A Detailed Guide To Professional Employer Organizations (PEO)

PEO Market

Professional Employer Organization (PEO) is growing in demand, given the increasing need from small and mid-sized businesses for administrative and employee management services in processes like recruiting, onboarding, employee benefits management, payments, payrolls, etc. As a result, PEOs are helping businesses increase their growth and get access to professional employees while enabling them to mitigate rising administrative costs.

In a recent study (1) published by noted economists Laurie Bassi and Dan McMurrer titled ‘The PEO Industry Footprint 2021’, it is observed that businesses using PEO services had grown 7%-9% faster, have 10%-14% lower employee turnover and are 50% less likely to go out of business. This report also indicates that PEOs provided services to 173,000 businesses and employed 4+ worksite million employees, paying them about $216 billion in 2020 alone. 

While the numbers look promising, the future for PEO also shows significant growth opportunities. As per a report on ‘Global Professional Employer Organizations Market 2021-2028’ that is published by Verified Market Research (2), the PEO market size was valued at US $52.44 Billion in 2020 and is projected to grow at a CAGR of 10.61%, reaching US $ 106.2 Billion by 2028. 

The popularity of PEO is mainly due to high demand in industries like IT services, BFSI, manufacturing, and others, which are looking to tap into a global talent pool to gain access to skilled resources that can add value to their specific industry demands. In addition, PEOs help businesses with valuable functions such as compliance with employment laws and local and international regulations, support for processes like global employee business recruitment, advertisements for open roles in international markets, and several others. 

What Is a PEO?

A PEO, or Professional Employer Organization, is a company that provides a range of HR and payroll services to small and medium-sized businesses. These services can include employee benefits, payroll, compliance with labor laws, and recruiting and training.

PEOs work by entering into a co-employment agreement with the businesses they serve. In this arrangement, the PEO becomes the employer of record for the business’s employees, taking on responsibilities such as payroll, tax withholding, and employee benefits. The business, however, retains control over its day-to-day operations and the supervision of its employees.

PEOs can help businesses streamline their HR and payroll processes, reduce costs, and free up time and resources to focus on their core business activities. They can also provide access to a range of benefits and resources that small businesses may not be able to afford or manage on their own.

PEOs are also understood as employer of record / EOR at times.

History about PEO

Eugene Boffa, Louis Calmare, and Joseph Martinez, three businessmen, launched employee leasing in the US in the late 1960s. Marvin R. Selter made the idea well-known by leasing the staff of a medical practice in Southern California. Employee leasing was further promoted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which gave businesses that made a minimum contribution to employee programs a tax shelter. However, the majority of the TEFRA incentive was ultimately repealed by stricter regulations in the Tax Reform Act of 1986. In the United States, there were about 275 staff leasing businesses in 1985.

PEO vs Other HR Service

A PEO is often confused with other HR outsourcing services, and there are quite a few similarities in terms of services and the kind of offers each offer to businesses. Giveb below are the differences between PEO Vs. a Human Resources Outsourcing Firm (HRO), Payroll Company, and Administrative Services Organization (ASO): 

PEO Vs. HRO

HROs provided businesses with HR services, which include hiring, recruitment assistance, expert guidance, consultation, training, and other HR operational services or solutions. However, unlike PEOs, HROs merely work on the outsourced HR tasks to the firm while the business or organization still maintains compliance and legal obligations. Thus, administrative, legal, employee requirements, payroll, and other obligations still have to be fulfilled by the business, while the HRO merely helps with the administrative and HR tasks as a service offered to the company. 

PEO Vs. Payroll Company

When it comes to payroll management, both PEOs and payroll service providers work on a similar approach. While a payroll company assists the business entity with managing payroll activities such as calculating, preparing, and remitting payroll taxes and returns, the business again is ultimately held responsible for all payroll and tax obligations. This is because the business still manages and is responsible for overlooking these financial details. These activities can be outsourced to the payroll company to help streamline the process. PEOs, on the other hand, offer a more comprehensive solution and have to assume full responsibility for paying employee wages and benefits and filing for taxes and other financial obligations with the respective authorities on behalf of the client company. Thus, PEOs go beyond standard support and are liable for all areas like employee benefits, compensations, administration, and compliance. 

PEO Vs. ASO

Administrative Services Organization (ASO) is responsible for HR-related tasks and administration for the client while the client still retains the administrative employer status. PEOs, on the other hand, act as the administrator on behalf of the client company and takes care of all administrative services like workplace safety, regulations, management, employee wages, insurance reporting, and other administrative tasks. 

