What is a PEO?

When it comes to outsourcing your HR, you have several options. One choice that a growing number of small and mid-sized businesses are taking advantage of is a PEO, or professional employer organization. With this full-service solution, the PEO handles HR administrative functions, such as payroll processing, payroll taxes, and employee benefits administration, for your company.

As a small or mid-sized business owner, you may be overwhelmed by the human resources side of running a business or perhaps you want to find more time to grow. Either way, a PEO helps manage your HR, giving you time back so you can focus on the reason you started your business in the first place: to pursue a passion and dream.

A form of HR outsourcing, professional employer organizations provide HR administration support on behalf of a business through a unique structure known as co-employment.

When you engage a PEO, your company enters into a co-employment relationship with the professional employer organization. The PEO becomes the employer of record for your business, which means you share liability with the PEO on employee-related matters.

In this agreement, you retain full control of the day-to-day operations and management of your business and employees, and this unique arrangement gives PEOs such as G&A Partners the authority to handle back-office administrative tasks on your behalf. Employee-related taxes are processed under the PEO’s federal tax identification number.

Here are some common PEO services:

HR management

Some PEOs such as G&A have HR experts who are dedicated to providing services and support, such as assisting with HR investigations, helping with paid time off and family leave, and supporting you through employee terminations and unemployment insurance claims.

Payroll administration

PEOs manage a range of payroll-related tasks, including setup, client training, payroll tax filing, Forms W-2 and W-4 distribution, direct deposit, processing of various payroll cycles, leave accruals, standard deductions, and more.

Benefits administration

Working with a PEO often gives you access to high-quality, affordable benefits – including ancillary options such as dental, vision, and life insurance. A PEO will also administer benefits, manage open enrollment, handle claims and invoice reconciliation, and answer employee questions.

Compliance

PEOs generally have compliance experts available to help you understand federal, state, and local laws and regulations that may impact your business, from the Fair Labor Standards Act to paid leave to the Affordable Care Act.

Risk management and safety services

PEOs provide workers’ compensation insurance to businesses in addition to claims administration, assistance with OSHA, post-accident investigations, and development of accident prevention plans and training.

Recruitment

A PEO may offer recruitment services that can help you source candidates, review job descriptions, post job openings, and screen resumes. Additionally, PEOs often provide access to prehire job assessments, substance abuse testing, background screening, and more.

Performance management/training and development

With a PEO, you may receive guidance on employee reviews from HR experts. You may also have access to technology that streamlines performance management and provides online training courses, such as mandated harassment training or certifications required by your industry.

If you’re like many small and mid-sized business owners, you’re feeling overwhelmed by the growing list of HR tasks involved in running your business – many of which require extensive HR expertise. That’s why a PEO for a small business or mid-sized company is a valuable partner. Saving time and unloading day-to-day HR administration is a significant advantage of working with a PEO, but that’s just the beginning.

Additional benefits of working with a PEO for small businesses or mid-sized companies:

Access to high-quality, affordable employee benefits

PEOs enter into co-employment agreements with each client, and the clients’ employees become “worksite employees” of the PEO. At G&A Partners, we are co-employers for thousands of worksite employees, giving us greater collective buying power that’s similar to a larger organization. When we (or other PEOs) negotiate rates for medical insurance and other benefits, we’re able to leverage that purchasing power to secure better rates and higher-quality plans.

In some cases, these plans – often referred to as “Fortune 500-level benefits” because they are comparable to plans larger corporations offer – may be more affordable than your current plans. And a comprehensive and competitive benefits package can improve your ability to attract and retain top talent.

Avoid costly penalties for noncompliance

The web of ever-changing workplace regulations is challenging to navigate. Unfortunately, a lack of awareness of employment law isn’t a defense against noncompliance, which can result in costly penalties, fines, and lawsuits.

When PEOs work with small businesses, their HR experts can provide guidance on existing laws and regulations that may impact you based on your business structure, industry, or location. And if you operate in multiple states, a PEO can be essential in helping you navigate compliance across states with different requirements.

Improved recruitment and retention

Does this sound familiar? You hire a promising employee who immediately makes an impact on your business. But within a year, that employee announces they’ve landed a job with a big corporation that offered better pay, comprehensive benefits, and a retirement plan.

PEOs can improve your ability to recruit and retain employees through comprehensive recruitment services and with strategic guidance on how to improve retention and employee engagement. In fact, the National Association of Professional Employer Organizations (NAPEO) found in a 2019 study that turnover is nearly 20% lower for companies that utilize a PEO.

