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For many smaller businesses, remaining up-to-date on employment regulations and health care options can be a struggle. One potential solution is a professional employer organization (PEO).
PEOs employ experts who understand and can take on many HR functions that your business would otherwise handle on its own, such as managing employment taxes and administering payroll and benefits. According to the National Association of Professional Employer Organizations, PEOs work with more than 175,000 small and midsized businesses in the United States. They cover about 15% of employers with between 10 and 99 employees.
The Pros — and a Few Cons
Why not simply hire an HR staff member instead of engaging a PEO? For one thing, even an experienced HR professional may struggle to keep up with the myriad and everchanging regulations with which employers must comply. The expertise a PEO brings can boost compliance.
Further, because PEOs work with multiple clients, the cost to engage one can be lower than hiring HR staff. Partnering with a PEO enables a business to focus on its core operations while it gains access to expertise on HR best practices and regulations, as well as to services such as health care benefits administration.
Many PEOs can recommend best practices for functions such as onboarding new employees. Some even provide an HR information system (HRIS) to allow your company to use the latest technology to manage recruiting, payroll and benefits, among other functions.
A PEO may have established relationships with multiple health insurance carriers, enabling your business to access a greater number of policies at competitive rates than it could on its own. The PEO also educates employees about the benefits available to them, helping to boost morale and retention.
That said, a PEO isn’t right for every organization. Some PEOs work with a limited number of health insurance providers. The options they can offer may be no better than those you’d get on your own. Consider the cost/benefit to decide whether it would be appropriate for your company.
When you partner with a PEO, your business and the PEO enter into a co-employment arrangement. Your company typically remains responsible for business operations and strategy, while the PEO takes on specific responsibilities outlined in the agreement. These responsibilities typically include tax, legal and other administrative responsibilities related to HR.
It’s important to thoroughly understand the co-employment agreement. Often, the business engaging the PEO remains responsible for paying employment taxes and filing tax returns. Under some agreements, however, this responsibility shifts to the PEO.
Before partnering with a PEO, research their operations and offerings. Some PEOs lack a single point of contact or experience high employee turnover themselves. You may wind up spending time teaching multiple people about your company. Your employees may become frustrated if the PEO doesn’t address their concerns in a reasonable time frame.
Although a PEO can help with recruiting, potential job applicants may question whether the business is a good fit if they meet only with a PEO representative and not your company itself.
How will the PEO bill your firm? Many PEOs charge based on either the number of employees or a percentage of payroll. The calculations should be transparent, and the payment scheme should make sense for your organization. For instance, a flat per-employee fee can become expensive if you hire many lower-level workers.
Some states require PEOs to be licensed or registered. You might also want to ask the PEO to provide audited financial statements.
A Thorough Analysis
Deciding whether to establish an in-house HR position, work with a PEO or use some combination of the two requires a thorough analysis of your company’s strategy and operations. Your CPA can help you determine which approach makes the most sense for your business, and can also help you assess potential partners if you decide to engage a PEO.