What You Should Know About a PEO

Chances are if you are a small business owner, you will, or already have, come across the term PEO. But what is a PEO? There are so many of them, where do you start? Do they all do the same thing?  How do you know which one is best for your company? How do you compare all the different options and pricing structures? Most importantly, what can a PEO do for your business and what are the effects on your bottom line?

What is a PEO?

Let’s start with the basics. “PEO” is an acronym for Professional Employer Organization. PEOs are experts in the areas of human resource management, regulatory compliance, employee benefits, payroll, and risk services. Think of them as your back office experts in every area related to being an employer. They even share in the liability with the client companies they serve, through what is called a co-employment relationship. What does that mean? Simply put, they are a larger employer working behind small business and providing the same suite of services that large corporations have in place.

What can a PEO do for you?

The advantage to the client company is now they have streamlined employee administration, reduced employer liability and the buying power for insurance products and employee perks. Business owners can then focus on their core competencies instead of wasting time, money and multiple resources on non-revenue generating tasks related to in house processes.

A client company will seek the service of a PEO for any number of reasons. Since most PEOs offer an extensive suite of services and options, PEO packages can be all inclusive, or custom designed, depending on the PEO’s business model and capabilities.

For example, a client company that wishes to do all their own hiring in house, but outsource payroll, benefits, and insurance, can do just that, depending on the contract, the needs of the client company, and the PEO provider in question.

One key benefit of entering into a co-employment relationship with a PEO is the PEO’s ability to secure workers’ compensation insurance coverage and employee benefits at a significantly lower price than most client firms can obtain on an individual basis. Because PEOs typically work with a pool of client companies, they are able to negotiate much better rates. Think of PEOs as umbrella corporations under which a wide range of companies of varying sizes and differing business sectors all live and benefit by sharing risks over a large pool. The bigger the pool, the lower the risk for each individual participant, and as a result, the lower the premiums. This economy of scale, can greatly aid small establishments in competing with multi-national corporations by lowering expenses while improving employee benefits, and thereby, talent acquisition.

Here’s what PEOs don’t do

PEOs are a great option for all businesses except those who do not want to outsource any of their administration or insurance products. Here are things that PEOs do NOT do:

PEOs do NOT provide temporary, or temp to permanent placements to client companies. Some PEOs do offer recruiting services, and are sometimes confused with staffing agencies, headhunters, or temp to perm leasing companies. The client company retains the direction and control of their own employees.

PEOs will NOT save an unsustainable business. Most PEOs require an extensive approval and underwriting process for a company to be considered to join their pool. The underwriting is typically done on the front end of the sales process, so once approved, the pricing structure remains until a renewal point with the contact. While highly useful within their core competency, PEOs are not a silver bullet solution. If a business has a poor loss history, many PEOs offer programs to get them back on track to bring their cost back down from a situation that may have occurred.

Is a PEO right for you?

Yes, PEOs can be an excellent solution for an alternative to a traditional HR department; however, they aren’t always for everybody.

NAPEO, the PEO industry’s official professional organization, states on their website that the typical client company has around 20 employees. Although businesses of all sizes can find HR outsourcing services to be helpful, there is often a tipping point between a tiny establishment that may prefer to handle it’s own employee-employer obligations, and a small business looking for a competitive edge and better benefits. Large companies who expect to expand for years to come may find hiring in house a financially feasible endeavor. Precisely where these tipping points occur can be difficult to pinpoint, but consulting with promising PEOs, or better yet, a PEO Broker, can help.

For thousands of small businesses, and the 2 to 3 million working Americans currently employed by a co-employer, PEOs are the right solution for them. Are they right for you? Contact a PEO Broker to find out.