A business is only as good as its workforce. But the more a business grows, the more complicated workforce management becomes. Payroll, benefits, policies, processes, safety, hiring, onboarding… the list goes on. An effective HR manager is part consultant, accountant, specialist, writer, leader, and more. When business owners are already wearing multiple hats, how can they take on HR and still drive revenue? Enter the PEO: an end-to-end HR solution for small and midsize businesses.
What is a PEO?
Est. 1.5 minutes to read. In this section:
- Definition and core functions
- Evolution of PEOs over time
PEO stands for Professional Employer Organization and describes a type of company that offers outsourced HR to small and midsize businesses. PEOs provide end-to-end workforce support spanning payroll, benefits, risk management, staff training, legal compliance, and more.
PEOs allow businesses to focus on revenue-generating work rather than getting bogged down with complex employee management. They can also provide the benefits of a Fortune 500 company for a fraction of the cost. This is especially useful for companies that can’t justify a full HR department.
The concept of a PEO took off in the 70s and was initially focused on providing insurance plans. Over the past several decades, PEOs have expanded considerably to become comprehensive HR outsourcing partners. Technology for HR has also improved significantly, giving businesses a way to access payroll, benefits, and other HR data easily. As regulations and employment laws become more complex, the PEO industry can provide an attractive solution for businesses looking to focus on growing their operations without the hassle of managing HR.
How does a PEO work?
Est. 2.5 minutes to read. In this section:
- Co-employment definition
- Breakdown of responsibilities
- The PEO contract
When researching PEOs, you’ll see the term “co-employment” used. Some business owners are turned off by this word, thinking it means they’ll lose control of their business. But it’s quite the opposite. Your business maintains control of decision-making, strategy, and core operations. The PEO simply takes on HR-related responsibilities. Co-employment is how your business and the PEO jointly support your employees.
You keep your direct relationship with your employees. The PEO supports both you and your employees by improving resources, processes, and communication.
The PEO assumes some duties like processing payroll, benefits, and insurance. They collaborate on other duties like hiring, onboarding, training, and termination if necessary. For example, when it comes to hiring, the PEO might optimize job descriptions, complete initial screenings, and conduct background checks, but you would still conduct interviews and have the final say. You maintain responsibilities such as scheduling, setting wages, managing facilities, and paying invoices.
Essentially, the PEO handles the “business of employment” while the client manages the “business of the business.”
The PEO can recommend action, but you are ultimately responsible for making the decision. In short, a PEO works by sharing the responsibility and liability of being an employer through a model called co-employment.
What are the pros and cons of a PEO?
Est. 2.5 minutes to read. In this section:
- Direct benefits
- Indirect benefits
- Common pitfalls to avoid
The main benefits of partnering with a PEO are risk mitigation, cost and time savings, as well as access to better benefits. Some advantages are direct, like cheaper insurance, while others are indirect, like reducing employee turnover.
Rather than hiring full-time staff to handle HR, PEOs allow you to outsource at a fraction of the price by leveraging “economies of scale.”
Think of “economies of scale” as the Costco business model. When you buy in bulk, you save. In a similar way, a PEO can offer good benefits at lower prices because they’re using the power of all their clients combined. This keeps costs down while offering benefit packages similar to those of large corporations.
As a result, PEOs can also help you attract and retain top talent. With great benefits, you can become known as a great place to work, which helps you compete for quality employees in the marketplace.
Solid processes and policies also help improve your employees' daily experience. Interpersonal support from an HR professional can improve team dynamics and your overall workplace culture.
Additionally, PEOs help ensure businesses are compliant with payroll rules, labor laws, safety regulations, anti-discrimination statutes, healthcare mandates, and more. Mandates happen rapidly, and neglecting changes can result in fines or lawsuits. PEO compliance assistance provides peace of mind and helps you avoid costly mistakes.
Without having to worry about all those HR tasks, you can get back to focusing on strategic operations and revenue-generating work.
While PEOs offer lots of advantages, some business owners have concerns about control and visibility. Proactively addressing these challenges maximizes long-term PEO benefits.
