What Is A PEO?

As always, small businesses face mounting human resource and workforce management challenges and must adapt to thrive. These challenges often relate to screening, attracting top talent, employee benefits administration, payroll, training, retention, termination, and the list goes on. Organizations must also stay up-to-date on new and constantly changing labor laws, regulations, and compliance requirements (especially those related to health insurance, payroll taxes, and deadlines). On top of this, there are always emerging HR best practices to adopt, and outdated policies and practices to drop.

We have not even mentioned the rise of remote/hybrid work in the aftermath of COVID-19, which is creating a range of opportunities and obstacles for organizations—the former that need to be embraced, and the latter that needs to be overcome!

The problem for many organizations—especially small and mid-sized businesses (SMBs)—is that most do not have the in-house capacity to address all of these challenges in an appropriate, efficient, and cost-effective manner. But the good news is that there is a solution that would allow them to check all of these boxes by partnering with a professional employer organization (PEO).

Defining a PEO

A PEO is a third-party organization that, on behalf of its client, provides various HR services and workforce management-related tasks such as: 

• Payroll processing
• Benefits administration
• Recruiting
• HR Administration
• Risk management
• Employee training, onboarding, and development
• Strategic HR planning
• Compliance assistance
• Retirement planning
• Workers’ compensation

A PEO provides these services by hiring its clients’ employees and becoming the employer of record (EOR) for tax and insurance purposes. This arrangement is known as co-employment (or sometimes joint employment). To put it simply, PEOs work by allowing business owners to outsource HR tasks and administrative tasks that would otherwise prevent them from running their businesses effectively

Who’s in Control?

Businesses that enter into a co-employment relationship with a PEO do not sign away control over their internal operations or employee management functions. Rather, they outsource (or practically speaking, delegate) only their HR-related responsibilities.

What tasks are included in this scope? This depends on the specific contract details. For example, some businesses opt to outsource all of their HR management responsibilities to a PEO, while others choose to outsource specific HR functions (e.g., payroll services, candidate screening, etc.).

Regardless of their current or anticipated needs, businesses should ensure that their PEO offers flexible services. Indeed, a PEO that can customize its services to fit the precise needs of a unique business is highly recommended at all times, especially in the current post-pandemic environment that is characterized by a great deal of volatility.

We have seen over the last few years that rules and regulations can change dramatically and rapidly, and businesses that do not have the expertise or the capacity required to adjust to these changes are at a distinct disadvantage. You can also look at more frequently asked questions to see what people commonly ask regarding how PEOs help their customers.

Pricing Structure

PEO services are offered in two pricing options: per employee, or a fee based on a percentage of the total monthly payroll. Which option is superior? There is no generic, standard answer. The average rate depends on the specific needs of each business and the number of employees you have in your company. An experienced and reputable PEO will provide a clear, custom quote that “shows the math” for each option to provide you with complete peace of mind.

PEO Versus EOR

There can be some confusion between PEO and employer of record (EOR), which is another popular and established partnership model. As discussed above, PEOs are co-employers. Alternatively, an EOR is a full legal employer of the client’s employees. In this capacity, an EOR oversees all aspects of payroll, taxes, staffing benefits administration, payroll compliance, reporting unemployment insurance claims, and other related tasks. 

Which partnership model is the “right” one? Again, this article cannot answer this (or any other). It depends on the specific needs of each business. With this in mind, businesses that want to expand across different states/provinces often find it highly beneficial to use an EOR. Why is this the case? Because businesses that partner with PEOs are legally required to establish a presence in every state/province where it has employees (since the PEO is not a party to any employment contracts).

Conversely, an EOR has a contract with its employees. As such, businesses do not have to retain responsibilities of co-employment and may engage employees through the EOR without having to establish a presence in applicable states/provinces.