What Is a Professional Employer Organization (PEO)? A Definitive Guide

Sep 11, 2017
| Michael Altiero
What Is a professional employer organization (PEO)

Over the last three decades, the HR industry has undergone many significant changes. From landmark legal and compliance decisions to shifting expectations of today’s workforce, human resources departments have had to adapt to the changing times. For small and medium-sized businesses (SMBs), these changes have completely transformed how they approach HR. This has led to the increase in HR outsourcing and the rise of professional employer organizations.

You may be thinking, what is a professional employer organization? A Professional Employer Organization, or PEO, is a firm that allows small and medium-sized companies to outsource most of their HR management responsibilities. PEOs deliver cost-effective, outsourced services for HR, payroll, benefits, and risk management. Many PEOs also offer expanded HR services like time and attendance, recruiting, employee training, and performance management.

When SMBs partner with a professional employer organization, a co-employment relationship is established. When engaged, a PEO assumes certain employer rights, responsibilities, and risk, while employers retain control over their business operations, hiring and firing, and staff advancement. It’s this unique relationship that sets PEOs apart from regular HR outsourcing companies.

This guide will go through everything you need to know about PEOs including: who PEO clients are, why SMBs partner with PEOs, PEO services, how to identify a PEO partner, and more. This post will also go into the relationship professional employer organizations have with clients and benefit brokers. After reading this guide, you’ll have a much better understanding of PEOs!
 

The Abbreviated History of the PEO Industry

Believe it or not, the professional employer organization industry is fairly new, having only developed within the last 20 to 30 years. Starting after the early 1980s, the number of laws and regulations surrounding employee and labor issues more than doubled. For SMBs and their owners, this caused a major disruption in how they approached human resources. What was once rather simple became increasingly more complex and required an in-depth knowledge of HR.

As the laws and regulations within the HR industry grew in number, SMBs began to seek alternatives to address their HR needs. This led to an increase in outsourcing of HR services, and the birth of PEOs. Professional employer organizations offered their clients the HR expertise that was needed, along with the compliance knowledge required to effectively manage the ever-changing human resources environment.

Today, there are between 780 and 980 PEOs operating in the United States. In addition, in each of the last 30 years, PEOs have added around 100,000 worksite employees and 6,000 net new clients. The industry has grown so much that regulations have been introduced that are specific to PEOs (more on those later). Now that we’ve covered a brief history of PEOs, let’s dive into the profile of a PEO client.
 

Who Are PEO Clients?

Not all companies are good fits to partner with a professional employer organization. We’ve already mentioned how the PEO industry was born from the needs of small and mid-sized businesses, and these companies almost exclusively make up the demographics of PEO clients.

However, even for SMBs, there are certain traits that a company should have to maximize the benefit of a PEO partnership. These include:
 
  • Number of Employees. Usually, SMBs with between 10 and 125 full-time employees are great fits for a PEO. Those numbers can vary for each professional employer organization.
  • Growth-Oriented Mindset. PEOs enable business owners and leaders to focus on growing their business instead of HR administration tasks. Small and mid-sized businesses who want to grow are a perfect PEO client.
  • Want to Provide Great Benefits. One benefit that professional employer organizations offer their clients is access to Fortune 500-level benefits. These include healthcare, vision, dental, 401(k) plans, and much more.
  • Operate within Specific Industries. The services offered by PEOs may be better fits for various industries. These can include Professional Services, Financial Services, Technology Firms, and Marketing Firms.

For SMB leaders, knowing if your business has the traits best suited for PEOs is the first step in the decision-making process. If so, partnering with a professional employer organization could enable your company to grow significantly.
 

Why Do Businesses Partner With a PEO?

Now that we know which companies are best suited for a PEO partnership, we can answer this important question: Why would a business want to partner with a PEO in the first place? We have touched on the fact that the HR industry is far more regulated and complex than it was even a few years ago. This is certainly one important reason.

However, professional employer organizations provide SMBs with a few major benefits that directly impact the success of the business. For company leaders, these are crucial to understand just how beneficial a PEO can be:
 
  • A PEO Can Help Small Businesses Grow % to 9% Faster. By partnering with a PEO, CEOs and business leaders can outsource their HR needs so that the focus can be on high-value activities that build a company. When leaders don’t have to worry about day-to-day HR work, and instead put full attention into the mission of the company, it increases the likelihood of business growth.
  • Companies Who Use a PEO Save 35% on HR Administration Costs. One of the bigger expenses companies have are their HR administration costs. Working with a PEO not only provides an organization with competitive benefits, but they can do it at a lower cost.
  • Partnering with a PEO Lowers Employee Turnover by 10% to 14%. Working with a PEO allows smaller businesses to offer their employees the same benefits as much larger companies. This helps lower turnover and improve employee happiness and engagement.
  • Small and Midsize Companies Using a PEO Are 50% Less Likely to Go Out of Business. Working with a PEO can help solve some of the challenges SMBs face. Faster growth, lower employee turnover and spending less on HR administration costs set small businesses up for greater success.
 
