What does PEO mean?
A PEO is a Professional Employer Organization that partners with small- to mid-sized businesses to provide human resources (HR) expertise and administration of employer-related duties.
How does a PEO work?
The PEO and client partner enter a co-employment arrangement that outlines specific HR duties, liabilities and administrative tasks. The PEO assumes responsibility and liability for the business of employment including payroll administration, benefits management, employee tax compliance, risk management, legal compliance and workers’ compensation. PEOs also provide HR guidance on wide-ranging interests including the impact of local, state or federal legislation, employee issues in the workplace and HR crises, like COVID-19. The PEO becomes the employer of record, but the business maintains control of its day-to-day operations. Like always, the leadership team establishes pay rates, determines business strategies, HR policies, hiring/firing/layoff decisions and just about everything else related to running the business. By outsourcing HR to a PEO, small businesses can focus on growth initiatives because all HR questions, concerns and requests are handled by the PEO.
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What does a PEO do for you?
That depends on the PEO. Most PEOs offer the same core services, but some bundle their services into set packages while others customize a package according to your needs. Here’s a list of common PEO services offered a la carte by MidwestHR, a Chicago PEO:
- Comprehensive employee benefits – Access to health insurance plans and voluntary benefits from leading providers, MidwestHR helps businesses develop benefits packages at competitive rates to support recruiting goals and reduce employee turnover.
- HR guidance – MidwestHR provides expert HR guidance on wide ranging concerns. Whether onboarding or terminating, interpreting new legislation or determining any legal ramifications of COVID-19, you can remain compliant and rest easy.
- Payroll processing and tax administration – Workforce arrangements continue to evolve. MidwestHR manages payroll and taxes for all types of employees (onsite, remote, out-of-state, full-time, part-time, flex time). We take care of withholdings, deductions, employee classification, overtime pay, tax filings and any IRS notices.
- Workers’ compensation – MidwestHR researches the best carriers and policies for your industry classification, so you’ll get the right workers’ compensation insurance at competitive rates. We also document and file any claims.
- Retirement services – Historically cost prohibitive for small and mid-sized companies, PEOs provide access to sought-after 401(k) plans. Unlike other PEOs, MidwestHR waives the standard set-up and yearly administration fees.
How can a PEO help your business?
When growing a company, you roll up your sleeves and do whatever it takes. This kind of dedication is critical, but it can also pull attention from strategic growth initiatives. A PEO solves this problem by helping clients save time. While cost savings are important to business owners, time savings and the peace of mind associated with using a PEO are cited as the key advantages for retaining PEO services.* Often times, leadership doesn’t realize how much time and energy is spent handling HR functions in-house until they start working with a PEO.
According to research conducted by NAPEO (National Association of Professional Employer Organizations)**, here are other meaningful benefits your company should consider:
- Compared to other businesses, PEO clients grow 7-9% faster
- Companies that use a PEO are 50% less likely to go out of business
- Companies that use a PEO have 23-32% lower turnover
Most common reasons why businesses use a PEO:
- Save time: Outsource time-consuming, back office tasks so worksite employees can focus on revenue generating initiatives
- Peace of mind: Avoid unintended HR errors that could trigger government fines. All local, state and federal legislation is also analyzed for potential impact
- Enhance recruiting/retention: Offer quality benefits that support your brand values and your team
- Expertise: Instead of figuring things out, all HR, benefit, payroll tasks and regulations are handled by specialists
How much does a PEO cost?
The cost of a PEO depends on which HR functions you’d like to outsource and the number of employees. The industry uses two pricing models for calculating PEO services: either a percentage of gross wages (ranges from 2% to 4%) or flat fee per employee (doesn’t fluctuate with compensation changes). If you’re considering a PEO, calculate which method works best for your company and compare it against current HR costs. Ask for a line item proposal to uncover any unexpected costs upfront.
Will I relinquish any control over my business?
No. All decisions pertaining to the business and the way it is managed remains with you. The PEO provides assistance, support and guidance – never dictating policy or requiring you to make any decisions. With the PEO handling HR, there’s no more wasting time on paperwork and non-core activities. Most businesses feel like they actually GAIN control after partnering with a PEO. Now they can spend time on whatever they choose knowing critical HR functions are being managed.
Will my employees feel uncomfortable with this arrangement?
With any change, proactive communication is critical. Educate employees on the benefits of your new PEO partnership and any changes they can expect. Once they understand why and how it supports the business’ values, many employees are very happy because:
- Their job won’t change
- Their paycheck will now come from the PEO but they don’t report to or answer to anyone at the PEO
- They will have more time to focus on business at hand
- They typically will have more health insurance options and more overall benefits
*NAPEO MARKET RESEARCH, Comprehensive Report, Provado, 2018, p. 17
**Professional Employer Organizations: Keeping Turnover Low and Survival High, McBassi & Company, 2014