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A Guide to PEOs and Employee Leasing

PEO Services
Credit: emerge/Shutterstock

Professional employer organizations (PEOs) are valuable because they take the frustrating corporate tasks out of your hands so you can focus on running your business. Your ability to wear multiple hats – part of what made your business so successful – can become counterproductive as your business grows, draining you of the valuable time and resources you need to keep your operation going.

PEOs specialize in services like human resources management, payroll processing, state and federal tax compliance, and benefits administration. These tasks are all crucial for your employees – they need to be paid, receive benefits and be part of a productive office culture. But many of these tasks can feel like full-time jobs in and of themselves. PEOs provide a unique co-employment model that grants small businesses access to Fortune 500-level benefits, standardized HR policies and practices, risk management support, and workers' compensation coverage, plus an extensive library of training resources to educate employees and partners on an array of topics.

More than 150,000 small businesses use PEOs to access benefits and corporate HR structures. The industry has grown considerably in the past few decades, with more than 900 PEOs now in the U.S. alone. The National Association of Professional Employer Organizations (NAPEO) found that 43 percent of the market is represented by only five companies. This presents an interesting choice for the small business owner: You can partner with a major company, with all the backing and top-of-the-line resources that come with their size, or work with a smaller company and get more personalized attention.

A PEO differs from HR outsourcing companies or administrative service organizations because of the co-employment model. This model allows a PEO to "own" hundreds of thousands of employees across thousands of businesses in the U.S., driving down health insurance costs and making HR standardization an easy process. Whether a PEO is right for your business depends on your various needs. Our buying guide will help you determine whether a PEO is right for you and give you some good questions and concepts to keep in mind throughout your search.

Before diving into PEOs and deciding what's best for your business, consider reviewing some reputable PEOs in your state on the NAPEO website. This site provides resources for small business owners looking to learn more about PEOs. It also provides a PEO finder, so you can search different companies, verify their credentials and compile a shortlist of companies you're interested in contacting.

Editor's note: Looking for the right PEO service for your business? Fill out the below questionnaire to be connected with vendors that can help.

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A PEO provides small and midsize businesses with a variety of human resources services. Here's a quick list of the types of services a PEO provides:

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

Small businesses have access to either all these services or a selection of services based on their needs. PEO service structure varies by company, and there are several different cost structures and plan options. Generally, PEOs charge a flat rate per employee or a percentage of your total payroll to fund their services. This is, of course, in addition to benefits administration costs.

One other general thing to keep in mind about PEOs is the structure of their organization. Look for a PEO that provides a dedicated team of experts to handle your HR, payroll, benefits and risk management needs. This guarantees that you'll get one-on-one support when you need it, and that you can work with the company to ensure you're getting the most out of your service.

While the PEO model is a unique option for small businesses looking for services generally only afforded to larger companies, it's not without its pitfalls. If you educate yourself on common PEO topics, you should be able to find the right organization with minimal cons for your business.

  1. Fewer administrative tasks: If you partner with a PEO, all the humdrum corporate tasks of your business will be out of your hands. This gives you more time to focus on the day-to-day operations of your business.
     
  2. Better benefits: The PEO model provides small businesses the opportunity to enroll in benefits that are usually only available to large corporations. Your employees will often have access to health plans at lower costs compared to dealing directly with insurance companies. This means better healthcare, retirement and workers' compensation coverage for your business and its employees.
     
  3. Legal compliance: PEOs have trained professionals whose job is ensuring your business complies with state and federal regulations. This includes tax structures, HR law changes, worker safety compliance and other risk compliance factors.
     
  4. Talent acquisition: With better benefits and stronger HR policies, you should be able to attract top talent in your field. If you need help hiring, onboarding or even terminating an employee, PEO services can help. They also provide other resources for posting job openings online and managing the interview process.
     
  5. Legal protections: Most PEOs provide civil defense and employment liability insurance in case a former employee sues the company for discrimination or wrongful termination. When you sign up with a PEO, you often partner with a large company that can provide resources in a legal battle.
  1. Surrendering responsibilities: If you're a small business owner who likes to have your hands on every part of your company, partnering with a PEO may be a tough adjustment. PEOs are organized to lift some of the weight of your business off your shoulders, so be aware of where you will and will not be needed once you bring a PEO on board.
     
  2. Health insurance changes: While you'll have access to better health benefits, you and your small business are at the mercy of the PEO's choices. Depending on what state you operate in, your insurance provider could change throughout your contract with a PEO. The companies will always be on the lookout for the best deals.
     
  3. Impersonal: The hope is that the PEO you use treats your company and employees as if they were its own. While this is great in theory, many PEOs are still very large companies that serve thousands of small businesses. It's possible that your business and workers could be lost in the shuffle at some point. As you look for a PEO, get a sense for the company's commitment level and how present it will be in providing you with services. Remember, you can usually cancel your services if you provide the proper notice.
     
  4. Setup and transition: When you bring in a PEO, some of your company operations are going to change. It could take time for you and your employees to adjust to the new methods and processes.

There's a lot of PEOs out there. If you think your business needs a PEO service, get ready to do some homework. It's important to establish your own needs as a business first so you have an idea of what you want once you start talking to different companies.