HR outsourcing refers to hiring an independent provider to handle all or part of your HR-related tasks. You may hire an HR outsourcing provider for a specific function, such as to assist with payroll and benefits, or for strategic initiatives, such as developing an employee handbook or evaluating employment-related policies.

A PEO is a type of full-service, HR outsourcing.

Let’s look at how a PEO compares to other HR outsourcing options:

A common misconception is that there are several types of PEOs. This is not true, but PEOs do offer different models, and service options can vary. Some PEOs try to commoditize tactical services, while others – such as G&A Partners – deliver strategic services that are both high-tech and high-touch.

Here are professional employer organization examples and models commonly offered:

Classic PEO model:

With this PEO model, a company enters into the co-employment agreement and engages in a full-service program, taking full advantage of all that the professional employer organization has to offer. Though this model can work for most small and mid-sized businesses, it’s ideal for dynamic, faster-growth businesses that are seeking more strategic, comprehensive HR services to support growth objectives.

PEO with carve-outs:

This model provides an a la carte approach to PEO services. It’s ideal for steady, slow-growth businesses that may already have existing arrangements they want to retain (such as workers’ compensation or an insurance broker). This model may also work best for businesses who only want to engage a PEO for specific services, such as payroll and benefits administration.

Additionally, some PEOs include an administrative services organization (ASO) – also referred to as administrative services only – that provides many of the same services available through a professional employer organization. The key difference is that the company and ASO do not enter into a co-employment agreement.

Another common misconception about PEOs is that they offer employee leasing. That’s because co-employment was once synonymous with employee leasing. But as the PEO industry has evolved, co-employment has become the preferred term. However, PEOs do not provide employee leasing (when a staffing firm provides temporary workers on a short-term basis) as part of their services.

PEOs are able to provide many of their benefits to companies because of a co-employment agreement between the PEO and company. In a co-employment agreement, your company and the PEO share employer responsibilities and employees are employed by both your company and the PEO.

For some business owners, the word “co-employment” can be, well, confusing. However, the co-employment arrangement is primarily a vehicle that allows PEOs to put economies of scale to work in your favor through more affordable benefits offerings. The PEO acts as the employer of record for your business, facilitating shared liability on employee-related matters.

“A major misconception amongst some business owners is that their employees won’t know who to take direction from because the PEO’s name is on their paycheck, but that couldn’t be further from the truth,” says John G. Allen, G&A Partners’ chief revenue officer. “Employees are loyal to the companies that hire them. Studies have shown that companies that partner with a PEO often have employees with greater trust and confidence in their leadership.”

So how does a PEO partnership with a business work?

Typically, employees notice very few changes when their company transitions to a co-employment relationship. For example, the PEO’s name may appear on their paycheck, they may receive their W-2 from the PEO, and the PEO may handle benefits enrollment.

But because you’re partnering with a PEO, employees experience several advantages. You may begin offering a more comprehensive benefits package (including life insurance and retirement plans), employees may have lower benefits costs, and workers may have access to better technology that streamlines common tasks such as onboarding, clocking in, or requesting time off.

What a PEO won’t do for your employees or company is set schedules or pay rates, make decisions about your business independently, or assist with sales or marketing. While PEOs make recommendations, it’s the company’s responsibility to determine if it’s appropriate for your business, how to implement those recommendations, and how you’ll enforce them.

Not all businesses need the full-service HR outsourcing solution that comes with a PEO. That’s where an ASO (administrative services organization) comes in.

There are a few key differences between a PEO and an ASO, including:

How the agreement is structured

A PEO requires a co-employment agreement. With an ASO, you do not enter into a co-employment relationship.

Full service vs. a la carte

A PEO offers a more full-service HR solution that may allow for some customization, while you pick and choose services from an ASO.

In-house HR

With an ASO, you’ll need an in-house HR person or team to handle common tasks such as approving payroll. With a PEO, many businesses designate an individual to be a liaison between your employees and the PEO.

When comparing PEO vs. ASO solutions, it’s important to understand your expectations, budget, and the needs of your business and employees.

Consider these questions:

Is a co-employment arrangement the right choice for your business?

When working with a PEO, you enter into a co-employment agreement, where you share employer responsibilities with the PEO. In an ASO, you do not enter into a co-employment agreement. How do you know if co-employment is right for you?

