WHAT IS A PEO (PROFESSIONAL EMPLOYER ORGANIZATION) AND WHAT ARE THE KEY BENEFITS?

> Companies that work with a PEO grow 7-9% faster than their competitors, have 10-14% lower employee turnover and are 50% less likely to go out of business! The ROI of using a PEO, in cost savings alone, is estimated to be ~ 27%. (Source: NAPEO- https://www.napeo.org).

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> A recent study by noted economists Laurie Bassi and Dan McMurrer showed that, when a company uses a PEO, employees have greater trust and confidence in the business and higher levels of engagement.

 

A PEO is the iPhone of Human Capital- providing comprehensive HR solutions to SMB's (small and medium-sized businesses)- typically firms with 5-150 employees, with the "sweet spot being 15-50. PEO clients span all industries- from white, blue to grey collar- from technology, to manufacturing, to medical, staffing, hospitality, and financial services (hedge funds/private equity etc.).

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PEO's provide payroll services & associated tax administration (workers compensation/STD/LTD etc.), a full suite of employee benefits (medical/dental/vision/ancillary), HR services and regulatory compliance, and 401 (k). They offer the peace of mind that comes with the expertise as if your firm had a full-service HR department. To note, even for companies that have dedicated internal HR resources, the PEO DOES NOT REPLACE such people. The PEO simply frees up those precious resources- TIME!-  so they can focus on STRATEGIC HR- helping to grow the business via retaining and attracting talent, focusing on company culture etc.

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By aggregating tens of thousands of clients into one "buying group", PEO's are able to leverage their significant economies of scale when negotiating with the healthcare carriers (and for other employee benefits such as dental/vision/ancillary benefits, 401 (k) etc.), while at the same time providing their clients access to healthcare plans not are simply not available in the "small group" market i.e. companies with < 100 employees. Not only Fortune-500 type benefits, but also a wide array of options- enhancing the employee experience, enabling the company to retain & attract talent, and generating significant cost savings in the process.

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There are a multitude of reasons why a firm would choose to engage with a PEO:

 

• ​​​Outsource non-core & non-strategic administrative HR functions, such as payroll processing, employee benefits, regulatory and compliance assistance, workforce management cloud-based technology (HRIS- Human Resources Information System), and 401 (k) etc.​

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• Free up a large amount of time spent on administrative HR-related tasks- so called "soft costs"- this is why companies that are with PEO's grow faster than their competitors, have less employee turnover, and reap the benefits of significant cost savings in aggregate.

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• Vendor consolidation: instead of going to multiple different companies and using disparate and non-integrated systems- for payroll, employee benefits, 401k etc., expense & performance management, the PEO offers everything as a "one-stop" shop, all streamlined into one core technology platform with an easy to use interface- both on the desktop and mobile. 

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• Flexibility: most PEO's also offer the option to "carve out" many of the benefits they offer- so, for example, a company can maintain their current employee benefits via a broker or directly with a carrier ('s), and just reap the benefits of outsourcing everything else i.e. payroll, multi-state/local/federal labor tax and labor law compliance and still get "large company" ancillary employee benefits. 

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• Offer "large company" or "Fortune 500"-type benefits, which is key in attracting and retaining talent in an increasingly competitive labor market. This is the one of the key reasons why companies that use a PEO grow faster than their competitors, have lower employee turnover and are less likely to go out of business.

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• Focus on growing the business, and not waste precious time and key resources on non-core and non-strategic administrative business functions.

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• Reduce legal liability due to the PEO's responsibilities to provide their clients with compliant and customized employee handbooks, legal postings, expert legal HR/employment guidance, and ensure compliance with local/state/federal labor and tax laws. This has become ever-more important these days with many companies having employees that work remotely and across multiple states- a compliance nightmare!   

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As noted, the ROI- based on calculated cost savings- of utilizing a PEO is estimated at ~27%, in the following 5 HR-related areas:

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1. HR Personnel costs;

2. Health Benefits;

3. Workers Compensation;

4. UI (Unemployment Insurance); and

5. Other external expenditures related to HR services (payroll services, other employee benefits such as dental, vision 401k etc.)

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HOW IT WORKS (CO-EMPLOYMENT) & RISK MITIGATION:

 

• Co-employment is a contractual agreement between a company and a PEO that allocates and divides employer responsibilities. The contract is often called a client service agreement (CSA). In a co-employment agreement, a PEO client’s employees (also called worksite employees) are employed by two separate entities, the client company and the PEO.

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• The client company is the employer who has a direct relationship with the employee and is responsible for all business decisions, operations, day-to-day supervision of employees, job assignments, employee reviews and assessments, and determining the employee's salary and benefits offerings.

 

• The PEO provides services related to employment such as: payroll processing; payroll tax administration; employee benefits; HR services; workers’ comp coverage and claims management; compliance assistance; and HR technology platforms.

 

What are the benefits of a co-employment relationship with a PEO?

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• Through a PEO, the employees of small businesses gain access to Fortune 500-level employee benefits such as: health insurance, dental and vision care, life insurance, retirement saving plans, job counseling, adoption assistance, educational benefits, and even pet insurance. These are benefits they might not typically receive as employees of a small business.

 

• PEOs also provide access to human resource professionals as a part of their services to small businesses. Through this service, PEOs help small businesses comply with myriad federal, state, and local employment laws, and help their employees better understand their rights and responsibilities under these requirements.

