- PEOs are strategic partners that take over the legal and administrative sides of a business, such as payroll and compliance.
- With a PEO’s help, HR teams can be relieved from routine tasks, expand their benefits offer, and enhance admin processes.
- AccessPoint provides a full suite of HR services to free up businesses so they can focus on growth. Contact us to learn more!
Looking to reduce the admin workload of your small or mid-sized business? Teaming up with a Professional Employer Organization (PEO) might be the right move. Read on to find out what is a PEO, the numerous advantages it can offer to your business, and some potential drawbacks.
Partnering with a PEO should be a carefully planned decision that must align with your specific business needs and goals.
So, let’s get started!
PEO Defined – What Does PEO Stand For?
PEO stands for Professional Employer Organization and refers to a third-party provider that supports a business by taking over certain HR responsibilities like payroll processing, risk management & compliance, and benefits administration.
Basically, PEOs help businesses streamline their HR processes and reduce administrative burdens, allowing them to focus on core business operations.
This form of HR outsourcing is highly beneficial for small and medium-sized businesses (SMBs) that may not have the resources or expertise to manage every aspect of HR and employment administration. Growing businesses can also benefit from PEOs’ scalability, which allows them to adapt their HR services as their workforce size and needs evolve.
How Does a PEO Work?
When a company engages with a PEO, they both enter a co-employment relationship. In this arrangement, both parties share certain employer responsibilities. So, what does that look like for your business?
Your company retains control over its day-to-day business operations, including hiring and managing employees’ workload and performance.
The PEO, on the other hand, becomes a co-employer, taking on specific employer responsibilities, such as payroll processing, benefits administration, and compliance with industry standards and employment laws.
Most PEOs handle the following areas of a business:
- Risk management and compliance
- Payroll processing
- Employee benefits administration
Occasionally, PEOs may also share other employer responsibilities such as managing Workers’ Compensation and employee relations.
What a PEO Doesn’t Cover – Differences Between a PEO and Other Services
PEOs offer several HR-related services. However, certain aspects of your business fall behind PEOs’ scope.
Let’s address some of the things that PEOs’ don’t cover, so you can make an informed decision:
- Strategic HR Consulting: PEOs don’t usually handle the strategic side of your business. If this is something you’d like to outsource, you should consider hiring the services of a strategic HR firm.
- Recruitment and Talent Acquisition: While PEOs may assist with certain aspects of recruiting, they generally don’t offer comprehensive talent acquisition services. To find qualified candidates for specific roles, you should contact a specialized recruitment agency.
- Employee Training and Development: PEOs don’t focus extensively on this area. However, there are specialized firms that offer services related to employee training, leadership development, and skills enhancement.
Advantages of Using a PEO – Why Do Companies Use a PEO?
PEOs offer several advantages to small and medium-sized businesses, which can have a positive impact on their business operations.
Here are some of the main reasons why businesses choose to partner with PEOs:
1. Cost Savings
To manage HR tasks internally, businesses need to hire full-time specialized professionals, invest in training, and acquire state-of-the-art technology.
However, by delegating HR functions like payroll processing, benefits administration, and compliance to a PEO, they can reduce those costs significantly and keep a smaller HR team.
“The ROI of using a PEO (in cost savings alone) is 27.3 percent.”— NAPEO
Because they can pool employees from multiple client companies, PEOs can also provide better rates and more competitive employee benefit packages.
2. More Time to Focus on Strategic Tasks
By outsourcing some of their HR functions to a PEO, businesses can concentrate on their strategic goals.
Instead of being swamped by paperwork and taxes, your HR professionals can spend more time on activities that directly contribute to business growth and success, like improving the onboarding strategy or providing new training opportunities.
3. Offer Better Benefits to Attract Top Talent
Gaining access to more competitive employee benefits is one of the main reasons why companies partner with a PEO.
It’s not just about getting better rates and saving costs:
By offering premium medical plans, 401(k) plans, and access to Employee Assistance Programs smaller businesses can attract qualified talent in a tight labor market.
On top of this, PEOs can handle all the benefits administration tasks and navigate complex legal requirements.
4. Keep Up with Compliance Regulations
Staying up-to-date with changes in labor regulations and compliance requirements takes time and demands highly skilled professionals. However, small businesses often lack compliance teams, which increases the risk of facing legal issues and penalties.
By relying on a PEO to handle complex regulations, companies can ensure that both their business and their employees stay on the safe side.
5. Increase Payroll Processing Efficiency
Payroll encompasses a variety of tasks, from filing taxes to tracking work hours. Taking care of all these tasks is not only highly time-consuming for your in-house HR team but also prone to errors which can cost businesses more time (and money) to solve.
“Each payroll error costs companies, on average, $291 to remedy directly and indirectly.”— EY, 2022.
By delegating payroll-related tasks to a PEO, companies reduce the admin workload for their internal team and avoid potential errors and penalties.
Drawbacks of Using a PEO
While PEOs offer numerous advantages, there are also potential drawbacks and considerations that your business should be aware of when deciding whether to use a PEO:
- Loss of Control: Outsourcing certain HR functions to a PEO could potentially lead to a loss of direct control over tasks such as payroll, benefits administration, and HR policies.
- Limited Customization: PEOs often provide standardized HR solutions. This can result in less flexibility and customization to adapt their offer to your unique HR needs or specific industry requirements.
- Transition Challenges: The transition to a PEO arrangement may involve a period of adjustment for employees and management. Changes in HR processes, benefits plans, and bringing a new service provider on board can lead to temporary disruptions.
- Complex Contracts and Fees: PEO contracts can be complex, and the fee structures may include various components. It’s crucial for businesses to fully understand the terms of the agreement, including any additional fees that may apply.
How To Choose a PEO
Choosing a PEO is a significant decision that can impact various aspects of your business, including sensitive areas like payroll management.
Here are a few things to keep in mind when choosing a PEO:
Assess Your Business Needs
Identify the specific HR functions and services that your business needs to outsource. Consider aspects such as payroll processing, benefits administration, compliance management, and any other HR-related tasks that are crucial for your operations.
Define Your Budget
Set a clear budget for PEO services. Understand the fees associated with different PEOs, including administrative fees, per-employee fees, and any additional costs. Ensure that the pricing structure aligns with your financial capacity.
Research PEO Providers
Do your research! Look for payroll providers with a proven track record, positive client testimonials, and a strong financial standing. Consider factors such as a PEO’s industry expertise and the range of services they offer.
Free Up Your Time to Grow Your Business with AccessPoint’s PEO solutions
HR teams at small and mid-sized businesses have a lot of ground to cover, from handling payroll-related tasks to staying on top of ever-changing regulations.
Partnering with a PEO can be a smart way of reducing the administrative workload and enabling HR professionals to focus on higher-impact activities.