Consider some big players, but look regionally as well – just because a PEO isn't a national organization doesn't mean it can't provide you with the services you need. A good place to start is the NAPEO website, where you can search PEOs by state and view their accreditation.

If you've already done so and are considering several companies, here are a few questions and ideas to keep in mind as you mount your search.

  • Is it an industry-accredited PEO? There are two main types of accreditation that prove the PEO is in good standing financially and has the resources to offer you good service: IRS certification and Employer Services Assurance Corporation (ESAC) accreditation.
  • As your business grows, will the PEO service be able to grow with you? What kinds of services can you add on as you grow?
  • What is the contract structure and cancellation policy? Does it require a long-term contract or let you cancel anytime?
  • Does the PEO have a team that's trained to know federal, state and local labor laws?
  • What kind of user access does the PEO offer? Is there an online payroll portal or mobile app?
  • What does the overall cost structure look like? Does it charge per employee or take a percentage of your total payroll?
  • How can the PEO tailor services to fit your business's specific needs?
  • What kind of customer service does it offer? Will you have personal access to a team of skilled professionals? Is there an IT support line you can call in case you have technical problems after hours?
  • What support channels does it offer? Some companies offer live chat and FAQs pages in addition to email and phone support. Which communication method would your business prefer?
  • Does the PEO have positive referrals? Combing through online reviews and talking with other business owners can help you understand if the PEO practices what its sales team preaches.

As you consider all your options, do your best to get through fluffy sales information and into the facts of each service. If an organization is accredited by the ESAC and IRS and has good customer reviews, that usually means it's a good place to start.

Still not clear on what PEOs do? Here are some frequently asked questions about the processes and operations of a PEO.

Q: Are PEOs typically used by small businesses?

A: Yes, PEO services are geared toward smaller organizations that don't have dedicated human resources staff. The average NAPEO member company has 19 employees. A wide variety of business types use PEO services. NAPEO reports that businesses ranging from small manufacturers to high-tech companies partner with PEOs. Many different professions – including doctors, retailers, mechanics, engineers and plumbers – also use PEO services.

Q: What is the difference between using a PEO service and simply outsourcing your HR services?

A: The biggest difference is the co-employment model. When you outsource human resources services, there is no co-employment arrangement. So, although you are hiring a service to handle some or all your HR needs, you are still responsible and liable for all of the outsourcing company's work. There are inherent advantages and disadvantages to the co-employment model. One thing to keep in mind is that, despite the term "co-employment," you're not losing control of your employees; they are just reorganized under the umbrella of the PEO company for legal purposes.

Q: How does the co-employment arrangement work?

A: Co-employment, also referred to as employee leasing, allows small businesses to maintain the day-to-day control of employees. However, the PEO becomes the employer of record for tax purposes and is responsible for all the HR-related tasks, such as paying the employees and providing the benefits. You are still in charge of your employees in terms of wages, hours and management. The PEO assumes responsibility over the benefits and compliance issues.

Q: What type of liability does the PEO provider incur on behalf of its small business customers?

A: PEO services take on all the liability of payroll and taxes. In addition, they share in a business's employment-related risk. For example, employer practices liability insurance is frequently part of PEO services.

Q: Do you lose control of your business by using PEO services?

A: No. Even though you will be operating as a partner with your PEO provider, you are still in charge of your business and how it is run. Your employees are still yours to direct. The PEO is responsible for your employees from a benefits standpoint.

Q: What does it mean if a PEO is accredited?

A: The Employer Services Assurance Corporation (ESAC) is an independent nonprofit and the official accrediting agency of the PEO industry. Its board of directors includes PEO industry attorneys, CPAs and independent directors representing more than 100 years of combined PEO industry regulatory experience.

The accreditation process verifies a PEO's ongoing financial solvency and compliance with government regulations and industry standards. Accreditation demonstrates a PEO's financial stability, ethical business conduct, and adherence to operational standards and regulations.

You can see which PEOs have earned accreditation on the ESAC website. The IRS also certifies and accredits PEOs that are in good financial standing.

Q: Do you have any options for the health insurance plans you offer to employees? Or does a PEO offer only one plan?

A: The majority of PEOs have a variety of plans that their customers can offer employees, including PPO and high-deductible options. However, your options will be limited depending on what state you are in. PEOs typically use a few health insurance providers and require all customers enrolled in the healthcare program to use one of their partners.

Those are the basics of searching for and analyzing a PEO for your business. If you're interested in learning more about specific organizations, which ones are right for various types of business, and what services specific PEOs can offer your business, check out our best picks to determine if a PEO is right for you.

Ready to choose a PEO solution? Here's a breakdown of our full coverage:

Editor's note: Looking for the right PEO service for your business? Fill out the below questionnaire to be connected with vendors that can help.

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Matt D'Angelo

Matt D'Angelo is a Staff Writer based in New York City. After graduating from James Madison University with a degree in Journalism, Matt gained experience as a copy editor and writer for newspapers and various online publications. Matt joined the team in 2017 and covers technology for Business.com and Business News Daily. Follow him on Twitter or email him.