Benefits from using a PEO
 

Services Offered by Professional Employer Organizations

Another aspect of PEOs that seems to confuse potential clients are the services that are offered. While the exact services offered varies from PEO to PEO, generally they include three key solutions: HR services, benefit services, and risk and compliance services. Within each of these services, there are various solutions available to clients. Let’s take a look:

1) HR Services. HR is more than just benefits; it covers a range of tasks from running payroll to developing the culture your firm needs to thrive. HR services can include:
 
  • HR Management
  • Payroll and Tax Solutions
  • Performance Management
  • Recruiting Services
  • Training and Development
  • Scheduling
  • Time and Attendance

2) Employee Benefit Services. Small and midsize businesses need benefit plans that are cost-effective and flexible enough to help with recruiting and retaining top talent. Partnering with a PEO allows clients to offer the same quality benefits as large companies. These benefits include:
 
  • Healthcare benefits
  • Life, Disability, Dental, and Vision Plans
  • 401(k) and Other Savings Plans
  • Voluntary Benefits (commuter benefit plans, supplemental insurance, legal benefits, etc.)
  • Complimentary Benefits (Employee Assistance Programs, entertainment and shopping discounts, etc.)

3) Risk and Compliance Services. You can never eliminate the risks of running a business, but you can always take steps to reduce your risk exposure. PEOs can work with small and medium-sized businesses to identify potential risks and recommend processes and procedures to help mitigate exposures to the business. Some of these risk and compliance services include:
 
  • Employee Lawsuits
  • Workers’ Compensation Management
  • Workplace Safety Improvements
  • Affordable Care Act (ACA) Compliance
  • Leave of Absence Management
  • I-9 Verification
  • Occupational Safety and Health Administration (OSHA) Support
  • Employee Policies and Notifications

These are just some of the services offered by PEOs. Each PEO may offer its own, unique solutions that set it apart from others (this is especially true when it comes to technology, which we will get to shortly). For SMBs, these services can be extremely valuable for growing the business, employee happiness and engagement, and recruiting efforts.

Another important aspect of HR services is the growing trend of personalization and customization of benefits. Today’s employees want and expect personalized benefit options that better suit their individual situations. For small and midsized businesses, working with a PEO can provide this important benefit, too.
 

What to Look for in a PEO Partner

As we have already mentioned, there are a lot of PEOs in the market today. For benefit brokers and small business leaders thinking about a partnership, there are plenty of options to choose from. The decision to work with a PEO is an important one, and partnering with the right organization can lead to business success. With that being said, what are some important characteristics to look for in a PEO partner?

1) ESAC Accreditation
In 1995, the Employer Services Assurance Corporation (ESAC) was formed to become the official accrediting agency of the professional employer organization industry. PEOs that are accredited by ESAC meet the gold standards for industry best practices and financial reliability. Currently, only 5% of all PEOs have earned this accreditation.

Most PEOs will have their ESAC accreditation status listed on their website. In addition, both ESAC and NAPEO have this information on their websites.

2) CPEO Status
On June 1, 2017, the Internal Revenue Service (IRS) designated a select few PEOs as Certified Professional Employer Organizations (CPEO), the first group to ever be certified. This established another benchmark for PEOs to reach, and another assurance to companies who partner with PEOs that they are working with a best-in-class organization.

To become certified, a PEO must apply to the IRS and provide extensive background information. In total, less than 3% of U.S. PEOs have been designated as CPEOs.* For a list of CPEOs, click here.

3) National or Regional/Local PEOs
In addition to accreditation and compliance, the type of PEO is extremely important. Most professional employer organizations will fall into one of two categories: national or regional. National PEOs generally operate throughout the country, and have clients in various states and regions. Local PEOs, on the other hand, may only have clients in one state or area of the U.S. Depending on the type of knowledge and service needed, understanding whether a PEO is local or national is something to keep in mind.

4) Selling Model
There are three different ways (generally) that a PEO will sell their services – direct to the consumer, exclusively through benefit brokers, or a combination of direct and through benefit brokers.

Knowing how a PEO sells its service is crucial to understanding the buying process. From a client perspective, there isn’t a “best” selling approach. While working with your broker may sound cumbersome, in most cases they will be able to help you make the most informed and best decision possible for your business. In addition, working with a professional employer organization through a benefits broker allows an SMB to retain an established relationship with a trusted resource while gaining the many benefits of a PEO.

This information is equally important for benefit brokers. PEOs who sell exclusively through insurance benefit brokers present an opportunity for partnerships that can be mutually beneficial.

5) Technology That is Offered
Most PEOs will offer technology to help their clients with the various services they provide. Time and attendance, benefits enrollment, and training and development are just a few examples where technology offerings can be differentiators.

From an employee standpoint, having easy-to-use tech will increase engagement and adoption of these tools. For business leaders, understanding the technology that is offered by PEOs can help you make the best decision possible.
 

How Well Do You Know PEO?

Working with a PEO can provide real value to benefit brokers and their clients. A PEO partnership can help brokers:
 
  • Win new business
  • Protect your book
  • Compete more effectively with other brokers and PEOs

A partnership between an insurance benefit broker and a PEO can be valuable for both sides. It presents another option for benefit brokers who are looking to grow and protect their business.

For clients, PEOs can help small businesses achieve the growth and success that leaders strive for. The stats from NAPEO (listed above) show just how valuable a PEO can be for SMBs. Having a better understanding of PEOs can help business leaders determine whether a partnership is an option.

While a PEO may not be the best solution for every SMB, knowing what they are and how they can help is valuable for small businesses leaders. Who knows, maybe a PEO is exactly what your business needs to grow and achieve even greater success!

Want to learn more about PEOs? Check out our eBook, How Well Do You Know PEO? This eBook provides an overview of the PEO industry as well as helpful information for brokers and employers!
 
How well do you know PEO

* The IRS does not endorse any particular CPEO. For more information on CPEOs go to www.IRS.gov.
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