A Professional Employer Organization (PEO) is an HR outsourcing firm that partners with employers to jointly employ staff. This model involves shared liability between the PEO and the employer for the co-employed workers.
Functioning of a PEO
PEOs primarily assist small and medium-sized businesses in reducing HR burdens and risks. They differ from other HR outsourcing solutions, such as employee leasing, by acting as co-employers. In the U.S., some PEOs achieve certification from the Internal Revenue Service (IRS), known as Certified PEOs or CPEOs, which signifies adherence to certain legal and financial standards. Globally, PEOs vary in availability and international coverage is not always assured.
Roles and Responsibilities of a PEO
A PEO offers comprehensive HR services, sharing responsibilities with the business it serves. These services include:
- Payroll Management: Handling employee attendance, wage processing, workers' compensation coverage, and Social Security tax withholdings.
- Tax Administration: Filing and paying employment taxes, ensuring compliance to avoid tax penalties.
- Benefits Administration: Managing benefits like insurance, retirement plans, and COBRA, including enrollment and claims processing.
- Human Resource Services: Offering full talent management, including recruitment, training, and performance evaluations.
- Compliance Management: Ensuring adherence to labor laws, OSHA regulations, and EEOC guidelines.
PEOs vary in their offerings, with some providing all-inclusive services while others may focus on specific areas.
Who Benefits from PEO Services
Small to medium-sized businesses, often lacking extensive in-house HR resources, commonly use PEOs. These organizations can partner with PEOs for specific HR tasks like benefits and payroll, while their internal HR teams focus on other areas like recruitment. Various industries, including healthcare, law, real estate, and consulting, utilize PEOs to allocate more resources to core business activities.
Advantages for Small Businesses Using a PEO
Small to medium-sized enterprises (SMEs) benefit from PEO partnerships by:
- Reducing Liability: Mitigating employer risks, including legal defences in employee-related lawsuits.
- Minimizing Administrative Burden: Relying on PEOs for complex HR tasks instead of developing a comprehensive internal HR team.
- Enhancing HR Practices: Utilizing PEO expertise for insights on market rates, turnover, and talent management to improve retention and HR efficiency.
PEO Payment Structures
PEOs typically base their fees on the company's payroll, charging a set percentage. Alternatively, some may have fee structures dependent on the number of employees. Costs vary according to the size of the business and the range of services required from the PEO.