Professional Employer Organizations: A Guide for Small Businesses

Small business owners quickly learn that the thing about payroll administration, employee benefits, workers’ compensation insurance, and many aspects of human resources is that these functions burn valuable time. A Professional Employer Organization (PEOs) provides a unique service model that saves time, transfers certain responsibilities, and provides access to big-company employee benefits, without changing the fabric of how a company runs.

“PEOs currently provide services to 4.5 million worksite employees,” according to the National Association of Professional Employer Organization (NAPEO) website, and this information is frequently echoed by active NAPEO member Samantha Bond Richman. In 1990, Samantha began her 34 year career of advising business owners of the advantages of using PEO services, formerly known as employee leasing. