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As the world adjusted to the COVID-19 pandemic, companies and employees realized that remote work is doable. While freelancing and outsourcing allowed companies to hire professionals overseas, managing employee compliance, benefits, and payroll became challenging. The challenge emphasized the need for a Professional Employer Organization (PEO).
PEOs specialize in payroll, benefits, HR, and labor compliance services so companies can streamline numerous employee-related administrations and make more time and resources for higher-value activities. They can take over and automate tasks such as running payroll, enrolling the hires in benefits, complying with current labor and employment laws, etc.
It may sound unwise to entrust your company’s biggest asset—your employees—to a third-party service provider, but it benefits your company in numerous ways.
According to the National Association of Professional Employer Organizations (NAPEO), firms achieve about 40% better revenue growth and 14-16% lower turnover rates. They are 50% less likely to be out of business when they utilize a PEO. So, how does a PEO work?
Table of Contents
How Does a PEO Work?
While PEO services vary from one provider to another, here’s a general overview of how they operate with small businesses or startups.
1. They co-employ your employees
Joining a PEO means they will co-employ your staff and perform administrative tasks, such as paying employees and filing payroll taxes. The good thing about hiring PEOs is that you still retain complete control over the people you hire, decide on the benefits plans and designs to offer employees, and make other essential human resource decisions.
According to NAPEO, co-employment is “a contractual allocation and sharing of certain employer responsibilities between the PEO and the client.” You and the PEO employ the workers and divide employer responsibilities.
- The PEO acts as the administrative employer who employs workers on record for tax purposes. They also process wages, benefits, withholdings, and taxes under the federal employer identification number (EIN).
- Meanwhile, your company acts as the worksite employer who maintains full authority over its employees, including hiring and salary. You also develop the company’s overall strategy and business operations, conduct product research and development, and handle marketing, sales, and customer support.
2. They offer services that handle your HR tasks
The PEO mainly takes over or automates the employment-related HR administrative work.
- Payroll - Your PEO partner will manage employee payments, withhold and pay taxes, and more. Modern PEOs will let you automate this in-house and spend only a few seconds on each pay run.
- Employee benefits - A PEO can influence its economies of scale to discuss and negotiate with providers about pricing, streamline employee enrollment, process claims, and such.
- HR compliance - Another responsibility of a PEO is that they can help you follow the rules and avoid getting fines by advising you about the different employment laws in every state.
3. They save money through economies of scale
PEOs have access to many individual businesses where they get workers so that they can negotiate for cheaper, higher-quality benefits with insurance providers for small business employees. As a result, you get to have lower employment costs while boosting the bottom line for the business.
What Are the Benefits of a PEO For Your Business?
Industry experts expect the PEO market to grow exponentially from 2021 to 2025, indicating a profitable long-term outlook for the industry. Let’s take a look at some of the reasons why companies are switching to PEOs. Your own business can benefit the same, too.
1. They can offer better benefits and a smoother HR experience for employees
It can be challenging to attract promising talents if you can’t offer competitive salaries and benefits compared to others. However, PEOs can harness and persuade quality talents since they have experience employing workers for larger companies. They also have access to more benefits for small business employees.
PEOs can provide a combination of any of the following benefits:
- Healthcare plans
- Disability and life insurance
- On-site-work benefits
- Mental health assistance
- Retirement plans
- Transport/Commute benefits
- Dependent care
These benefits would cost less for employees with the help of a PEO. Moreover, PEOs have enough knowledge and experience to quickly answer queries and process benefit claims for employees.
2. They can save money
As mentioned earlier, PEOs can negotiate more reasonable rates with insurance companies and other benefits providers. NAPEO also found that administrative expenses are around $450 less for each employee for a company that works with a PEO because they already have existing infrastructure to do administrative tasks more efficiently than regular HR.
3. They can maintain payroll compliance
It can be difficult to keep up with the complex and changing federal state and employment laws. If you’re not careful you might pay costly penalties, and this can affect the business heavily. In 2020, the Internal Revenue Service (IRS) assessed about $6 billion in penalties to companies that miscalculated or missed their employment taxes.
Hiring a PEO can help unload the burden of taxes as they can monitor employer-related laws and ensure payroll and benefits compliance. Many help you out with tasks like:
- Payroll compliance - This entails classifying employees correctly and issuing and filing tax forms. Reporting, collecting, and depositing taxes to the appropriate authorities. PEOs can also help to comply with wage law requirements like minimum wages and overtime.
Labor compliance services – Ensures that you abide by workers’ compensation and Equal Employment Opportunity (EEO) laws and implement state-required labor posters and leave policies.
Out-of-state compliance - Registers with unemployment agencies and complies with the local minimum wage, sick leave, vacation, and other ordinances.
How Do You Choose a PEO For You?
PEOs vary, so it’s better to compare and contrast each when choosing the best provider for your company.
1. Make sure they can provide all the services you need
Some PEOs can customize their services to specific company sizes, industries, or geographic locations. Make sure that the PEO you choose is experienced with your company profile and can provide continuous support as you grow. In return, make sure you also have the requirements they need.
2. Check their pricing structure
Generally, PEOs either charge a flat fee for each employee or get a percentage of your payroll. Paying the flat fee is more predictable but could also come with hidden costs. Always ask about additional charges and work with a PEO that’s transparent with their prices and provides a sample invoice to see if they are detailed enough and easily understandable.
3. Make sure they’re easy to use
Some PEOs might be using outdated software, so ask for a demo of the software you will use to access pay stubs and tax forms for easier navigation among you and your employees. You may want to check if they can integrate with the software you already use in the company.
Save More Time and Resources With a PEO
Real talk—you and your employees are better off focusing on growing your company than filing paperwork, negotiating with benefits providers, and sifting through the complex employer-related laws. You may spend extra on hiring a good PEO, but you can also save time, money, and resources once they deliver exceptional service.
Do your research on PEOs and seek the help of a reliable, professional employer organization that can provide a centralized service coordinating your payroll, employee benefits, and HR compliance in one place.