What Is a PEO? Everything You Need to Know
You may have heard the word “PEO”—PEO employment is growing at a rate 16 times faster than the rest of the economy.
But what is a PEO service? And how does it work?
PEO is one of the secrets to giving your business a competitive advantage, especially if you’re small to mid-sized.
Curious to learn more?
Below, we’ve created the following guide explaining what PEO services are and how they can benefit your company.
What Is a PEO?
A PEO, or professional employer organization, is a company that provides employee and management solutions.
It acts as the legal employer of a workforce employed within a company. Essentially, it works on behalf of the client company.
Services will vary between PEO service providers. For the most part, though, services will include payroll processing, onboarding, and securing benefits. PEO services will also manage HR.
The PEO model was first developed in the US, but it has also become popular as a global employment solution. Many companies looking to expand team up with a PEO to have additional resources for a growing network of employees.
PEO can be referred to as a national PEO when it operates across state or local ones. Global PEO is a solution for businesses operating overseas.
A global PEO provides even more services than a national PEO would. Additional solutions include international recruitment and strategy. They also assist with visas, immigration support, and foreign legal entity setup.
How Does a Standard PEO Work?
When your organization teams up with the PEO, the PEO will share many employee-related responsibilities with you.
PEOs hire employees directly and handle the administrative tasks for these employees. This includes processing payroll, taking care of benefits, and being responsible for taxes.
Meanwhile, your company will still have day-to-day control over the employees and how they serve the company. Employees will receive all assignments and instructions from the business.
With this arrangement, the PEO will act as the “Employer of Record” for insurance and tax purposes. This position will be coupled with their other administrative and compliance duties.
PEOs are experts in performing these duties. When taking over these responsibilities for a company, the company will save costs. This is because a specialist PEO will deliver more services more efficiently than their client company.
The company and the PEO will work together to write out a contract outlining what the PEO is responsible for. A standard agreement will likely include
- Payroll administration
- Essential taxes
- Employee benefits regulation and administration
- HR duties
PEO agreements can also include recruitment, onboarding, and training. Global PEOs typically have international services.
How Does Global PEO Work?
Global PEOs handle many of the same tasks as standard PEO services. For example, they hire employees, manage HR tasks, and keep your business compliant. But they do all of this on an international level.
Furthermore, global PEO acts as the company’s employer of talents internationally, relying on its global network and relationships to build a solid international reputation for your business.
Conventional PEOs in the US primarily work to manage the HR operations of a company. Global PEOs take it a step further: they mitigate risk, create and execute an international hiring process, and ensure that payment is compliant with different countries’ rules.
You won’t be surprised to hear that global PEO can get much more complicated than a national PEO service. Global PEO services act as the employer of record for people living throughout the world.
A global PEO service can also work with a company to expand globally in the shortest possible time. They’ll assist your business with finding the right people for each location and establishing your presence in different areas.
Who Benefits From a PEO?
PEO services can be effective for any company that looks to streamline operations and expand into new markets. But PEO services are particularly beneficial in three situations:
- Companies that need HR professionals
- Small businesses that want to be more competitive
- Organizations looking to expand globally
Companies may be looking to add an HR department to their team or be unsatisfied with their current outsourced HR services. In these scenarios, you should consider working with PEO services.
Many companies will make the mistake of assigning HR tasks to employees who do not specialize in HR or who are not equipped to handle such tasks. This will only result in more errors, delayed task completion, and frustration among the team.
When your company reaches the point of needing its own HR department, a PEO service should be a top consideration. You’ll be able to save on time and money instead of committing to building an entirely new department.
Small and mid-sized businesses looking to be more competitive may also benefit from a PEO service. Many small businesses have difficulty attracting high-quality candidates because they cannot compete with the benefits that larger companies offer.
A PEO partnership gives these small businesses access to top-tier retirement plans, insurance, healthcare, and even pension options that put them on the same playing field as more prominent corporations.
Businesses looking to expand globally will also benefit from a PEO.
One of the most challenging parts of global expansion is familiarizing your business with the foreign market. With a PEO service, you will significantly lower your responsibility.
Global PEO services have access to resources around the globe that will help you hire the right team members, stay compliant with international laws, and ultimately reach customers within your target location.
How Does PEO Relate to Co-Employment?
Co-employment is often used to mean PEO, but the words have different meanings. Co-employment is a specific subset of PEO that is offered in certain countries.
Co-employment means that two distinct companies take on the rights of an employer. One is the operating employer, responsible for the day-to-day management of employees.