First, it’s important to understand that co-employment is often misunderstood. In a co-employment relationship, the PEO assumes much of the responsibilities – and shares the risk – of your company’s employment matters. You continue to direct your employees’ day-to-day activities, handle business decisions, manage operations, and make personnel decisions.

It’s a good idea to consider whether you are comfortable assuming all the risks associated with running a business. When you work with PEOs, they assume some of the risk of carrying employees.

Do you have an employee or internal team dedicated to HR?

If you’re handling most HR tasks in house, you may not need a full-service PEO. An ASO, though, can support your in-house HR person or team on specific tasks – such as benefits administration, compliance issues, or recruiting. With G&A’s ASO, you also gain access to integrated technology that streamlines many HR tasks.

If your business has an in-house HR team but you are curious about outsourcing HR, you may find an ASO as an attractive first step. If you eventually decide to outsource all HR functions, you can transition to a PEO later.

What is your current budget for HR outsourcing?

When comparing PEO vs. ASO, budget should be a consideration as both are cost-effective alternatives to in-house HR. PEOs are an excellent option for small and mid-sized business owners who want to increase operating efficiencies and gain valuable time to focus on growing their companies. Generally, PEOs charge a percentage of total payroll (usually between 3-8 percent) or a flat, per-employee-per-year fee.

With an ASO, the cost is typically charged on a flat, per-employee basis, and total costs may be less than a PEO.

Are you happy with your current benefits?

With an ASO, you maintain your current benefits or the administrative services organization will help you find a provider to fit your budget and needs. Additionally, your ASO may handle benefits administration.

Some PEOs such as G&A will also provide benefits administration on carve-outs, so it’s important to explore both options if you plan to maintain your current plans.

Are you reentering employee data across technology platforms?

As businesses begin outsourcing HR, it’s common to hire a vendor that uses its own technology platform. As you add more outsourcing partners, you may also be working with multiple technology platforms, none of which talk to one another. This leads to the time-consuming process of reentering data into each platform. It can also lead to mistakes.

With most PEOs and ASOs, you can save time and avoid data-entry errors by moving to a single source data system, which eliminates data duplication, improves data security, and increases productivity.

An EOR, or employer of record, legally employs workers on behalf of a company. An EOR handles payroll administration and ensures compliance with all local laws and regulations for those workers.

EORs are beneficial to small businesses who want to hire workers in states and countries outside of their headquarters. In many cases, a company must register as an entity to hire employees in states outside of their main location or in another country. Most EORs are already registered in multiple locations, so small businesses can turn to an EOR to be the employer of record for employees in those locations. This saves time and money, while also expanding the talent pool for these businesses.

Partnering with a PEO that has a nationwide presence, however, means the professional employer organization is likely set up to operate in multiple states. At G&A Partners, we are a nationwide PEO with service centers located across the continental United States. We also work with businesses to help them remain compliant in every state they have a work presence and offer state-by-state Compliance Starter Kits that are packed with helpful resources. We do not provide services in foreign countries.

Though a PEO and EOR share the term “employer of record” in describing their roles, there are several key differences to consider when comparing a PEO vs. EOR:

If you’re considering a PEO, there are options available, but not all are created equally. As you research your options, it’s important to understand the scope of service offerings for each PEO, along with your business needs and goals. This will help you to determine which PEO can help you achieve those goals and greater operating efficiencies.

Whether you hire a local or national PEO, you’ll want to ensure they are accredited or carry a Certified Professional Employer Organization (CPEO) certification through the IRS. Per the IRS, certification indicates the “PEO has met the background, experience, business location, financial reporting, tax compliance, and bonding requirements described in the statute and regulations of the CPEO program.”

You’ll also want to consider these key factors when exploring your PEO options:

Finally, research the reputation of each PEO you’re considering, including how long they’ve been in business and any awards they have received. It’s important to choose a PEO that aligns with your company’s values and has a solid reputation.

At G&A, our commitment to best-in-class customer service is what sets us apart from our competitors – and we have the client service ratings to back it up. We believe in delivering world-class HR solutions that help build thriving businesses, and we are committed to making a difference in the lives of you and your employees.

A professional employer organization goes beyond the typical HR outsourcing relationship. When you engage with a trusted PEO like G&A you gain a valuable HR partner that not only helps you free up time by handling administrative HR functions, but one that also offers strategic guidance to elevate the experience you provide employees.