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Professional Employer Organization: Everything You Need to Know

Matthew Speiser

Matthew is a staff writer at Fundera and the son of a small business owner. His work has appeared in Business Insider, the Fiscal Times, and the World Economic Forum, among others. He's passionate about helping entrepreneurs find ways to succeed.

PEOs provide services to over 175,000 small and mid-sized businesses, according to statistics from the National Association of Professional Employer Organizations (NAPEO). In addition, 15% of businesses in the United States that employ between 10 and 99 people use PEOs.

Let’s take a closer look at how professional employer organizations work, what they can do and how to go about selecting the best PEO for your small business’s human resources needs.

How Professional Employer Organizations Work

PEOs work with client companies to co-employ the company’s worksite employees. Under a co-employment arrangement, the client and the PEO agree to share certain employer responsibilities. Typically, a PEO will oversee HR tasks, such as:

  • Payroll: Including automated or one-off payments to full-time or part-time employees, as well as temps, vendors, and contractors.
  • Benefits: PEOs can offer medical, dental, and vision coverage to your employees at reasonable rates, and can also assist with benefits onboarding and claims. Some PEOs also provide life and disability insurance, 401(k) access, flexible spending accounts, pre-tax commuter benefits, gym membership discounts, employee assistance programs, and more.
  • Compliance: A PEO will help ensure you are compliant when it comes to payroll and employee tax forms. PEOs can also help with new hire reporting, workers’ compensation, employment practices liability insurance, unemployment insurance filings and maintaining compliant I-9 records.

As the business owner, you maintain full control of your business and its operations, but the PEO becomes the employer of record, meaning it is legally responsible for paying your employees and dealing with taxes, benefits, and insurance. The only time a PEO will impact your employees’ day-to-day workplace experience is if they need to contact them with inquiries related to one of these responsibilities.

professional employer organization

Professional Employer Organization Pros and Cons

There are benefits and drawbacks to working with a PEO, much of which depend on the type of business you run, your HR needs, and your personal management style. Find out the advantages and disadvantages of joining a professional employer organization, and decide what is best for you.

Pros of Using a Professional Employer Organization

There are many advantages to partnering with a PEO for your small business HR needs. According to NAPEO, businesses that use PEOs see a 10% lower employee turnover rate, as compared to the national average. This might be due to several factors, including:

Better Benefits

PEOs group co-employees from all their client companies together in order to secure benefits packages and rates typically reserved for large corporations. The PEO sponsors the plan and is responsible for all administrative tasks, such as negotiating with providers and providing legal notices.

Legal Protection

Because PEOs co-employ with their client companies, they can also share liability on employment-related legal issues, such as wrongful termination. For a small business owner this is a good thing, as most PEOs have specialists with a deep understanding of employment laws. PEOs can also be used as an advisor to help avoid legal trouble. However, PEOs are not a substitute for legal counsel.

No Need to Hire for HR

Because PEOs handle most of the responsibilities an in-house HR team would, client companies can delay recruiting and hiring for this position, saving them time and money. And when the time does come to make HR hires, a PEO can free up their time from administrative duties and allow them to focus on company culture and job satisfaction.

Focus on Running Your Business

By not having to worry about payroll, benefits, insurance, or legal claims, you get hours back in your day that you can use to grow your business.

Cons of Using a Professional Employer Organization

Depending on the type of business and needs of the owner, a PEO might not always be a good fit. Here are some of the most common reasons a professional employer organization relationship does not work out:

Less Independence

If you are the type of owner who likes to control every aspect of your business, a PEO might not be for you. Under a co-employment arrangement, the PEO selects the vendors that your business works with, such as health care and workers compensation carriers. This means you could end up with a provider your employees dislike, without having any input in the decision.

Some owners also feel they are the best person to oversee hiring, firing, training, and discipline, and don’t want to have to do this in conjunction with a PEO. If you employ family and friends, it may be uncomfortable to share their employment with a third-party organization. Also, some PEOs require that the owner themselves become an employee of the PEO.

PEOs Have Their Own Bottom Line

While a PEO’s job is to assist your business, PEOs are also their own companies with their own priorities. This means that if your company becomes too much of a liability for the PEO, they may charge you a higher rate for their services. If your business has a history of safety or employment issues, a PEO may be more reluctant to work with you. Professional employer organizations also have their own deadlines to meet, meaning they may require certain payments up front. This could have an impact on your cash flow.

Poor Culture Fit

The first few weeks after you contract with a PEO are vital for them to understand the culture and procedures of the business. However, if you already employ HR personnel, they may perceive the PEO as a threat to their power or job security and be less cooperative or supportive. As a business owner, it is important you set expectations for all parties involved when hiring a professional employer organization.

