PEO 101 – Introduction to Professional Employer Organizations (PEOs)

In today’s increasingly competitive marketplace, small and mid-sized businesses need to utilize all available advantages.  This means finding opportunities to ramp up efficiencies and boost cost-effectiveness.  Professional employer organizations (PEOs) are providing the types of services that save companies time and money by outsourcing employee-related administrative functions to a dedicated service provider.  Understanding a PEO’s role and possible benefits can be critical for smaller firms looking to obtain a complete strategic outlook on their futures.

Understanding Professional Employer Organizations

Under the correct circumstances, PEOs are a powerful tool that can alleviate a company’s human resources burden while decreasing the costs associated with managing its employees.

The model in which a professional employer organization operates is called shared or co-employment, which allows the PEO to act as the administrative employer of record for its clients’ employees.  A PEO assumes responsibility and, in some cases, the liability for administrative tasks such as payroll, taxes, HR, employment law compliance, and risk reduction.

With the economies of scale generated by their size and specialization, PEOs can oftentimes negotiate lower insurance rates and provide more attractive benefits packages than a client can on its own.

Through this relationship, the client remains the operational employer responsible for determining who to hire/terminate, employee job function and wages, day-to-day activities, and the overall general strategic direction of the business.  The co-employment relationship is designed to outsource routine human resources tasks and compliance so that the client company can use its time and energy on its core competency.

PEOs provide these services in exchange for an administrative fee typically charged as a per-employee-per-month (PEPM) flat dollar amount or, in some cases, as a percentage of the client’s overall gross wages.

The industry has existed for over 25 years and has grown considerably over the last five years.  More than 700 professional employer organizations are currently operating in all 50 states across the United States.  They cover several million workers with over $80 billion dollars in annual revenue.

What is a PEO’s Value Proposition?

The benefits of choosing a PEO to manage employee-related administrative tasks and benefits have helped fuel the industry’s growth.  Selecting a PEO is a process for each business, dependent on their unique needs and circumstances.

Due to purchasing power, PEO clients generally enjoy better rates on health insurance than they would otherwise be able to procure on their own.  In addition to health insurance, PEOs typically offer ancillary benefits such as dental, vision, life/AD&D, short and long-term disability, 401k, flex spending, and commuter pre-tax deductions.  The bundling of these products onto one platform has earned the industry its reputation of being a one-stop-shop, single-vendor solution for all benefit needs.

Utilizing a PEO can also save the client the time and expense of conducting most employee-related administrative tasks that distract companies from focusing on their core business.  This component of the PEO solution is especially attractive to small and mid-sized businesses that can reallocate the time saved in these areas to focus on more revenue-producing activities.

PEOs also provide peace of mind by constantly monitoring and providing updates to their clients on all changes to local, state, and federal employment law.  In most cases, the PEO will require their clients to comply with these laws, thus significantly reducing each entity’s regulatory liability.

Value-added components to a PEO core service offering include benefits administration, HR consulting services, a human resources information system (HRIS) platform, employee recruiting, and risk and safety training programs. 

New Developments

Recently passed federal legislation has been favorable to the PEO industry.  With a new certification process and more favorable tax rules, the Small Business Efficiency Act (SBEA) has constructed a framework for even greater inclusion of PEOs within mainstream business practices.

Perhaps the most impactful piece of business legislation in recent memory, the Patient Protection and Affordable Care Act (commonly known as Obamacare) has had a profound effect on small and mid-sized businesses both in terms of the need to provide their employees with health insurance as well as comply with the Act’s regulatory requirements.

In addition to the compliance burden, experts anticipate that many small employers will slowly realize erosion in the types of plans they can offer their employees.  To help solve this problem, some businesses rely on professional employer organizations to help them secure more attractive healthcare coverage through the PEO’s access to large-group employer plans.

The time, money, and effort required to adapt to this new legislation can be prohibitive for many small companies.  Due to the nature of its business, a PEO can provide expertise and guidance to smaller organizations as they struggle to comply with the additional burdens created by the law.

With the SBEA providing further legitimacy to the industry and healthcare reform generating demand for its services and expertise, PEOs appear poised to capitalize on current market trends to increase market share.

Choosing the Best Fit

Due to the abundance of choices, navigating the world of professional employer organizations requires diligence in order to choose the most appropriate fit for one’s business.  As important, it is necessary to understand whether those services are being provided at the right price.

Once these hurdles are cleared, the correct PEO relationship can be extremely helpful in improving the client’s operational efficiency and cost-effectiveness, leading to higher growth potential and profitability.

For more insight into the professional employer organization industry, sign up for the free eBook “The Truth About PEOs.”