wide range of human resources tasks has become too much for you to handle, then a Professional Employer Organization (PEO) may be right for you. But what exactly is a PEO—and is it worth it? Read on for answers to the most frequently asked questions.

What is a PEO?

A PEO—which is sometimes known as a “co-employer”—is a firm that’s empowered to handle your payroll, benefits, and other HR functions. Under this arrangement, you continue to manage your company’s day-to-day operations; however, the PEO acts as the administrative employer. In this capacity, the PEO assumes certain employer rights, responsibilities, and risks.

Because a PEO partners with many small businesses, it has the purchasing power to offer your employees potentially higher-quality, lower-cost benefits. According to the National Association of Professional Employer Organizations (NAPEO), there are 907 PEOs in the United States providing services to 175,000 small and mid-sized businesses that employ 3.7 million people.

What’s the difference between hiring a PEO and outsourcing your HR services?

In a PEO employment model, the PEO assumes liability for your payroll and tax reporting. However, with HR outsourcing, you remain liable for the work that the PEO does on your behalf.

What exactly does a PEO offer?

Typically, a PEO has expertise across a wide range of areas, from insurance coverage to payroll taxes. The tasks that your PEO manages will be outlined in a contract generally known as a client service agreement (CSA). Under the contract, the PEO becomes your “employer of record” and assumes control of responsibilities such as:

  • Payroll—Your PEO calculates tax contributions, handles tax filings, makes deposits, and manages other payroll processing details.
  • Benefits—Your PEO coordinates medical, dental, vision, and other employee benefits in partnership with benefit providers. Want to offer additional benefits like a 401(k) plan, commuter perks, or flex spending? Your PEO can handle that, too.
  • Personnel matters—From monitoring long-term disability and workers’ compensation to performance management and termination pay, your PEO can manage a wide range of HR-related responsibilities.
  • Compliance—Local, state, and federal labor laws change all the time, but your PEO can help ensure your company stays in compliance with them.

What kind of company is best suited for a PEO?

Small and mid-size businesses often benefit the most from working with a PEO. That’s because a smaller company may not have the HR expertise, system capabilities, or desire to manage complex HR functions. If you’d prefer to outsource these responsibilities so you can retain a laser focus on your company’s mission, then the PEO model may be appropriate for you.

What are the main benefits of a PEO?

Did you know that 33% of small businesses get fined every year for making payroll mistakes? By hiring a PEO, you can rest assured that the HR details are being taken care of—and you can return your focus to your company’s mission and growth. According to research from NAPEO, small businesses that use PEOs:

  • Grow 7% – 9% faster
  • Have 10% -14% lower employer turnover
  • Are 50% less likely to go out of business

Plus, a PEO can help your employees gain access to a wide range of benefits from 401(k) plans to dental plans that they might not typically enjoy—boosting employee productivity and satisfaction. If you want even more hands-on services, your PEO can also assist in recruiting, interviewing, hiring/firing, and onboarding employees.

How much does it cost to hire a PEO?

Typically, fees are charged in one of two ways:

  • A flat fee calculated per employee
  • A flat fee calculated as a percentage of your payroll

According to Fit Small Business, PEO services range in price from as low as $39 per month per employee to $125 per month per employee, and PEOs with more comprehensive services charge even more. For example, if you hire a PEO that manages benefits and recruiting, you might pay up to 11% of payroll. Fit Small Business reports that the following factors impact the price of services:

  • Setup fees
  • Training and consulting fees
  • Monthly service fees
  • Health insurance premium contributions
  • Workers’ compensation premiums
  • Other company-sponsored benefits

Because PEOs are entering into a co-employer relationship with you, some may also take your company’s credit rating, risk level, and health benefits history into consideration when determining the price.

What are the most important considerations to think about before hiring a PEO?

PEOs can be incredibly helpful, but there are also significant downsides. Ask yourself this list of questions for help deciding if a PEO is right for you.

  • How many employees do you have?
    Janis Sweeney, owner of National Employee Management Resources, told Entrepreneur magazine that the sweet spot for a PEO is between 17 and 80 people, because “once a company gets very big, then it’s easier to have an in-house HR department.”
  • Can your company afford the PEO fee?
    As we detailed above, PEOs can be expensive depending upon which services you elect. However, you should take the time to understand the total cost of managing your HR responsibilities internally. If it’s taking hundreds of hours and immeasurable stress, it may be worth it to outsource those functions to a qualified PEO.
  • Do you want to relinquish control of HR responsibilities?
    When you hire a PEO, you are essentially adding a business partner. So, if you don’t want a third-party weighing in—or signing your employees’ checks—then a PEO may not be appropriate for you.
  • Are you happy with the PEO’s benefit partners?
    The benefits available through the PEO will be with select partners, and may not be the specific partners if you had complete freedom of choice.
  • Which services are appropriate for your company?
    Do you want your PEO to only handle payroll and medical benefits? Or do you want more expansive services that encompass recruiting, performance reviews, and more? Think carefully about which services you’d like to outsource—and which services you’d prefer to keep in house.

How do the pros and cons measure up for your company?

PRO CON
Less in-house responsibility—Your PEO will shoulder payroll, benefits administration, and a variety of other tasks. Less control—Your employees will be co-employed by the PEO, which means you will give up control of some aspects of your organization.
Lower benefit rates—PEOs manage many small businesses, so they may be able to negotiate lower insurance rates (and potentially better benefit packages). Less benefit customization—You may have less ability to customize your benefits to meet your employees’ unique needs.
Potentially lower in-house costs—If you outsource your HR responsibilities, you may be able to save money on staff who would otherwise be handling these tasks. Potentially high fees—If your PEO charges a per employee fee, your solution will become more expensive as your company grows.

How can you evaluate the quality and reliability of a PEO?

Every PEO is different—and has a different way of doing business. However, one important consideration is whether or not they’re accredited by the Employer Services Assurance Corporation (ESAC), a nonprofit corporation that is the official accreditation and financial assurance organization for the PEO industry. According to the ESAC, only about 5% of PEOs have earned this distinguished accreditation. Wondering if a potential PEO is accredited? Visit the ESAC website to search for accredited PEOs in your state. In addition to checking accreditation, NAPEO recommends that you:

  • Make sure the PEO is capable of meeting your goals—whatever they may be
  • Ask for client and professional references
  • Explore the company’s administrative and management expertise and experience
  • Understand how the employee benefits are funded—that is, whether they are fully insured or partially self-funded (and if they are partially self-funded, make sure the third-party administrator (TPA) is authorized to do business in your state)
  • Review the service agreement carefully to ensure the responsibilities and liabilities are clearly defined
  • Check that the company you’re considering meets all state requirements

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