Why Outsource To A Peo Firm?
s the $51 billion industry you ve likely never heard of: PEOs. Private
Employment Organizations, or PEO s as they re known, were deemed the fastest
growing business service during the 1990s by the Harvard Business Review.
Currently over 700 PEO s operate in all 50 states and provide service
to approximately 100,000 small to mid-sized businesses. So what exactly
is a PEO, and how can your business benefit by using one? Following is
an introduction to the basics of PEOs.
What is a PEO? A PEO is not a temp or staffing agency and it is not a
payroll service. As defined by the National Association of Professional
Employer Organizations (NAPEO), a PEO is an organization that provides
an integrated and cost effective approach to the management and administration
of the human resources and employer risk of its clients, by contractually
assuming substantial employer responsibilities and risk, through the establishment
and maintenance of a co-employer relationship with the client s employees.
In other words, a PEO legally hires a company's employees, which makes
the PEO the employer of record for tax and insurance purposes. The employees
are leased back to the original employer under a co-employment contract.
The PEO is then responsible for administration of payroll, workers compensation,
employee benefits, and workers compensation. Numerous duties such as 401
(k) administration, risk management, employee counseling, and training
and development can fall under these categories depending on the terms
of your contract.
Why use a PEO?
Being an employer can be a headache: there are over 60 different employment-related
governmental regulations with which a business must comply. The U.S. Small
Business Administration reports that owners of small or mid-sized businesses
now spend up to a quarter of their time on employment-related paperwork.
By outsourcing to a PEO, employers can focus on operating and building
their business. Employees gain improved, comprehensive benefits. Some
other benefits to consider:
Improved human resource practices can increase your profitability. PEOs
handle basics like employee handbooks or more delicate HR tasks such as
sexual harassment training.
Comprehensive employee benefits makes your business a more attractive
place to work.
State of the art HRIS systems better serve you and your employees with
on-line access to payroll and employee information.
Coverage under a PEOs master workers comp policy means insurance is more
affordable. PEOs yearly shop for the best insurance rates, and since they
have an interest in keeping claims low, they conduct risk management training.
Progressive PEOs offer benefits such as college tuition reimbursement
programs and travel services
Who can benefit from a PEO s services? Businesses from numerous industries
medicine, automotive, construction, retail, manufacturing, hi-tech outsource
to PEOs. According to the NAPEO, their member PEOs average client is a
small business with 17 employees. PEO clients are small enough that they
do not have the need or ability to staff a human resource department.
Even large companies with a dedicated HR department can benefit: they
get access to supplemental HR expertise, competitive health insurance,
and state of the art HR information systems. PEOs work in cooperation
with larger companies HR departments.
When is your business ready to outsource to a PEO? Industry experts advise
careful preparation when deciding if your business should contract with
a PEO. Do your homework. Here are some questions to consider (courtesy
Are you spending too much for workers compensation insurance?
Are your employees asking for benefits you can t offer?
Are you paying too much for health insurance?
Is your company compliant with state and federal regulations?
Is your turnover rate adversely affecting your company s performance?
Is your HR department as effective or as efficient as you believe it could
If the answers to these questions lead you to believe that a PEO is in
your future, appoint a team to the task of conducting thorough market
research, attend conferences, and read case studies about HR outsourcing.
Utilize their findings in your PEO search.
How do you choose a PEO? First, make sure the PEOs you consider are accredited
by the Employer Services Assurance Corporation (ESAC), a nonprofit organization
which protects the interests of businesses contracted with PEOs. Accreditation
means a PEO meets ESAC s ethical, financial, and operational standards.
In addition, Make sure your PEO meets state licensing and registration
requirements. The following states have licensing laws: Arkansas, Florida,
Illinois, Montana, New Hampshire, New Mexico, Oregon, South Carolina,
Tennessee, Texas, Utah, and Vermont. The following states have registration
laws: Kentucky, Louisiana, Maine, Minnesota, Nevada, New Jersey, New York,
North Carolina, Ohio, Oklahoma, Rhode Island, and Virginia.
Here are some more guidelines provided by the NAPEO:
1. Assess your workplace to determine your human resource and risk management
2. Make sure the PEO is capable of meeting your goals. Meet the people
who will be serving you.
3. Ask for client and professional references.
4. Check the firm's financial background, and ask for banking and credit
references. Ask the PEO to demonstrate that payroll taxes and insurance
premiums have been paid.
5. Check to see if the company is a member of NAPEO, the national trade
association of the PEO industry.
6. Investigate the company s administrative and risk management service
competence. What experience and depth does their internal staff have?
Do any of the senior staff have professional training or designations?
Check to see if the PEO s risk management services have been certified
by the Certification Institute at www.certificationinstitute.org.
7. Understand how the employee benefits are funded. Is the PEO fully insured
or partially self-funded? Who is the third-party administrator (TPA) or
carrier? Is their TPA or carrier authorized to do business in your state?
8. Understand how the employee benefits are tailored. Determine if they
fit the needs of your employees.
9. Review the service agreement carefully. Are the respective parties
responsibilities and liabilities clearly laid out? What guarantees are
provided? What provisions permit you or the PEO to cancel the terms of
Rob Zawrotny is a copywriter for MWI.
He has been assisting Workforce
Solutions in providing quality content to those who are considering
using a PEO service.