Why Do Companies Need PEO?

Companies may work with a professional employer organization (PEO) for various reasons. Some common reasons why companies may need a PEO to include the following:

Lack of HR expertise

Small and medium-sized businesses may not have the resources to hire dedicated HR staff or may not have the expertise to handle complex HR tasks, such as compliance with employment laws and regulations. A PEO can provide these services and help businesses stay compliant.

Time and cost savings

Outsourcing HR and payroll functions to a PEO can save businesses time and money by eliminating the need to hire and train staff to handle these tasks in-house.

Employee benefits

PEOs often offer a wider range of employee benefits, such as health insurance and retirement plans, which can be attractive to employees and help businesses attract and retain top talent.

Risk management

PEOs can help businesses manage risks related to HR and payroll, such as liability for employment law violations or errors in payroll processing. But, this also brings up PEO risk management issues that warrant attention.

Focus on core competencies

By outsourcing HR and payroll tasks to a PEO, businesses can free up time and resources to focus on their core competencies and strategic goals.

How Does PEO Work?

PEO, or Professional Employer Organization, is a type of business service that helps companies manage their human resources, payroll, and employee benefits. PEOs provide a range of services, including payroll processing, employee benefits administration, tax compliance, and HR support.

Here’s how PEOs typically work:

1. The company contracts with a PEO to handle certain HR and payroll responsibilities.
2. The PEO becomes the employer of record for the company’s employees, meaning that it is responsible for payroll, taxes, and other employment-related matters.
3. The PEO works with the company to manage employee benefits, such as health insurance, and other perks, including PEO 401K plans.
4. The PEO provides HR support, such as helping with onboarding new employees, managing employee records, and handling employment-related disputes.

By outsourcing these tasks to a PEO, companies can save time and resources and focus on their core business operations.

What Is the Scope of PEO?

They co-employ the employees: PEOs co-employ the workforce for administrative purposes, meaning they are responsible for all employee-related activities like payroll management, taxes, withholdings, benefits, and others. The PEO maintains full authority over your employee, while you can leverage these resources for your work, enabling you to get the job done with minimal dependencies. 

They take care of HR activities: PEOs also take away administrative and HR-related activities such as employee benefits, labor and employment compliance, and other requirements, making it easier for businesses to lower employment costs and get the benefits of additional resources.

What Does a PEO Not Do?

Although PEOs can help you offload the entire administrative and HR-related activities for its resources, it is not a replacement for your internal HR or administrative team. A PEO is responsible only for employees on their payroll, and you can count on them to manage HR and administrative decisions for these resources only. A PEO also may not assist you with marketing, sales, or product distribution activities, which are typically outside their scope of work. 

PEO – Advantages vs. Disadvantages

Here are some potential advantages and disadvantages of using a PEO. Depending on your business situation, if you are considering a PEO, the advantages could outweigh the disadvantages.

Advantages

The PEO model has advantages ranging from cost optimization to risk management. PEOs are able to help businesses focus on their core competency without getting distracted by administrative tasks.

Permanent Establishment is optional

This is by far the best benefit for practitioners. Imagine getting access to talent in a new country at the click of a button without the challenges of payroll, tax, and compliance. That indeed is a big advantage.

Setting up a permanent establishment (PE) is a business decision and at times even the board has to get involved. All this delays business decision-making in an agile marketplace. Having PEOs as an option is a good way to execute business decisions fast.

Cost savings including lower premiums

By outsourcing HR and payroll functions to a PEO, businesses can save money on hiring and training staff to handle these tasks in-house. Outsourcing also frees up time and money to focus on the core business instead of non-core activities.

Since PEOs work with multiple companies, PEOs take advantage of group purchasing power. This creates economies of scale bringing down insurance premiums since the coverage pool increases. It also allows PEOs to negotiate better rates and pass on the savings to their PEO clients.

Expertise

PEOs often have specialized expertise in HR and payroll, which can benefit businesses that do not have the resources to hire HR professionals.

Compliance and Risk Management

PEOs can help businesses stay compliant with employment laws and regulations, which can help avoid costly fines and legal issues. e.g. Workers’ compensation is a doctorate subject in itself. Thanks to ambiguous state and federal regulations, compliance is a continuous challenge. PEOs specialize in this area because they deal with a number of employers across sectors and states. Compliance management also leads to improved risk management measures. PEO risk management is key though and you are encouraged to do proper due diligence before taking on the services of a PEO.

