Professional Employer Organizations
While large businesses may have the resources to maintain their own in-house HR, payroll, & benefits teams, the same may not be true when it comes to small and mid-size businesses. Some small and mid-size businesses may opt to outsource some of these functions to a third-party (ex: payroll through a payroll company) or outsource the entire function by working with a Professional Employer Organization (PEO).
When a business elects to outsource to a PEO, the PEO and business establish a co-employment relationship whereby the PEO assumes certain principal employer responsibilities while the business (the “PEO client”) retains day-to-day operational control over the business and its employees.
The PEO acts as the “Employer of Record”, and their name and EIN will appear on employee Form W-2s. The PEO will handle compliance and statutory reporting and filings (ex: payroll tax withholdings and quarterly filings) on behalf of the PEO Client with all filings reported under the PEO’s EIN. The PEO will respond to any applicable inquiries from governmental/tax agencies related to those compliance and statutory requirements on behalf of the PEO client.
PEO services generally include HR, payroll, benefits (medical, dental, vision, life insurance, commuter benefits), retirement benefits (ex: 401(k) plan), leaves administration, unemployment insurance, workers’ compensation insurance, employment practices liability insurance (EPLI), employer legal defense coverage (provided PEO client follows all PEO protocols), employer/employee compliance training, employee support services, employee discount programs and more.
Let’s be clear … working with a PEO does not mean business owners can take a hands-off approach! Business owners still need to take an active role and perform certain functions even when outsourcing to a PEO. Hiring/intake of new employees (including the paperwork), submitting/running payroll, reviewing annual Open Enrollment benefit offerings and making elections which align with the business and their employees, forwarding any applicable correspondence from federal/state/local agencies to the PEO for timely response (as PEO is Employer of Record), reviewing reports and invoices for accuracy, submitting information for annual 401(k) non-discrimination testing, etc. still need to be managed or carried out at the PEO client level.
That doesn’t necessarily mean the business owner needs to be the one to do this but someone within the business should be the point person or liaison to work on behalf of the business to manage the PEO relationship and carry out the necessary functions and responsibilities (ex: Head of Operations, Head of Accounting/Finance).
What about the downside to PEOs?
Pricing isn’t 100% transparent. While there may be a rate card for some a la carte services, if you’re looking for a detailed itemization of what the PEO is charging for their services, you probably won’t find it.
While you get some cost-benefits from negotiated rates between insurance carriers and PEOs, insurance carriers still look at the size of the PEO client so the premiums for your size business may still be much higher than what larger businesses pay. In addition, the PEO client doesn’t get a say in negotiating the rates with insurance carriers.
If you need to take advantage of any employer or employment legal defense services/coverage included with the PEO relationship, you need to do things by the book (that is, the PEO’s book)
You lose some control over how you run your business as it pertains to managing employees/employment as you need to adhere to the policies of the PEO or risk losing the coverage/protections afforded under the PEO relationship
The PEO is only as good as the people who work for the PEO. Some reps will be on point and others will not. It can be hit or miss depending on who is managing your account
Employee information is stored on the PEO’s proprietary system and while there are usually options to export data to Excel or PDF, if you leave the PEO, you may not have streamlined access to current/historical employee information and reporting
There’s always FINE PRINT so read it carefully including the termination clause and any applicable termination fees.
That all said, the pros often do outweigh the cons if you’re a small or mid-size business looking to streamline and fully outsource HR, payroll, and benefits. Just be sure to have the right person or people on the business side acting as the liaison or point person to manage the PEO relationship. It can make a huge difference!
Tip:
If you’re considering a PEO, be sure the PEO is reputable and has met the IRS requirements to be recognized as a Certified Professional Employer Organization (CPEO).