Stifle Growth

One of the best reasons for hiring a PEO is to free up time so you can focus on growing your business. But it is important to select a PEO that can support your needs as your business expands. As you hire more employees, you may want an HR system custom tailored to your businesses needs. Most PEOs use a system that can accommodate the needs of a majority of their client companies. It is important to find a PEO that can provide flexible solutions through multiple phases of a business. Of course, at a certain point it may make sense to abandon a PEO altogether and bring your entire HR team in-house.

professional employer organization

How to Decide If You Need a Professional Employer Organization

Whether or not you need a PEO depends on the unique challenges facing your business. Before entering the PEO market, ask yourself these questions:

  • How many employees do I have? The typical cost of a PEO ranges between $900 and $1,500 per employee per year depending on the type of services you want. Some PEOs opt to charge a percentage of total gross pay. There are also fees associated with PEOs, such as a setup fee or a charge for making one-off payments. You’ll need to understand how much a PEO will charge you and if it’s the most cost-effective HR solution for your business.
  • What kind of benefits do I want to provide? Most PEOs offer access to a wide range of benefits. However, the cost of these plans can vary greatly. It’s important to understand what your current and potential future employees want in terms of benefits, and what your competitors are offering. Will hiring a PEO give you a competitive advantage in terms of recruiting and employee retention?
  • How much of my day is spent handling administrative tasks? If finding the time to complete logistical tasks is impacting your ability to effectively run and grow your business, you may want to hire a PEO to take on some of that burden.
  • Can I comply with all regulations pertaining to my business? There are hundreds of state and federal regulations affecting employers. If you don’t feel confident you can adequately comply with all of them on your own, you may want to leverage the HR expertise of a PEO.
  • Am I about to hit a growth phase? If you are about to undergo a period of hiring, consider if you have the HR support on-hand to facilitate that growth. It is important your recruiting and onboarding infrastructure is optimized, and a PEO can help you get there.

What to Look for in a Professional Employer Organization

There are more than 900 PEOs operating in the United States. To pick the best one for your business, consider the following factors:

  • What kind of support can they guarantee? Depending on the size of your business and the needs of your employees, you may want to hire a PEO that can ensure 24/7 support. Some PEOs also offer access through multiple channels, such as phone, email, online chat, and text.
  • Is the PEOs platform a fit for my business? Most professional employer organizations will offer a demo of their platform to help you understand the user experience. Make sure your team likes it, because they will have to use it fairly routinely. Also consider if the platform is customizable to your businesses needs, especially as you grow.
  • Does the PEO have strong client and professional references? Be sure to check their net promoter score, which measures the willingness of customers to recommend a company’s products or services to others.
  • Does the PEO have a track record of adherence to industry standards? This includes responsible financial management and certified risk management practices. If a PEO has been certified by the IRS, they are considered a certified professional employer organization (CPEO). A CPEO is subject to ongoing audits.
  • How does the PEO fund employee benefits? Consider if they are insured or partially self-funded. Also see if their third-party administrator is authorized to do business in your state.

professional employer organization

Top Professional Employer Organizations for Small Business

Once you’ve decided that a professional employer organization is right for your business, here are some of the best PEOs for small business to get you started on your next steps:

TriNet

TriNet is considered one of the most flexible PEOs, perfect for very small businesses and businesses with employees in multiple states. Business owners do not need a minimum number of employees to work with TriNet, and can cancel their contract at any time by providing 30 days’ notice. TriNet offers a comprehensive platform that can accommodate most employee needs, as well as a customer support team that is available weekdays from 7:30 AM ET to midnight ET.

Other benefits of working with TriNet include industry-specific customer service teams and employee discounts on a variety of services, such as cellphones and car rentals. Pricing varies depending on services required and the size of your team. Reach out for a free consultation.

Paychex

Paychex provides customizable PEO services than can accommodate businesses of all sizes. One benefit of working with Paychex is that they will typically send an HR representative to your office, rather than having to rely on online communication. Paychex also allows you to only select the offerings that make sense for your business, and add on others as you grow. In addition, the company provides 24/7 customer support.

Prices depend on variables like location and number of payroll periods. Reach out for a free quote.

ADP TotalSource

ADP TotalSource is known as the industry leader in the PEO space, and with good reason. Over 500,000 employees in the United States are co-employed by ADP TotalSource, and they are accredited by the IRS and the Employer Services Assurance Corporation.

Pricing varies widely and is based on a business’s credit rating, workers’ compensation rating and health insurance experience. On ADP TotalSource’s all-encompassing platform users can perform a myriad of tasks related to onboarding, payroll, benefits, insurance administration, scheduling, recruiting, and performance reviews.  

Oasis Outsourcing

Oasis Outsourcing offers PEO services with an emphasis on compliance. Clients are allowed to mix and match features to get exactly what they need, and offered a 90-day money-back guarantee if they aren’t satisfied with their service.

When you co-employ with Oasis Outsourcing, they provide you with three representatives who oversee all aspects of your account. Oasis Outsourcing is also accredited by the IRS and the Employer Services Assurance Corporation. Reach out for a free consultation. Pricing varies based on business location and number of employees.

Finding the Right Professional Employer Organization for Your Business

A PEO can present a cost-effective and comprehensive solution to HR administration. Before contracting with one, make sure you have a clear understanding of what your HR needs are and what the PEO can provide. Finding the right PEO can lead to higher job satisfaction and employee retention, while giving you peace of mind and more time to focus on growing your business.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Matthew Speiser

Matthew is a staff writer at Fundera and the son of a small business owner. His work has appeared in Business Insider, the Fiscal Times, and the World Economic Forum, among others. He's passionate about helping entrepreneurs find ways to succeed.

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