Employee benefits including return-to-work programs

PEOs often offer a wider range of employee benefits, such as health insurance and retirement plans, which can be attractive to employees and help businesses attract and retain top talent. Additionally, PEOs can assist businesses especially SMBs with much-needed return-to-work programs for injured workers planning their return back to the workplace. This, in turn, helps reduce costs by minimizing employee absences and providing them with the necessary care.

Time-saving including claims management

Outsourcing HR and payroll tasks to a PEO can free up time for businesses to focus on their core competencies and strategic goals. Some aspects of the HR function e.g. claims administration is a big drain on time. Workplace injury triggers a number of interconnected steps that could distract a business from its usual. A PEO can manage not just insurance but also compliance from a state and federal standpoint.

Disadvantages

Loss of control: 

By outsourcing HR and payroll functions to a PEO, businesses may lose some control over these areas and may have less flexibility in managing them.

Limited customization: 

PEOs generally offer standard packages of services, which may not be fully customized to meet the specific needs of a business.

Contractual obligations: 

Working with a PEO typically involves entering into a long-term contract, which can be difficult to terminate early if the arrangement is not meeting the business’s needs.

Additional costs: 

While outsourcing to a PEO may save money in some areas, it may also involve additional costs, such as fees for the PEO’s services.

Risk of miscommunication: 

Communication between a business and a PEO may be more complicated than communication within a company, leading to misunderstandings and problems.

Who Benefits from PEO in HR Services?

The key beneficiaries of a PEO approach are:

• Human Resources
• Training and development courses
• Administrative & Payroll Management Staff
• 401(k) retirement plan
• Tax compliance
• Government Compliance
• Securities Brokers
• Section 125 plans
• Recruiting and outplacement support
• COBRA
• State unemployment insurance
• Insurance

How Do User Personas at the above Companies Benefit?

In terms of user personas, PEOs can benefit companies by providing access to specialized HR and payroll expertise and resources that may not be available in-house. It can help companies better understand and meet the needs of their target audience, as well as streamline HR and payroll processes and reduce the workload of in-house HR staff. 

PEOs can also provide companies with access to employee benefits and other resources that may be difficult or cost-prohibitive to obtain on their own, which can help attract and retain top talent and improve employee satisfaction. This model of often most effective for organizations that are trying to expand to additional geographies, where PEOs can help with managing local resources and compliance requirements.

Challenges Faced in Working with Peos

There are a few key challenges that companies may face when working with PEOs:

Cost:

PEOs charge fees for their services, which may be a concern for companies with limited budgets. It’s essential for companies to carefully consider the costs and benefits of using a PEO before making a decision.

Control: 

When a company contracts with a PEO, it relinquishes some control over HR and payroll matters to the PEO. It can be a challenge for companies that are used to handling these tasks in-house.

Communication: 

Miscommunication can be challenging when working with any third-party vendor, and PEOs are no exception. It’s important for the company and the PEO to have clear lines of communication and ensure everyone is on the same page.

Complexity: 

PEOs often offer a wide range of services, making it difficult for companies to understand exactly what they’re getting. It’s important for companies to review the terms of their contract with a PEO carefully and to ask questions if they’re not sure about something.

Overall, it’s important for companies to carefully consider the pros and cons of working with a PEO before making a decision. It may be a useful solution for some companies, but it may not be the right fit for others.

The PEO Selection Process

Here are some steps that companies can follow when choosing a professional employer organization (PEO):

Determine your needs: 

Before starting the selection process, companies need to assess their HR and payroll needs and determine what services they require from a PEO.

Research potential PEOs: 

Companies can research potential PEOs by looking at industry directories, reviewing online reviews and ratings, and seeking recommendations from other businesses or industry associations.

Request proposals and compare: 

Companies can request proposals from multiple PEOs and compare them based on the services they offer, their fees, and any additional features or benefits.

Check references: 

Companies need to check references and speak with current or former clients of the PEOs they are considering to understand better their experiences working with the PEO.

Evaluate the contract: 

Companies should carefully review the contract with the PEO and ensure it outlines the services provided and any fees or charges.

Consider the PEO’s track record: 

Companies should consider the PEO’s track record, including its financial stability and any legal issues or complaints it has faced.

Assess the PEO’s communication and customer service: 

Companies should consider the PEO’s communication and customer service to ensure they can effectively partner with the PEO and receive the support they need.

