April 2, 2021

What Is a PEO? Pros and Cons of Professional Employer Organizations

It sometimes happens that companies aren’t able to fully meet their human resources needs. For this reason, a company can hire a Professional Employer Organization (PEO). If you hire a Professional Employer Organization, your employees don’t fall under your tax ID number: they become employees of the PEO.

The Professional Employer Organization manages a range of HR processes and is paid by the company for its services. In this article, we’ll walk you through everything you might want to know about PEO: what is PEO, what kind of services it can offer, and what are the pros and cons of hiring a PEO. Let’s get down to business.

What Is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) is a staff leasing company that acts on behalf of a client company to provide employee management and administrative solutions. PEOs offer a wide range of services to their client partners. The most popular services that a PEO provides are:

  1. payroll processing
  2. payroll taxes and compliance with local taxation laws
  3. employee benefits
  4. workers compensation insurance
  5. health insurance administration
  6. HR administration
  7. training and development
  8. 401k and retirement plan administration

Using a PEO allows the client company to share the employee-related functions and liabilities with a company that specializes in those responsibilities. A PEO also allows a company to reduce the costs related to hiring internationals. Often times, a PEO will employ a staff of individuals with extensive experience in human resources, employment related laws, payroll tax, and accounting.

A PEO that provides solutions for international clients is called a Global PEO. Global PEOs offer the same basic service of a standard PEO but they also include visa and immigration services, employee recruitment, and services to establish a legal entity.

Services Offered by Professional Employer Organizations

Professional Employer Organizations are managed and staffed by professionals experienced in human resources, taxation, employee related laws, and processes related to payroll administration. Let’s take a closer look at some of the most popular services that PEOs typically offer.

Human Resources Associate

The Human Resources Associate provides general support to the company in several areas. The associate is generally the first line of contact when a potential candidate applies for a job opening at the company. Associates also verify a potential job candidates references and educational background.

In addition, human resources records management is generally performed by the Human Resources Associate. The associate is responsible for verifying completion of employment contracts and necessary documents related to onboarding a new employee. After the new employee is onboarded, the Human Resources Associate oversees the employee's orientation and benefits explanation.

Internal human resources related inquiries are coordinated by the Human Resources Associate and responded too accordingly. It’s the responsibility of the Human Resources Associate to assist in maintaining the confidentiality of employee records. The Human Resource Associate also assists with the dissemination of training materials.

Employee Benefits Administration

The Employee Benefits Administration service provides support for the daily health and welfare of the employee. Employee benefits include retirement plans (401k), health insurance, workers compensation, paid sick leave, and other incidental benefits an employer might offer. Benefits Administration also coordinates the annual benefit enrollment program that many companies offer.

This service can also research and propose beneficial changes to an employee benefits program. As Employee Benefits Administration teams are experts in their field, they can often locate or negotiate better rates for employee insurance coverage and workers compensation rates.

Not to mention, the Employee Benefits Administration service closely partners with the Human Resources Associate to prepare training materials related to changes in the annual benefits enrollment process. Finally, the Employee Benefits Administration service offers strategic planning services related to financial health of the company's benefit plan and programs.

Payroll Administration

The Payroll Administration service offers all manner of services related to the compensation of a company's employees. It’s important that a company be familiar with all payroll and taxation laws in every market that they operate within. The Payroll Administration service provides expertise to the client company in their established markets. The service provides paying employees, withholding the necessary taxes and subsequent filing of those taxes with the local and national authorities.

In addition, the service assists in the proper calculation of performance bonus taxation. Occasionally, legal garnishments against employee wages are necessary. The Payroll Administration service carries out the garnishment orders and remits the funds to the proper party. Where employee retirement plans are offered, the service assumes responsibility for withholding employee contributions to the plan and forwards the funds to the established plan administrator. Lastly, the Payroll Administration service provides computer systems for payroll processing related tasks in order to ensure accuracy of the processes.

Benefits of Hiring a PEO

A PEO tends to have a much lower employee turnover rate when compared to businesses that operate without the assistance of a PEO. In general, that turnover rate is 10%-14% lower according to a national association in the U.S. that tracks and monitors PEO data. It is also found that businesses who work cooperatively with a PEO see growth rates that are typically 7%-9% higher than the other business in their peer group.In fact, the benefits of using PEOs are numerous. Let’s take a closer look at the major ones.

Reduction in Operating Costs

PEOs can provide streamlined payroll and compliance services which alleviates the need for the client company to provide qualified staff to perform those functions. A global PEO can ensure that these services are optimal for the local market. Not to mention, a global PEO can ensure that a company complies with local laws and regulations thereby avoiding potential penalties that can occur when operating in an unfamiliar market.

Saving Time

Another benefit to using a PEO is the reduction in time taken to enter a new market. By leveraging the expertise that a PEO provides, a company can save time as the PEOs provided staffing solution will already have expertise in the local market.

Eliminating Risk of Compliance Violations

Payroll compliance is another very important benefit that PEOs provide. This is especially important for an employer that operates across state and international borders. Different regions have their own approach to payroll processing. It’s important that management understand the impact to their business if they operate out of compliance with local payroll processing laws. The monetary penalties for compliance violations can be severe, so it’s important that this be on the PEO services list of offerings. In addition to employees payroll compliance, general regulatory compliance is also important. General compliance services offered by PEOs can assist an employer in hiring employees in a manner that’s compliant with local laws. This generally falls under the category of HR outsourcing which can include a fully established, local HR department and payroll HR. PEOs can assist employer management in determining the appropriate level of compensation and employee benefits in order to avoid any potential compliance violations.

Disadvantages of Hiring a PEO

While the benefits of hiring Professional Employer Organizations are numerous, it’s important that potential client companies understand the downside to outsourcing employee benefits and human resource services.

You Lose Control Over HR Processes

It goes without saying that providing employees with quality human resources services is important for any employer. But, when companies leverage PEOs to handle these tasks they essentially give up direct control of the processes.

You Expose Yourself to Impact from an Outside Organization 

Another concern with hiring PEOs is that a company exposes themselves to influence from an outside company. These external influences can be disruptive and potentially damaging to a company's culture. 

You Can Encounter Your Employees’ Resistance

Some employees may be resistant to the concept of outsourcing human resource services. It’s generally considered desirable for employees to have personal contact with their HR department, especially when discussing confidential matters relating to compliance training, employee benefits, workers compensation, or insurance. Additionally, outsourcing the human resource functions can diminish the value of the HR department as a whole. Employees may not feel the value or necessity of having an in-house HR department if it is viewed as a third party resource. 

Security Issues

In the United States, human resource services are highly regulated. This includes protection of employees personal information and employment records. An employer can increase their risk exposure when contracting a PEO service because they have no control over the integrity and security of a PEOs workplace or HRIS systems. The financial penalties for a breach of security related to employees confidential information can be severe for an employer.

Does PEO Suit My Business?

All in all, Professional Employer Organizations can provide benefits to a wide variety of companies. For startup companies that need to quickly grow their employee base, PEOs can provide agile, scaled human resource solutions all while controlling the costs associated with rapid expansion.

In addition, Non-Governmental Organizations (NGO) that operate in several countries can benefit greatly from the services that PEOs provide. When the need arises for an NGO to hire staff in a foreign country, a PEO can ensure that the hiring process complies with the local regulations and laws.

If you are a medium or large size company, PEOs can deliver recruiting services and help you maintain legal compliance, all while keeping your employer onboarding costs under control. PEOs can provide a range of services at a much lower cost than if your company took the time to set up a local office in each country where you wished to expand your business.

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