The other company is the administrative employer, taking on payroll tasks, benefits administration, and potentially onboarding processes. The PEO will act as the administrative partner within the two companies.
PEOs using the co-employment method have more than just the two companies involved. There is a third party: the employees. A co-employment partnership should involve a Tri-partite agreement that outlines the obligations for all three parties.
Benefits of Using a PEO
Through a PEO, employees working at small businesses gain access to benefits that they typically only receive from larger firms. But PEOs offer more benefits to both employees and the company itself.
Working with a PEO means that you won’t be fully responsible for the actions of your employees because they will act as the co-employer. This also goes for lawsuits and other potential problems.
A PEO will share some of the liability associated with specific employment-related issues. Its resources will help reduce damage and keep your business running in crisis.
Using the services of PEO has the potential to save on overhead costs when running your business. You’ll be able to provide more benefits while lowering your bottom line.
Research from NAPEO shows that using a PEO generates an ROI of 27% in cost savings alone.
Using a PEO has the power to decrease costs significantly because you are shifting many of the HR responsibilities to the PEO. You won’t have to hire an HR department or pay for completing tasks like payroll and assigning benefits.
HR tasks can be time-consuming for businesses. When they have to focus on filling an HR position or correcting a payroll error, it can take precious hours from the week and cost the company numerous resources.
PEO services will help companies become re-focused on their goals. Businesses won’t have to spend as much time on mundane tasks or employee-related issues. All of these areas will be taken care of by the PEO.
This additional time and money can be leveraged into growing and developing the company. Executives can focus their energies on their core responsibilities while PEO services handle the rest.
PEOs give businesses access to numerous benefits that they would otherwise not be able to use.
How does this work?
PEO services often have thousands—some may even have hundreds of thousands—of employees. They negotiate with insurance companies and benefits providers on behalf of these employees.
With the potential to gain business from all of these employees, insurance companies and benefits providers will often work out details with the PEOs that provide more benefits at lower rates.
Most PEOs can offer many, if not all, of these services:
- Comprehensive healthcare plans
- Worksite benefits
- Mental health support resources
- Computer benefits
- Retirement plans
- Life insurance
- Disability insurance
Small and mid-sized companies may not be able to offer many of these benefits using their own funding. But PEO packing gives them access to more comprehensive services for the entire staff.
There are often many rules and regulations involved with HR duties and the employment process. These rules may change frequently.
Because PEOs operate as professional employment searches, they will stay updated with this information. They’ll be aware of the critical regulations that you may not understand.
Using a PEO will make it easy for your company to comply with significant HR rules and regulations. You’ll be able to grow and manage your staff more efficiently with a clearer understanding of your obligations.
Covid-19 led to a mass resignation called the Great Resignation. Employees are quitting en masse (23% are expected to quit in 2022) as they continue to look for more flexible jobs and better benefits.
Using a PEO service will make your business more competitive when recruiting. Often, candidates may choose larger companies because of better benefits and perceived opportunities.
With PEO services, candidates won’t have to compromise. Your company will be a serious contender because your benefits will match those of a larger corporation. In addition, you’ll be able to provide those benefits within a close-knit work environment.
Build Employee Performance
PEO services can also extend beyond just the hiring of employees. A PEO can also help companies evaluate employees and help them become more successful.
A PEO can observe employees and evaluate them. They can coach managers and supervisors on how to form better relationships with employees and offer better feedback. They can also give employees more resources to develop personal goals and grow within the company.
The PEO’s knowledge working with dozens of organizations will give them insight into creating effective training programs and methodology that will lead to employee success.
PEO Potential Drawbacks
The numerous benefits of using a PEO service have the power to transform your organization. But like any other business service, a PEO has its drawbacks that you should consider.
Compliance Not Guaranteed
One of the responsibilities of a PEO involves handling your payroll filing and taking care of your taxes. If the PEO does this correctly, you will have saved yourself time and effort. But if they fail to do these tasks properly, it’s you who is vulnerable to penalties for noncompliance.
When choosing your PEO, make sure to select an organization that guarantees compliance. Some PEO services offer to do these tasks but do not guarantee results.
Most PEO providers will offer tax compliance with payroll processing. They’ll calculate, file, and pay your taxes as the reporting agent on your behalf. The guarantee also means that they will cover any fees or fines if they make an error.
Limited Access to HR
When you are in complete control of your employees, you have full access to their information. Having this visibility allows you to make personnel decisions. But with PEO services, you have minimal access to this information.
