PEOs: What They Are and How Your Company Can Benefit from Them

In an era of market consolidation and specialization, it is becoming more common for companies to outsource certain functions to service providers. Indeed, that is why our company exists. Client's outsource their payroll and benefits administration to us in order to save money, save time, and refocus their efforts on doing what they do best. Another option is to work with a professional employer organization (PEO).

What is a PEO? According to the National Association of Professional Employer Organizations (NAPEO) a PEO is a company that provides "comprehensive HR solutions for small businesses." Those services include everything from regulatory compliance assistance to tax administration.


PEOs Are Co-Employers

Note that a PEO is not just a company providing outsourced services. Under U.S. law, a PEO is considered a co-employer. What does this mean? It means that the PEO supplies employees to its clients. The PEO is the employer of record for tax purposes even though the client controls the day-to-day activities of the employees. This arrangement creates a co-employment situation by which the PEO and client 'share' both the benefits and responsibilities of maintaining a workforce.

Let us say your company partnered with the PEO to handle HR. All your current employees would leave your official employ and be hired by the PEO. The PEO would then handle virtually everything your HR and payroll departments previously handled. They would deal with payroll, hiring and firing, tax withholding, regulatory compliance, and so forth.

In exchange for their services, the PEO would charge your company a fee. You and your management staff would still maintain day-to-day control over the workforce. You would assign tasks, create work schedules, offer promotions, etc.


Leveraging a PEO for Your Business

By now you might be wondering why companies would choose to work with a PEO. It is all about leveraging what the PEO has to offer.

For starters, the NAPEO says a study conducted by two independent economists shows that companies choosing to use a PEO grow up to 9% faster than those that do not. Furthermore, those companies experience up to 14% lower turnover and are 50% less likely to go out of business.

Statistics aside, here are a few examples of how companies can leverage PEO relationships for better business:

  • Tax Compliance – Tax compliance is one of the biggest headaches small business owners face. A PEO takes care of everything related to employment taxes, including withholding and reporting income tax, FICA, and unemployment tax. That means fewer headaches for the business owner.
  • Benefits Packages – Sometimes, partnering with the PEO is the only way a small business can afford to offer employees a decent benefits package. PEOs tend to get better rates than small businesses because their insurance groups are larger.
  • Worker's Comp – Worker's compensation insurance is another issue for small businesses. PEOs can often obtain blanket coverage for all their co-employed workers at a better rate than individual businesses.
  • Payroll – A PEO handles payroll on behalf of all its clients. Some PEOs employ their own payroll staff while others outsource payroll to a company like ours. In either case, the small business doesn't have to devote precious time and energy to running payroll.

The PEO model is catching on with small businesses across America. Under the right circumstances, the co-employment arrangement created when a small business partners with the PEO can be the most important factor that enables the small business to flourish. PEOs are not right in every situation, but they are the right choice for many small businesses.