What is a PEO and How Does it Work? The Pros and Cons Explained

Apr 6, 2020 | Business Insurance

Proper Human resource management is very important in any business, be it big or small. From hiring to payroll, every company has a lot to gain from professional employee management. If you do not have the right skills, you might consider hiring a Professional Employer Organization (PEO). 

This leads us to the question, what is a PEO?

What Is a PEO?

A Professional Employer Organization (PEO) is a human resource solution that is outsourced from another company to provide HR solutions like recruitment, benefits, appraisals, payroll, workers compensation, compliance and more.

A PEO is a company that has staff who have the right experience in tax compliance, legal issues. HR, accounting, client services, business insurance and more. 

Partnering with a PEO will help you reduce the costs and time involved in recognition, benefits and payroll. You will not only save your time and money, but you will be able to expand your business even without your entity quickly.

PEO allows the employer to focus more on the day to day running of the business as it handles human resource management. 

The PEO operates under your company’s model, and this means you will still have full control of your employees. The employees will, however, appear on the employer organization’s books for compliance and tax purposes.

These companies help both small and medium-sized business to offer excellent benefits to their employees without burdening their in house HR resources. They will guide your company through all human resource-related challenges like compensations according to the law, hiring international employees, or terminating an employee.

How It Works

When you hire a PEO, they will put your employees on a PEO payroll. Your employees will continue to answer directly to you, but the PEO will handle everything about their benefits, payroll, and more.

PEOs provide a company with several different services. You can either choose to work with a company that gives you all the services or with one that helps you in building a plan that has features that are more specific to your business. 

PEOs do not operate on long term contracts, and you can cancel their services after giving 30 days’ notice. 

You must find a company that offers what your business needs. Though some of the services provided may vary from one PEO to another, here is a breakdown of what you can expect to get from a PEO.

  • HR management
  • Insurance plans
  • Training and development
  • Tax compliance
  • Safety programs (OSHA compliance)
  • Benefits administration
  • Government compliance
  • Workers’ compensation
  • Section 125 plans
  • Payroll administration and processing
  • 401(k) retirement plans
  • State unemployment insurance
  • Recruiting and outplacement support

When choosing the right PEO, especially when it comes to human resource management, you should ensure that they offer basic HR services like benefits, payroll, and compliance.

The Pros of PEO

There are a lot of advantages that your business will benefit from working with a PEO. From saving your time to sustainable growth, you will have an easier time running your business, and this will promote growth.

Here are some of the advantages of a PEO

No More HRM

When you partner with a PEO, you will also be saying goodbye to every aspect of human resource management. One of the main reasons why companies use such organizations is because they assume all HR related roles and gives business owners the chance to focus more on their business.

Your Company Will be Up to Date

There are regulatory bodies like OSHA that govern business operations. Every employer needs to comply with the set rules and regulations. A PEO will ensure your business stays up to date with any changes so that you can remain compliant.  

Competitive Benefits

Your employees are entitled to some benefits and insurance. A PEO knows how and where to get affordable benefits and insurance for your employees. 

They also know how to negotiate for the best deal. 

Liability Assurance

With a PEO, you will get access to licensed professionals like HR professionals and attorneys that can help you mitigate any employment-related risks. You do not have to hire any other experts once you partner with the right PEO.

The Cons of a PEO

While there are several benefits of working with a PEO, there is a downside to it too. Here are some of the disadvantages:

Lack of Transparency

These companies charge a percentage of your payroll, and this makes it hard for business owners to know how much they are paying. The invoices you receive includes all the services provided and the administration fees.

It can be almost impossible to know if the fee charged for service is reasonable. With a PEO, companies also find it difficult to gauge fair pricing for their specific businesses in relation to geography, size, and industry.

Health Plan Inflexibility

PEO selects a health insurance provider for your company. You will not get to weigh in on this. Your employees are limited to what the PEO chooses. This means if you wanted to select a specific plan or carrier, you would have to get an independent broker for your health insurance.

Lack of Modern Technology

PEOs have been around for a long time, and while this is a good thing, some of them still use old technology. The rise of technology has made it very easy to handle things like reports, payroll and more. 

A PEO who still uses the old methods will take weeks to update their records and give reports.

Find the Right PEO for Your Business

Before you consider hiring a Professional Employment Organization, you should first find out what is a PEO so that you can know exactly what to expect from it. With the right PEO, you will be able to manage your businesses’ demand for growth and your employees as well. 

If you are looking for an insurance solution for your business, go to our website and check out our business insurance solutions. Do not hesitate to contact us for more information.

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