What is a Professional Employer Organization?

Discover how a Professional Employer Organization (PEO) can streamline your HR responsibilities and provide expert support for a fraction of the cost. Learn about the various services offered by PEOs and how they differ from staffing agencies.

By Brad Nakase, Attorney

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Have a quick question? I answered nearly 1500 FAQs.

Introduction

Confused about what a professional employer organization does and whether it is the same or different to a staffing agency? Don’t worry because by the end of this article you’ll know everything there is to know about professional employer organizations and whether they are a good fit for your business.

What Is a Professional Employer Organization (PEO)?

A professional employer organization is a company that will manage your obligations as an employer (in terms of payroll, benefits administration, and tax filing) on behalf of your business. It is often considered as outsourcing your HR services as PEOs often offer a full suite of outsourced and consulting services. It is a great way for businesses to experience the benefits of having senior HR professionals supporting their business for a fraction of the cost.

While every professional employer organization is different in terms of the services they offer, and each partnership will be different based on the business’s needs, the HR responsibilities will be shared. Often, businesses will retain control of their staffing and training and development decisions. For example, they will be responsible for hiring or firing members of staff as needed. They may have their own internal HR department for those functions or work with a specialist recruiter. The professional employer organization will then take care of all other tasks that need specialist expertise (like payroll taxes, workers’ compensation, etc.)

3 Types of Professional Employer Organizations

Professional employer organizations are categorized based on their specialization and accreditations. The law usually requires significant reporting, legal, and financial requirements of professional employer organizations at higher levels.

1. Professional Employer Organization (PEO)

A professional employer organization can help with a vast array of HR services either as an outsourced HR resource or as expert support for your internal HR team.

2. Certified PEO (CPEO)

Certified professional employer organizations have passed IRS certification requirements and therefore can file federal taxes on your behalf. With this certification come a number of benefits, like tax efficiency, transparency around the CPEO’s responsibilities, and financial protections. Certified professional employer organizations also have a fiduciary duty, which gives businesses peace of mind when seeking their advice.

3. ESAC Accredited Professional Employer Organization

The highest level is a ESAC Accredited Professional Employer Organization. They will have an IRS certification and be certified by the ESAC (Employer Services Assurance Corporation). As a member of the ESAC, they are bound to uphold the ethical standards and regulatory requirements of the ESAC.

What Services Does a Professional Employer Organization Offer?

PEOs will all offer different services with different inclusions, so it is worth researching the inclusions of the companies you are considering. Some of the standard services that professional employer organizations offer include:

  • Benefits administration – Professional employer organizations often have partnerships with providers of benefits and perks. This includes retirement plans, dental care, and health insurance providers. Businesses can completely outsource the recommendation, enrolment, and management of these benefits and perks to the professional employer organization.
  • Compliance – Businesses are subject to a large number of laws and regulations, many of which carry significant penalties and fines for non-compliance. A professional employer organization has specialist divisions focused on compliance consulting.
  • HR support – For businesses who don’t have an in-house HR department, a professional employer organization can provide HR services. In addition, they can partner with your current HR department to provide extra support.
  • Payroll and payroll taxes – Most professional employer organizations process payrolls on behalf of businesses, including time and attendance logs. They often offer payroll or HR tools to help automate the process. These systems will calculate payroll taxes, and in most cases, the professional employer organization will be able to file payroll taxes on your behalf.
  • Risk and safety – Some professional employer organizations will also assist with risk and safety training, including Occupational Health and Safety training. They can also help with safety audits.
  • Talent management – If a business wants to outsource hiring, training, and other talent management services, many professional employer organizations can help with that.

Consider which services you would benefit from and research professional employer organizations that fit your needs.

What Can’t Professional Employer Organizations Do?

Businesses do need to keep some oversight of their organization and ownership decisions, even if they are working with a talented professional employer organization. Professional employer organizations cannot do the following things:

  • Make business decisions without input from you.
  • Dictate schedules, payrates, or hours.
  • Help with services from other disciplines (like marketing, operations, product development, etc.)

The professional employer organization will provide you with all the information you need to weigh up the options but look to you (or the designated stakeholders for your business) for decision-making.

The Benefits of Working with Professional Employer Organizations

There are plenty of benefits to working with professional employer organizations, and the most beneficial to you will depend on your industry, business structure, and needs. However, these are the most impactful benefits for all types of businesses.

1. Reducing Employer Liability

Penalties and fines for failure to comply with laws or regulations can cripple a business. And the worst thing is that, in many cases, you may not even be aware that you are not complying with these laws or regulations. Working with a professional employee organization (many of whom will have legal experts on staff) allows you to outsource the stress of compliance to the experts. You can rest assured that your liability is reduced because you won’t have any unexpected fines or penalties coming your way.

