Professional employer organizations (PEOs) partner with businesses to handle the administrative needs associated with a company's employees. This is done through what's known as a co-employment relationship. This contractual arrangement allows the PEO to serve as the official employer of record for tax and insurance purposes. Meanwhile, the client retains control of their operations and the management of their workforce, including all hiring and firing.
Companies partner with a PEO to assume a long list of employer responsibilities and provide a higher level of expertise in human resources management and administration without the overhead. This frees up valuable time and resources a company can direct towards other areas of the business, such as customer service, sales, or other revenue-generating initiatives.
PEOs and Staffing Agencies: What's the Difference?
Unlike temporary staffing agencies, PEOs do not recruit, hire, and place labor. PEOs co-employ existing workforces (the client's permanent employees) and services to the client company. Staffing or temp agencies recruit and hire workers for their clients' businesses, usually in special situations, to fill temporary positions, supplement seasonal work staff or provide workers with specific skills.
The scope and caliber of service and expertise among PEOs can vary greatly, but most PEOs are hired to handle HR administration and all things "people-related." In addition to ensuring compliance with federal, state, and local employment regulations, a PEO can manage payroll processing and tax administration, handle the unemployment insurance claims process, and manage risk and safety compliance. PEOs can also provide clients with access to technology to handle HR maintenance tasks such as Paid time off (PTO), skills tracking, new hire onboarding, and terminations. Applications to administer time and attendance, eLearning, manager training, and hiring and applicant tracking can also be part of the PEO technology offering.
By leveraging its buying power, a PEO can offer more affordable, Fortune 500-caliber health insurance and other related employee benefits products such as comprehensive health, dental, and vision coverage, life insurance, and other voluntary employee benefit plans and perks. Some PEOs create an "exchange" for clients who want to closely manage the cost of offering health benefits. The client can define a set dollar amount to buy certain benefits and then direct employees to the exchange during open enrollment. There, employees shop benefit plans and other services based upon what the employer has selected as options. A PEO typically holds a master policy contract with one or more carriers. The PEO handles the negotiations with the carriers and can take on full benefits administration, annual open enrollment, and Affordable Care Act (ACA) compliance. Some PEOs also offer 401(k) retirement plans and administration.
Workers' compensation insurance and Employment Practices Liability Insurance (EPLI) can also be part of the PEO insurance mix. A PEO can offer a client a workers’ comp policy and handle the management of claims, and provide an EPLI policy to provide coverage against claims made by employees alleging discrimination, sexual harassment, wrongful termination, and other employment-related issues.
What to Look for in a PEO: Certifications and Accreditations
PEOs that are certified by the IRS* (Certified Professional Employer Organizations, or CPEOs) can provide greater protection and tax advantages to clients. For example, after federal employment taxes on wages are paid through the CPEO, the client is relieved of any future tax liability. The CPEO has express authority to collect and remit federal employment taxes for wages the CPEO pays to worksite employees.
Potential clients should also look for a PEO that is accredited by the Employer Services Assurance Corporation (ESAC) – similar to the FDIC for banks. Clients of ESAC-accredited PEOs each receive a bond to protect them for up to $16 million, among other financial and service quality assurances.
The benefits of a PEO relationship
Virtually any company with employees can benefit from a PEO relationship, but typically, PEOs serve small and mid-size employers with at least ten "worksite employees." Businesses in a PEO relationship report higher growth rates and less turnover, according to NAPEO – the National Association of Professional Employer Organizations. Surveys of PEO clients have found that PEOs help increase workplace safety, and businesses that use PEOs are more likely to upgrade their employee benefits packages and can significantly increase participation rates in retirement plans.
A good PEO can elevate a company’s human resources capabilities, help the business work more efficiently, and save money. A great PEO will do all of the above with consistency and become a trusted strategic partner for the long term.
*The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to IRS.gov.