Your existing HR managers and top company executives will have little insight into employee company data. Communication between personnel managers and employees also can become more complicated with PEO services.
With the PEO relationship, you have to contact the PEO with the message. Then you wait as they fulfill the request.
This can be helpful if it is a difficult situation to handle. But with simple requests that could be quickly taken care of by the organization, it will feel like unnecessary additional steps.
May Impact Morale
Many employees choose to work with a company because of the company culture. Unfortunately, many employees are not engaged or motivated in their workplace. F worldwide are not engaged or are actively disengaged.
It’s important to consider employee morale before teaming up with a PEO. How will you explain to employees that they are no longer directly working for your company?
Many employees will feel as if they are caught in the middle of your business and the PEO. Some may not feel valued and may leave their positions as a result.
Think about how your employees would feel if they learned that they have been “leased” to a PEO. How could you demonstrate to them that the partnership is the best choice for the entire company? You will have to integrate other employee appreciation methods within your organization to keep morale high.
Giving Up Control
Many business owners start their own companies because they want freedom. In fact, 55% of business owners say their motivation for starting their own business was to be their own boss.
When you join forces with a PEO, you will lose access to some of your control as a business owner. You won’t have full access to your employees’ information anymore, and much of the hiring process and payroll process will be out of your hands.
If issues arise with your employees, you’ll have to go through your PEO. In some cases, you may feel like this is unnecessary and inefficient. Keep in mind that using a PEO means that you have to sacrifice some of your freedom if you want to share the responsibilities.
Potential Benefit Changes
For the most part, PEOs are a great way to access benefits traditionally associated with larger companies. Their relationships with insurance and benefits providers make them significant assets for employers.
But keep in mind that PEOs can switch providers at any time. While it’s normal to occasionally switch providers, be wary of PEO services that frequently change the plans they offer. The last thing employees want is fluctuating prices or unpredictable options.
Also, be aware that some plans may be better than others. Lower benefits for your company are enticing, but certain companies may provide options that don’t fit employees’ needs. In some cases, you may need to compromise your expectations for plan options.
Guidelines for Choosing a PEO
Not all PEO services are the same. Here are a few guidelines for choosing the best PEO service for your business.
Assess Your Workplace
Spend some time assessing your company’s operations. Do you have an HR department? What does it look like?
Analyze how long it takes employees to complete specific HR tasks. Maybe payroll is taking up a large number of workers’ hours. There may be tense relationships among employees that are causing problems.
Also, consider expansion plans for your company. Are you looking to grow in the near future, or are you in a stage where you’re focusing on internal operations?
Understanding the current state of your company will give you a starting point for your PEO services. You may be looking for PEO services on a more local level, or you may realize that global PEO will be the best choice for your business.
Investigate Company Expertise
Once you have narrowed down your choices to a few companies, investigate the expertise of those companies. One of the best ways to do so is by exploring the company’s website. The best PEO companies will have professional-looking websites with numerous resources.
Consider your needs and see if the company addresses them on their website. Are you looking to expand into Serbia? Maybe you want PEO services in Hungary.
Take advantage of the free resources that PEO companies offer on their websites, from blog posts to downloadable guides. The quality of these resources will indicate how knowledgeable their PEO services are.
Understand How Benefits Are Tailored
Talk with the PEO company to learn about how benefits are offered and tailored. Some companies may provide universal plans to all employees, while others may take a more individual approach.
Also, look for information on how the PEO is funded. Is the PEO fully insured or partially self-funded? Who is the carrier for the benefits?
Understanding how the PEO provides its services will help you better understand what to expect. A PEO that has been using the same insurance provider for years will likely offer you stable benefits. Consider that other services may be more flexible with benefits, but that prices may change accordingly.
The bottom line is to look for PEOs transparent about how they’re funded and the services they provide.
Review the PEO’s Client Service Agreement
Most importantly, review the service agreement carefully. Your relationship should be carefully laid out in the agreement. Each party’s responsibilities and liabilities should be clear.
What are the PEO’s guarantees? Ensure there are no grey areas and you understand your role in the partnership.
Look to see if there is a way out of the contact. Make sure you’re not locked in unknowingly. What provisions allow you or the PEO to cancel the contract?
Leveraging PEO Services
Now that you can answer the question “What is a PEO service?” you can start to research the best PEO fit for your company.
Ultimately, PEO services have the power to transform your business. If you are willing to relinquish some control over your business and trust the process, you could benefit greatly.
Bradford Jacobs offers global PEO services in countries ranging from Belgium and Greece to China and Israel. Contact us to learn more about our services.