1. What is a PEO?
A Professional Employer Organization (PEO) is a multi-service provider that allows companies to outsource the management of payroll administration, employee benefits, workers comp insurance, 401(k), and Human Resources under one roof. What ultimately defines and differentiates a PEO from other HR Outsourcing vendors is the concept of coemployment.
2. What Companies use a Professional Employer Organization?
In most cases small businesses with US operations that have 5-250 employees. Larger companies with several thousand employees are also known to work with PEOs although it is much less likely as many key facets of the PEO value proposition are diluted as companies get larger. PEO clients come from almost every business vertical. Some PEOs cater to white collar verticals like technology and professional services. Other PEOs cater specifically to blue-collar verticals such as trucking and manufacturing. There are also boutique-like PEOs that cater to start-ups and international companies. The common thread between all PEO clients is the desire to reduce HR liabilities and streamline HR administration. Some PEOs provide employee benefits, many do not; so although improving employee benefits is a very popular entry way to a PEO, it is not always the case.
3. Can a company save money by using a PEO?
Yes, depending on the situation PEOs have a significant ability to reduce a company’s HR overhead. PEO’s use their buying power for the cooperative purchasing of items such as health insurance and workers comp insurance, the most common place PEOs save companies money. PEOs also save companies significant soft cost as PEOs are proven to improve employee retention, increase employee motivation, and reduce employment litigation and legal fees.
4. How large is the PEO Industry?
There are over 700 PEOs nationwide. The PEO industry has seen steady growth since its inception in the early 1980s. It is estimated that about 2-3 million American employees are in a coemployed relationship, yet overall PEO industry market penetration is still lower than 2%. Many PEOs have reported record growth since 2010, which is largely attributed to the onset of Patient Protection and Affordable Care Act (Obamacare). The PEO value proposition gets more valuable as American employers are faced with increased employment regulations and healthcare costs.
5. Do business owners loose control of their employees when they use a PEO?
No. PEO clients retain ownership of their company and have control over its operations. Through coemployment, PEOs and clients essentially split the responsibilities of employing a workforce. The PEO will become the “employer of record”, which means all back office functions associated with HR are performed by the PEO. For example the PEO files all clients’ payroll taxes under its own tax ID #s. The PEO will sponsor the health insurance plan that is offered to employees, which means they are responsible for its administration and compliance with all regulations, including Healthcare Reform. Under coemployment the PEO client will become the “work-site employer” which means the client still controls, among many other things, employee job functions, hours of operation, hiring and firing.