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A Guide to PEOs and Employee Leasing

PEO Services
Credit: emerge/Shutterstock

As a small business owner, it's easy to end up drowning in administrative tasks. Part of what made your small business so successful – your ability to wear multiple hats – can end up becoming counterproductive, draining you of the valuable time and resources you need to focus on keeping your operation going.

From payroll to tax compliance, if you're starting a business or are at the helm of a growing organization, there are certain things that you just won't have time to take care of. Professional employer organizations (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 gain access to benefits and corporate HR structures. It's an industry that's grown considerably in the past few decades and, in the U.S. alone, more than 800 PEOs serve small businesses everywhere.

A PEO differs from HR outsourcing companies or administrative services 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 United States, driving down health insurance costs and making HR standardization an easy process. Whether a PEO is right for your business depends largely on your 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, the services they offer and what's best for your business, consider reviewing some reputable PEOs in your state on the National Association of Professional Employer Organizations' 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 information on PEOs? Use the questionnaire below, and our vendor partners will contact you to provide you with the information you need:

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

  1. HR management
  2. Benefits administration
  3. Insurance plans
  4. Section 125 plans
  5. Payroll administration and processing
  6. State unemployment insurance
  7. 401(k) retirement plans
  8. COBRA
  9. Workers' compensation
  10. Safety programs (OSHA compliance)
  11. Training and development
  12. Recruiting and outplacement support
  13. Government compliance
  14. Tax compliance

Small businesses have access to either all of these services or a selection of services based on the business's needs. PEO service structure varies with each company, and there are several different types of cost structures and plan options you can choose from. Generally, PEOs charge businesses a flat rate per employee or take a percentage of total payroll to fund their services. This is, of course, in addition to costs provided by you and your employees for benefits administration.

One other general thing to keep in mind about PEOs is the structure of their organization. As you search for a PEO, choose one that provides an entire team of experts to handle your HR, payroll, benefits and risk needs. This guarantees that you'll get one-on-one support when you need it, and 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 by larger companies, it doesn't come 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, then all the hum-drum corporate tasks related to your business will be out of your hands. The idea is that this provides you with more time to focus on the day-to-day operations of your business.
  2. Better benefits: The PEO model provides small businesses with the opportunity to enroll in benefits that are only available to large corporations. This means that 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 with hiring someone, onboarding an employee 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 partner with a large company that can help provide resources in a legal battle.
  1. Surrendering responsibilities: If you're a small business owner who likes to have his or her hands in every part of the 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. Healthcare 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're 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, PEOs are still very large companies that serve thousands of small businesses. It's possible that your business and its workers could be lost in the shuffle at some point. As you look for a PEO, get a sense for their commitment level and gauge how present they will be in providing you with services. Remember, you can usually cancel your services if you provide the right notice.
  4. Setup and transition: When you bring in a PEO, some company operations are going to change. That means it could take time for you and your employees to adjust to new methods and processes.

There are 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 also 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 a host of companies, here are a few questions and ideas to keep in mind as you mount your search.

  • Is the PEO industry accredited? 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 ESAC accreditation.
  • As your business grows, will the PEO 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? Is a long-term contract required?
  • 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?
  • How can the PEO tailor services to fit your business's specific needs?
  • What kind of customer service do they 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 in an after-business-hours situation?
  • What kind of support do they offer? Some companies offer live chat and FAQ pages in addition to email and phone support. Would your business have a need for those support avenues?
  • 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 of your options, do your best to get through fluffy sales information and into the facts of each service. If an organization is industry 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 a dedicated human resources staff. The average NAPEO member company has 19 employees. There is also a wide variety of business types using PEO services. The NAPEO reports that businesses ranging from small manufacturers to high-tech companies use PEO services. In addition, an extensive number of professions – including doctors, retailers, mechanics, engineers and plumbers – 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 despite the term "co-employment," you're not losing control of your employees. Instead, 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 control of the employees from a wage, hours worked and management standpoint. The PEO would assume 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 as it relates to payroll and taxes. In addition, PEOs share in a business's employment-related risk. For example, coverage under employer practices liability insurance is frequently a part of the 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 that is the official accrediting agency of the PEO industry. A board of directors that includes PEO industry attorneys, CPAs and independent directors representing more than 100 years of combined PEO industry regulatory experience manages the ESAC.

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

You can see which PEOs have earned accreditation by visiting 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 offer a variety of plans that their customers can offer employees, including PPO and high-deductible options. However, your options will be limited to one or a few depending on what state you are in. Most PEOs typically use a few health insurance providers and require all customers enrolled in its healthcare program to use one of their partners.

Those are the basics when it comes to searching for and analyzing a PEO for your business. If you're interested in learning more about specific organizations, which ones are right for varying 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 information on PEOs? Use the questionnaire below, and our vendor partners will contact you to provide you with the information you need:

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Matt D'Angelo

Matt D'Angelo is a B2B Tech 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 Purch team in 2017 and covers technology for Business.com and Business News Daily. Follow him on Twitter or email him.