 

• By providing payroll, benefits, and HR services and assisting with compliance issues under state and federal law, PEOs allow small businesses to improve productivity and profitability, to focus on their core mission, and to grow.

 

Who has control of the business?

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• The PEO client/business owner retains ownership of the company and control over its operations. As co-employers, the PEO and client will contractually share or allocate employer responsibilities and liabilities per a client service agreement (CSA). The PEO will generally only assume employer responsibilities like administration of benefits and remittance of payroll and payroll taxes. The client will continue to have responsibility for worksite safety and compliance. The PEO will be responsible for remittance of payroll and employment taxes, may maintain employee records and may retain a limited or general right to hire and fire, as delineated in the CSA. Because the PEO also may be responsible for providing access to workers' compensation coverage, many PEOs also focus on and provide assistance with safety and compliance.

 

• In general terms, the PEO will focus on employment-related issues, and the client company will make all decisions related to day-to-day operations, business growth, supervision and evaluation of employees, job assignments, and employees’ salary and benefits. 

 

Who makes decisions about hiring and firing?

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• Generally, the client company makes decisions about hiring and firing. However, the PEO will typically work with the client company to manage potential risks and ensure that procedures are being followed and documented appropriately.

 

• Many PEOs also provide recruitment assistance to help the client company find qualified candidates with the right skills who will fit into the organizational culture.

 

How does co-employment impact the employees?

 

• There is little, if any, disruption to existing employees when the co-employment relationship is established. The client company continues to employ the employees with the PEO becoming a co-employer for certain purposes.

 

• Employees appreciate the wide array of benefits available to them through the PEO, as well as the online technology PEOs can offer and the availability of HR expertise. A recent study by noted economists Laurie Bassi and Dan McMurrer showed that, when a company uses a PEO, employees have greater trust and confidence in the business and higher levels of engagement.

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PEO INDUSTRY STATISTICS:​​

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• There are ~500 PEO's in the United States

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• PEO's provide services to more than 200K small and medium-sized businesses, representing ~ 4.5M WSE's (worksite employees) who were paid over $300B in 2023​

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• The PEO industry's > 200K clients represent ~17% of all U.S. employers that have 10-99 employees

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• The total employment represented by the PEO industry is roughly the same as the combined number of employees for the four largest employers in the U.S. 

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 ​CPEO + ESAC PEO INDUSTRY ACCREDITATION- THE GOLD STANDARD:

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SE INSURANCE SERVICES only works with PEO's that are CPEO (Certified)- which is < 10% of the approximately 500 PEO's in the U.S.- in accordance with the SBEA (Small Business Efficiency Act #479), which is the federal act that governs the PEO industry. As part of the SBEA, the Internal Revenue Code offers CPEO classification- Section 7705(a)- to PEO's that meet certain financial stability requirements, organizational integrity, and local/state/federal tax law compliance: https://www.irs.gov/tax-professionals/certified-professional-employer-organization.

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Further, we also only work with PEO's that are also ESAC Accredited (Employer Services Assurance Corporation- like the FDIC for banks): only ~ 5% of PEO's can boast such accreditation: https://www.esac.org. ESAC accreditation confirms a PEO's reliability in its financial stability, ethical business conduct and regulatory compliance.​​ CPEO & ESAC accreditation are the gold standard for PEO's. See also: https://www.esac.org/Business/find-a-peo.

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​EMPLOYEE BENEFITS:

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• Benefit plan management: healthcare, dental, vision, life insurance, LTD, STD

• Voluntary benefit plans: 401k, IRA, FSA, dependent care, supplemental life insurance and LTD

• Benefits consultation: annual healthcare renewal, employee onboarding & open enrollment, consultative meetings, plan questions

• Benefits compliance: 1095, ACA, ERISA compliance, 401k fiduciary. Note the PEO is responsible for keeping its clients' benefit plans in compliance with applicable laws (e.g. ACA/COBRA/HIPAA and ERISA)

• Ancillary benefits/employee paid: FSA/HSA (Flexible Spending Accounts/Health Savings Accounts), DCRA (Dependent Care Reimbursement Account), critical illness/hospital indemnity/accident insurance, identity protection, legal assistance, pet insurance, commuter benefits

• Discount programs such as pet products/supplies, travel, amusements, events, consumer products, property/auto/umbrella insurance 

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CLIENT SERVICE:

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• Depending on the PEO- a dedicated, single point of contact service individual (SHRM-PHR) certified with a team of payroll, workers compensation, employment lawyer specialists etc. behind them or more of a call center type model for general employee inquiries. 

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HR SUPPORT/GUIDANCE & RISK MITIGATION/COMPLIANCE:

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• Payroll tax laws- local & state wage and hour compliance and audit, paid time off set-up, workers compensation claims support; state unemployment claims management; FLSA (Fair Labor Standards Act), DEI (Diversity, Equity & Inclusion) training; social media policies; employee handbook review; employee disciplinary procedures/investigations; harassment & discrimination training; HR-related claim investigation and mediation assistance; EEO-1 (Equal Employment Opportunity) reporting; FMLA (Family Medical Leave Act)/LOA (Leave of Absence) disability; customized reports, EDI/API integration with external vendors, R&D tax filing support.