Some business owners worry about handing over employer responsibilities. Others find they gain more control as it gives them a renewed focus on operations. The PEO will have a service agreement so that each party understands its duties as it relates to employees.
In an arrangement with a PEO, the PEO becomes the “employer of record” for tax purposes, enabling them to take responsibility for payroll taxes and filings. This also allows the PEO to offer large-group benefits to your employees. The client is still viewed as the “common-law employer,” meaning the client retains actual control of the employees.
Losing visibility into employee performance may also cause hesitation. But today’s leading PEOs offer digital dashboards that provide near real-time information. Clear and frequent communications lead to fruitful PEO relationships without common hangups around visibility or misaligned priorities.
How do you find the right PEO?
Est. 1.5 minutes to read. In this section:
- Criteria for choosing a PEO
- Tips for interviewing a PEO
Not all PEOs are the same. Choosing the right PEO partner is crucial for getting the full range of financial and operational benefits. The ideal PEO partner aligns with your business and its future goals.
When interviewing PEOs, ask about:
Flexibility. Does the PEO allow for flexibility if you already have an HR person on staff? Will they adjust their approach to help your current staff take on more strategic goals by assuming their administrative burdens? Do they offer a flexible service model if you want to take advantage of some, but not all, of their offerings?
Capacity. PEOs are made for small to midsize businesses. However, some are designed for higher or lower on that spectrum. Ask your PEO how many employees their typical client has to see if you fall in that range.
Communication. Some national PEOs take a more digital approach to HR, opting for automated support and online communication. Others offer a more high-touch model with in-person meetings and HR managers dedicated to your account. If you have an HR crisis at work, is it important that someone is available to come to your office? Or are you okay with reviewing resources on your own?
Partnership. You want your PEO to act as a partner, not a vendor. As you’re going through the sales process, ask situational questions to see how they handle collaboration.
How do PEOs support small businesses?
Est. 1.5 minutes to read. In this section:
- HR challenges of a small business
- Small business case study
- Future trends in HR
When small businesses grow, they often hit roadblocks related to managing employees and following regulations. When a business owner is already stretched in many directions, worrying about HR, benefits, and compliance can hinder their growth potential. PEOs are especially well suited for these businesses because they offer an affordable solution. By taking HR off the business owner's plate, PEOs allow small businesses to invest more of their time and mental capacity into the actual business.
See how a PEO helped this small business focus on growth.
But how do you know when it’s time to level up your HR? Once you have five employees? Twenty-five? Fifty? There are a lot of reasons businesses choose to partner with a PEO. Here are a few of the top ones:
Seven signs it's time to bring on a PEO
1. You're drowning in paperwork.2. You're not sure if you're compliant.
3. Your day is never spent doing the things you've planned.
4. You are concerned about losing employees because your competition has better benefits.
5. You don't have the resources to build your own HR department.
6. Your focus on employee issues is greater than your focus on operations and opportunities for revenue generation.
7. Your business is growing quickly.
Unfortunately, the HR landscape for small businesses is only going to get more complicated. With increasing employment regulations and tax obligations, it's incredibly difficult to grow a small business.
PEOs are managing these changes by implementing better technology. A human resources management system (HRMS) can help automate certain administrative processes like payroll, time tracking, and benefits. They can also produce and analyze reports to help you optimize your workforce.
How can you get started?
PEOs help small and mid-size businesses by sharing the responsibility and liability of being an employer. From administrative tasks like payroll and benefits to more personal challenges like screening candidates and conflict resolution, PEOs give you access to experienced HR talent for a fraction of the cost of hiring in-house.
The right PEO for your business should have the flexibility to work with your current HR processes and the capacity to support all of your staff. They should act as a partner, not a vendor. A PEO should meet your expectations for hands-on support, blending seamlessly with your team.
To get started, consider interviewing PRO Resources as a potential PEO partner. With 30+ years of experience across key industries, PRO has helped hundreds of businesses just like yours.
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