2. Cost-Effective HR Support for Small Businesses

Small business benefit from working with a professional employer organization because it allows them to maximize the expertise of their HR support for very little cost. As small businesses often need to think strategically about the roles in their company, it is a major benefit to have that support and the peace of mind that comes from knowing that payroll and other functions are being managed properly. Good quality HR support can cost a lot, especially as HR professionals will often specialize in particular types of HR services. Working with a professional employer organization ensures your small business is covered across the board for a fraction of the cost.

3. More than Just HR Administration

HR does a lot more than just administration and sorting out internal conflicts. A professional employer organization can help with things like:

  • Analyze your performance as an employer (turnover, talent gaps, benefits, etc.)
  • Compliance support
  • Market research for pay rates
  • Payroll management
  • Risk and safety consulting
  • Support or manage hiring to ensure best practices.
  • Tax consulting or filing

Businesses can pick and choose what kind of support they need from a professional employer organization.

How Much Do Professional Employer Organizations Cost?

It will vary depending on the professional employer organization’s fees and payment structure. There are two main ways that professional employer organizations will structure their fees:

  1. A Percentage of payroll
  2. A flat fee based on the number of employees

No matter what fee structure they use, a professional employer organization will ask for information about the size of your workforce, industry, and your benefits set up before quoting a price. This is because your needs can vary greatly depending on the size of your business, number of employees, and industry.

Due to the fact that every business needs different types and levels of support, most professional employer organizations will tailor a solution to your business. That way you only pay for the services and technology that you want and need, instead of paying for a set package that doesn’t suit your business. Professional employer organizations operate with a lot of transparency around their prices, so be sure to ask questions if you want more information about where your fees will be allocated and the expected ROI (return on investment).

How to Choose a Professional Employer Organization

Just like with any other service provider, do your research before picking who you want to work with. While budget is an important consideration, it should not be the only consideration. Weigh the benefits against your business needs to evaluate where you are happy spending money and where you would prefer to make savings. Most professional employer organizations will tailor a package to your needs, so don’t be afraid to discuss your budget and needs with them if their full package is over budget. They may be able to offer you a more streamlined offering that better fits your budget.

Consider the following things when finding a professional employer organizations:

  • The PEO’s business finances
  • References and testimonials from businesses like yours (industry and/or size)
  • Your desired level of accreditations
  • The services and support your business needs
  • Your company culture
  • Whether or not they operate in your market(s)

Don’t be afraid to contact the professional employer organizations you are considering to ask them questions. You want to build a trusting and long-lasting partnership.

Frequently Asked Questions About Professional Employer Organizations

1. What kind of businesses work with professional employer organizations?

Businesses in all kinds of industries can benefit from working with a professional employer organization. They are commonly hired in the following industries:

  • Accounting, auditing and bookkeeping
  • Engineering services
  • Financial
  • Health services
  • Insurance
  • Legal services
  • Management consulting services
  • Manufacturing
  • Nonprofits
  • Property management
  • Real estate
  • Technology
  • Trades
  • Wholesalers

Often small businesses will work with professional employer organizations more often than large corporations – however both benefit from their expertise.

2. Who employs the staff in a co-employment arrangement?

If you hire a professional employer organization to help with hiring and training staff in a co-employment capacity, then the PEO is the employer. The employees will work for you and you will have the typical employer controls and oversight, however, for tax purposes, the professional employer organization is the employer.

3. How do professional employer organizations make money?

Through their fees. Professional organizations will charge for their services, either by taking a percentage of payroll or by charging a flat fee. There are a number of factors that go into their fee structures and amounts.

4. Is a professional employer organization a staffing company?

No, it works differently. A staffing company employs professionals and “leases” them out to businesses on a temporary basis. When working with a staffing company, a business will have no control over the hiring process.

A professional employer organization does not make the hiring decision. The business has the decision-making power in the recruitment process (either the business will handle recruitment or outsource it to the PEO) and the professional employer organization hires the employee and manages all payroll. The business retains ultimate decision-making power, including over the employee’s wage and onboarding. The professional employer organization may support the business in this decision-making, but they will not make the decision for the business.

5. Will working with a professional employer organization impact company culture?

It will not have any negative impact on your company culture – your employees are unlikely to notice the difference too much. It will just seem like your business is particularly efficient and well-run in terms of payroll and HR.

A professional employer organization can often provide services that relate to company culture, so you can hire them to impact your company culture in a positive way. For example, they can tailor your benefits package and perks to reflect your company values and boost employee morale. Your PEO may create predictive reporting and a strategy for increasing parental leave and implement flexible working to improve gender diversity in your business.

Have a quick question? We answered nearly 2000 FAQs.

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