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What Is a PEO? Professional Employer Organization Explained

What does PEO Stand For

A PEO is a professional employer organization. This organization provides comprehensive human resources services for small and mid-size businesses. They pay employee wages, handle tax issues and assist with regulatory compliance. More businesses are turning to PEOs as a cost-effective way to outsource their HR duties.

Types of Businesses that Use PEOs

There are currently about 180,000 small and mid-size businesses that use PEOs. They are responsible for hiring approximately 3.4 million people. Approximately 15 percent of small businesses with 10 to 99 employees work with PEOs.

Small and mid-sized businesses use PEOs so that they do not have to deal with all of the legal complications of having their own employees. However, larger businesses also use PEOs to manage administrative duties. These PEOs can work together with a business’ own internal human resources department.

Various industries use PEOs, including small manufacturers and small service providers. High-tech companies, mechanics, engineers, plumbers, retailers, and even doctors work with PEOs.

Services PEOs Provide

PEOs provide a host of services. These services are included in the PEO arrangement between the PEO and the host organization.

Some common services that are provided by SEOs include:

  • Payroll
  • Benefit administration
  • Human resources services
  • Tax administration
  • Regulatory compliance
  • Legal support

PEOs may offer additional services, such as recruiting services and immigration assistance for international employees.

How does a PEO Work

A host company retains the services of a PEO, often entering into a written contract with it that details the scope of services that will be provided.

The PEO employs workers at the host company’s worksite. The PEO is the official employer of record, which is recognized in the United States on the state and federal level and recognized in other countries as the legal employer.

As the legal employer, the PEO is usually responsible for withholding proper taxes, paying unemployment insurance taxes and providing workers’ compensation coverage.

The PEO is typically responsible for paying employee wages, collecting employment taxes and depositing taxes with the proper taxing authorities. Additionally, the PEO often provides human resources services and benefit administration.

Meanwhile, the host company handles the day-to-day management of the employee. The employee may work in production, manufacturing, product development, sales, marketing or other positions. In this arrangement, the PEO focuses on employment-related issues while the host company is responsible for business operations.

Why Businesses Use PEOs

Businesses turn to PEOs to outsource their human resources services. Many small and mid-size businesses want to concentrate on business operations rather than regulatory compliance or time-consuming administrative tasks.

As businesses grow, their owners often do not have the time to devote to training, payroll, accounting, and regulatory compliance. PEOs are skilled at these tasks and can employ cost-effective methods to save the business time and money. Additionally, they can help companies minimize risk.

Using a PEO can replace or augment an internal human resources department. Additionally, some PEOs provide a technology or service infrastructure.

Benefits of Using a PEO

Using a PEO provides myriad benefits to employees and employers alike. Many of the reasons businesses use PEOs is because they offer the following benefits:

  • Faster Growth

    The Intuit Small Business Employment Index shows that since the end of 2004, small businesses that use PEOs have grown more than 7 percent faster when compared to small businesses that do not use a PEO.

  • Lower turnover

    Companies that used PEOs for at least four quarters experienced a turnover rate that was 10 to 14 percent lower than the average business.

  • More likely to stay afloat

    Small businesses face daunting challenges, and many go out of business. Companies that used PEOs were 50 percent less likely to go out of business.

  • More time

    PEOs focus on the administrative tasks of a business. They are familiar with local laws, so they can help keep the business in compliance and avoid bureaucratic hassles. This frees up time for the host business to focus on operations and increased productivity and profitability.

  • Better benefits

    Because the PEO is the official employer and tends to hire many more employees than small businesses, it can usually offer employees better employee benefits that are available to larger businesses, such as health, dental and life insurance, dependent care and retirement plans. Depending on the PEO and host employer, additional benefits may be available. These include dependent care, adoption assistance, educational benefits and job counseling.

  • Lower costs

    PEOS implement best practices in handling administrative costs, which lower employment costs. Additionally, lower turnover prevents employers from having to spend more money on training and recruitment efforts. Administrative costs are approximately $450 lower for each employee when using a PEO. Additionally, PEOs are familiar with the state and federal requirements and can keep a business in compliance and can help the business avoid fines and other penalties that stem from violating regulatory provisions.

Checklist for Finding a PEO

Many businesses rely on PEO to cover their human resources needs. They recognize the many benefits a PEO arrangement can provide. If you are interested in finding a PEO, follow these steps:

  1. Assess your business and determine what human resources needs you have.
  2. Ask for references from other businesses or others in the industry.
  3. Interview prospective PEOs. Learn whether the PEO could provide for your stated needs. Ask about their certifications and licensing and ensure these meet the requirements of your state or country. Learn about the professional backgrounds of the PEO.
  4. Ask prospective PEOs about how employee benefits are managed. Determine if the employee benefits that the PEO offers will help attract and retain talent. Inquire about whether the PEO is fully insured and about their insurance company and coverage.
  5. Ask for referrals from the PEOs.
  6. Review the PEO service agreement. Read over your responsibilities as the host employer and the PEO’s responsibilities. Ensure that the PEO agreement is flexible enough to meet your needs so that you can scale up or down as the needs of your business dictate.

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