The Everyman’s Guide to PEOs
As a small or mid-sized business owner, it can be difficult to balance your HR obligations with the responsibilities of growing your company. Staying on top of payroll processing, ensuring tax compliance, and finding ways to provide an attractive benefits package can be challenging. Many who find themselves in this situation choose co-employment with a Professional Employer Organization (PEO) as a way to tackle these issues head on and remain focused on business operations.
When partnering with a PEO, you (the business owner) act as the onsite employer, managing daily operations, while the PEO acts as a fractional HR team.
As the administrative employer (or employer of record) the PEO will process your payroll, workers’ compensation, and all employment taxes under their Federal and State Employer Identification Numbers. This means they take on the responsibility of ensuring your company stays tax compliant in addition to getting your workers paid on time. They can also provide onboarding assistance, healthcare and retirement packages, and human capital management (HCM). With a co-employer handling your admin, this creates more time for you to focus on improving core company operations and growing your business.
A good PEO will not disrupt or dictate your company’s day-to-day activities. They will not make decisions about your business independently of you, they will have no say in sales or distribution, and they will not regulate schedules or working hours. These responsibilities will still be yours to handle as the onsite employer.
Companies that use a PEO have been shown to have more growth, lower turnover, and more resilience than those that do not. There are three primary reasons for this:
Improved work-life balance. A PEO will handle the bulk of your company’s overhead (the business expenditures not directly related to creating products or services), which leads to more opportunities to increase productivity without increasing hours.
Better company culture. PEOs typically have a team of HR experts on hand ready to encourage company cohesion through performance reviews, employee handbook updates, and soft skills job training.
More (and better) benefits. A PEO’s business model allows them to offer competitive healthcare and retirement benefits that would otherwise be too expensive for smaller businesses to easily afford – making your company a more attractive option to potential employees.
PEOs benefit many types of small businesses, including (but not limited to):
Health services
Wholesale
Insurance
Manufacturing
Computer services and technology
Plumbing, HVAC, and electrical
MRBs
Legal services
Accounting
Nonprofits
Churches and religious organizations
Some PEOs specialize in a particular field while others have a more general reach. When researching the best PEO for your company, look for ones with clients that work in the same or similar industries as you. When inquiring directly, a reputable co-employer will provide you with references from their current roster that you follow up with independently.
Of course, partnering with a PEO is a financial investment. There are the two typical models PEOs use when charging for their services.
A flat rate – per employee per month (PEPM). Exact prices vary, but they can range to up to $250 per person. Some PEOs that offer industry specific or specialized services and can charge more. This payment model works best for companies that have stable employee numbers.
A percentage of gross payroll expenses. In this model, the PEO will charge anywhere between 2% and 12% of total payroll. This system is most effective for companies that routinely utilize seasonal employees.
Some PEOs require a minimum headcount for enrollment, some do not.
It is important to note that, while all PEOs automatically offer payroll and tax services, sometimes perks like health insurance, dental plans, and specialized training cost additional fees to obtain. If your company already has well established benefits and HR programs then maybe a simplified plan is right for you. Maybe the opposite is true. When looking for the right co-employer, make sure you take this into consideration.
A PEO might also charge you for things like:
Setup and program installation
Access to HCM technologies
Industry specific HR services
Early termination penalties
Reputable PEOs will give you unbundled, itemized example invoices upon request or when providing an initial quote.
Furthermore, when interviewing a co-employer, always ask for their State Unemployment Insurance (SUI) certification. Part of what makes PEOs so appealing is that they often have lower experience ratings (which dictates how much your company is legally required to pay the government to cover SUI; the higher the rating, the more your pay and visversa). Some shadier PEOs will take advantage of this and will attempt to charge you your old tax rate and then pocket the difference. The same goes for health insurance, always request proof of their carrier rate to compare to your own.
Agreeing to co-employment is a big step, one that can either make or break your company. Always carefully read your entire contract and seek out clarification from your potential co-employer or a third party legal source if you encounter anything you are unsure of. A reputable PEO will do everything they can to make sure you understand all their terms and conditions before signing.
The onboarding process with a PEO takes place in two stages and can last anywhere from three to ten weeks (depending on proactivity and the complexity of your business).
In the first stage (lasting one to two weeks), you will submit an employee census, then you and your PEO will set up, sign, and formalize contacts, benefits, and service packages.
In the second stage (lasting an additional two to eight weeks), your PEO will set up and configure their payroll software, upload all the data you provided, check and correct tax and classification information as needed, and test their system to make sure it is running smoothly. Once this is done they will give your employees their login information for their access to their personal profile and HR benefits portal where they will have to sign new paperwork and enroll in benefits programs.
Once this is done the system will go live and the PEO will begin processing your payroll and filing taxes on behalf of your company. During the first few weeks there may be hiccups in the new system, but a good PEO will have advisors that regularly check in and correct any issues that may arise.
Once you’ve settled into your new co-employment relationship, you can focus on growing your business and improving your workplace while your PEO completes the bulk of your administrative tasks.
PEOs v. CPEOS
There are approximately 500 PEOs recognized by the IRS as official businesses that can legally operate in the United States. However, there is a voluntary certification program a PEO can submit to in order to become a Certified Professional Employer Organization (CPEO).
CPEOs post a performance bond every year, guaranteeing payment of federal unemployment tax. Their status also eliminates the potential of FICA (Federal Insurance Contributions Act) overpayment (which can be helpful if you run a high compensation company and join a PEO in the middle of the year). Additionally, they are responsible for periodically renewing the certifications that prove they consistently meet fiduciary standards. In the most basic terms: this certification provides assurance, at the federal level, that a PEO demonstrates financial stability and legal responsibility. The official CPEO list can be found on the IRS website.
It is important to note, however, of the hundreds of PEOs operating in the US, only 50 are certified. This is because maintaining CPEO status is costly. The performance bonds mentioned above range from $50k to 2 percent of annual payroll (whichever is greater). This inherently makes CPEOs a more costly option and, therefore, less accessible to smaller businesses than their non-certified counterparts.
Just because a company is certified does not necessarily mean it is the right choice for your business. Nor does it mean that the approximately 450 PEOs that do not appear on the certified list are automatically untrustworthy. There are other ways to vet potential co-employers. For example, some PEOs have Employer Services Assurance Corporation recognition (ASAC), or Society for Human Resource Management (SHRM) certifications. There are numerous ways to ensure a PEO will handle your company’s back office responsibly. Always be sure to exercise your due diligence when determining which one is right for you.