List of top PEOs

There are many Professional Employer Organizations (PEOs) available, and the top PEOs may vary depending on a company’s specific needs and preferences. Here is a list of some of the top PEOs in the United States:

1. ADP TotalSource
2. TriNet
3. Insperity
4. Paychex
5. Justworks
6. Oasis Outsourcing
7. CoAdvantage
8. EmployBridge
9. Accuchex
10. APA Solutions

It’s important for companies to carefully research and compare PEOs to determine the best fit for their needs and budget. Factors to consider when choosing a PEO may include the services offered, the fees and pricing structure, the company’s reputation and experience, and the level of support and customer service provided.

PEO Pricing

The cost of PEOs can vary depending on various factors like the services you’re availing of, the size of your organization, and the PEO’s pricing model. Typically, PEOs use one of these pricing models:

• Fixed monthly fee per employee
• Percentage of payroll plus applicable taxes, workers’ compensation, and employee insurance
• With both methods, the administrative fees, employee payments, taxes, and other charges will be included in the PEO contract, but there might be hidden fees that businesses need to understand before they sign a contract with a PEO fully. 

Types of PEOs

Although most PEOs work in a co-employment contract with their customers, there are specialized PEOs that offer tailored services, which include:

• PEOs and other categories of outsourcing
• Certified PEOs / CPEO / IRS
• ESAC-accredited professional employer organizations

How Will Technology Impact the PEO Market?

Technology will likely significantly impact the professional employer organization (PEO) market in the coming years. Here are a few ways that technology may impact the PEO market:

Technology can improve automation of HR and payroll tasks:

 As technology advances, PEOs may be able to use automation to streamline HR and payroll tasks, such as processing payroll and managing employee benefits. It could reduce the time and resources needed to provide these services and allow PEOs to offer more competitive pricing.

Improved communication and collaboration: 

Technology, such as cloud-based HR software, can facilitate better communication and collaboration between businesses and PEOs. It can help to improve efficiency and reduce the risk of miscommunications.

Enabling remote work: 

The COVID-19 pandemic has led to a significant increase in remote work, and this trend will likely continue even after the pandemic ends. As a result, PEOs that can adapt to this shift and provide HR and payroll services to remote employees may be more successful in the market.

Data analytics and decision-making: 

PEOs may be able to use data analytics and artificial intelligence (AI) to make more informed decisions and improve the services they offer to clients. For example, PEOs may be able to use data to identify trends in employee benefits usage or to optimize payroll processing.

Overall, technology is likely to play a major role in the PEO market in the coming years, and PEOs that can leverage technology effectively may have a competitive advantage.

Abuses

An employer with a high unemployment insurance rate may engage in State Unemployment Tax (SUTA) arbitrage, sometimes known as “SUTA dumping,” when it transfers or “dumps” workers to acquired subsidiaries with lower unemployment insurance rates. In a PEO agreement, the client firm is required by law to accept the SUTA rate of the PEO, which frequently results in a reduction in their SUTA through SUTA Arbitrage. Only in states that require client reporting would this not be the case.

Owners of professional employer organizations are able to conduct fraud by retaining the money withheld from employee paychecks rather than paying the insurance and governmental organizations for whom the deductions were made. Four executives were found guilty of stealing $133 million from the three PEOs they owned and ran in a case in San Antonio, Texas.

Certified PEOs

Certified PEOs have satisfied the IRS’s strictly financial, legal, and reporting criteria. Dealing with one could provide you with specific tax advantages and financial safeguards.

Points that help to ensure CPEO 

• According to the certification program, a CPEO must yearly deposit a bond assuring the payment of its federal employment tax liabilities this enables financial guarantee.
• For certain federal payroll tax reasons, certification eliminates the wage-base “restart” if you enter or leave a CPEO arrangement midyear.
• It builds trust as PEOs are required to reauthorize regularly to demonstrate that they continue to adhere to fiduciary standards and other obligations.

Ethics, Labour Policies, and Governance of PEOs

Professional employer organizations (PEOs) are responsible for following ethical and legal guidelines in their business practices, including labor policies and governance. Here are some key considerations for PEOs in these areas:

Ethics: 

PEOs should act with integrity and adhere to ethical standards in their business practices, including their dealings with clients and employees.

Labor policies: 

PEOs should ensure they follow all relevant labor laws and regulations, including employment, wages, and working conditions.

Governance: 

PEOs should have strong governance structures in place to ensure they are managed effectively and transparently. This may include establishing clear policies and procedures and having a system for holding leadership accountable.

PEOs that do not follow ethical and legal guidelines may face legal consequences and damage to their reputation, which can negatively impact their business. In addition, the company involved may also lose its reputation or get negatively affected due to the PEO not following established practices or guidelines. 

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