What is a PEO?
Professional employer organizations (PEOs) provide human resource services for small to medium business clients—paying wages and taxes and often assisting with compliance with a myriad state and federal rules and regulations. In addition, many PEOs also provide workers with access to 401(k) plans, health, dental, life insurance, dependent care and other benefits not typically provided by small businesses. In doing so, they enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers’ compensation. PEO clients can then focus on their core competencies to maintain and grow their bottom line. [Learn More About the Difference Between a PEO and an ASO]
How does a PEO arrangement work?
Once a client company contracts with a PEO, the PEO will then co-employ the client’s worksite employees involving a contractual allocation and sharing of employer responsibilities between the PEO and the client pursuant to a client service agreement (CSA). The PEO typically remits wages and withholdings of the worksite employees and reports, collects and deposits employment taxes with local, state and federal authorities. The PEO also issues W-2 Forms for the compensation paid under its EIN. The client company retains responsibility for and manages product development and production, business operations, marketing, sales and service. The PEO and the client will share certain responsibilities, as determined in the CSA. As a co-employer, the PEO will often provide a complete human resource and benefit package for worksite employees.
Who uses a PEO?
Any business can find value in a PEO relationship. Increasingly, larger businesses also are finding value in a PEO arrangement, because PEOs offer robust web-based HR technologies and expertise in HR management working in conjunction with their existing human resources and payroll departments.
PEO clients include different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. A broad range of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.
Why would a business use a PEO?
Business owners want to focus their time and energy on the “business of their business” and not on the “business of employment or payroll”. As businesses grows, most owners do not have the necessary human resource training, payroll and accounting skills, knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small-group markets access to many benefits and employment amenities they would not have otherwise.
Do business owners lose control of their business when working with a PEO?
No. The PEO client/business owner retains ownership of the company and control over its operations. As co-employers, the PEO and client will contractually share or allocate employer responsibilities and liabilities per a client service agreement (CSA). The PEO will generally only assume responsibilities associated with a “general” employer for purposes of administration of benefits and remittance of payroll and payroll taxes. The client will continue to have responsibility for worksite safety and compliance. The PEO will be responsible for remittance of payroll and employment taxes, may maintain employee records and may retain a limited or general right to hire and fire, as delineated in the CSA. Because the PEO also may be responsible for providing access to workers’ compensation coverage, many PEOs also focus on and provide assistance with safety and compliance. In general terms, the PEO will focus on employment-related issues, and the client will be responsible for the actual business operations.
How do PEO’s help their clients control costs and grow their bottom line?
A PEO’s economy of scale enables each client company to lower employment costs and increase the business’s bottom line. The client can maintain a simple in-house HR infrastructure or none at all by relying on the PEO. The client also can reduce hiring overhead. The professionals at the PEO can provide critical assistance with employer compliance, which helps protect the client against liability. In many cases, the client can pay a small up-front cost for a significant technology and service infrastructure or platform provided by the PEO. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients. This enables the business owner to focus on the company’s core competency and grow its bottom line.
How do employees benefit from a PEO arrangement?
Through a PEO, the employees of small businesses gain access to big-business employee benefits such as: 401(k) plans, health, dental, life, other insurance opportunities, dependent care and other benefits they might not typically receive as employees of a small company. When a company works with a PEO, job security is improved as the PEO implements efficiencies to lower employment costs. Job satisfaction and productivity increase when employees are provided with professional human resource services, enhanced benefits, training, employee manuals, safety services and improved communications.
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