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Professional Employer Organizations: What You Need to Know

Manasa Reddigari

Is your business behind the curve when it comes to payroll, benefits or other HR functions? It might be time to shift the burden to a PEO.

Keep reading to learn what PEOs are and get some options for the best PEOs today.

What are PEOs?

Professional employer organizations (PEOs) help small businesses with various employer-related HR functions. For example, they might take over the payroll, tax processing and benefits. They can also manage the various vendors you use to carry out these functions today.

When you partner with a PEO, you enter into a co-employer relationship with the PEO. This means that the PEO becomes the employer of record. In other words, your employees become the PEO’s employees. And the PEO files payroll taxes for these employees through its own tax ID.

But you remain the employer on site. Employees continue to work at your premises, not those of the PEO. And you continue to manage the employees day to day.

A PEO is distinct from a payroll provider. A payroll provider only acts on behalf of your business. But your employees do not become the payroll provider’s employees.

What are the pros and cons of partnering with a PEO?

Below are some benefits and drawbacks of PEOs.

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The pros of professional employer organizations include:

  • Lower benefit costs. A PEO may pool employees from many businesses. This lets the PEO negotiate lower rates on health insurance or workman’s compensation. Your small business employees can enjoy the benefits of working for big business. This can make your business more attractive to potential hires.
  • Reduced risk and liability. You will share the risk of employee claims with the PEO. PEOs also tend to stay on top of workplace regulations. So may be able to improve compliance and prevent legal hassles.
  • Increased productivity. Partnering with a PEO means that you don’t have to invest time or man power on time-consuming HR tasks. This can free you and your employees to focus on revenue-generating work.
  • It can fill skills shortages in your in-house staff. PEOs have staff members who know the ins and outs of HR management. Chances are that if someone at your business can’t fill the role of an HR professional, the PEO can.

The cons of professional employer organizations include:

  • You lose control over benefit carriers and plans. You might lose access to a benefit plan that’s working for your business if the PEO chooses a different one.
  • Your long-term benefits costs may increase. Benefit carriers often calculate risk based on who is in a pool of policyholders. This is common in the health insurance market. A PEO can at any time add new employees to its employee base unbeknownst to you. New additions who come with a higher level of risk may increase the risk of the pool of policyholders. This can cause the cost of benefits to increase.
  • You may get hit with high fees. PEOs charge a flat fee or a fee assessed as a percentage of gross payroll. In the latter case, as your business scales up, you may find it harder to afford the growing fees. If you fail to pay a PEO, employee benefits can lapse and leave your employees in the lurch.
  • It can leave a skills gap among in-house staff. An opportunity cost of using a PEO is that your own in-house staff members may fail to develop vital HR skills. When you keep HR in house, employees can. You don’t have to depend on external knowledge.

What are some of the best PEOs?

Below are some options for top professional employer organizations.

ADP TotalSource. TotalSource offers Fortune 500-caliber benefits, custom HR strategies and data insights. It can help you with benefits, talent and risk management among other functions. It also claims to have more co-employed employees than its competitors. A bonus? TotalSource has the backing of ADP, a major HR management company.

Insperity. Insperity is among the best professional employer organizations for small businesses. A separate team handles each part of its PEO service. Its service include payroll, risk management and other HR functions. But it shines in the area of employee training. It provides access to thousands of online HR courses to beef up your employees’ skills.

TriNet. You can partner with TriNet without signing up for a long-term contract. There’s no set number of employees you need to use their PEO service. TriNet handles payroll, benefits, risk management and other HR functions.

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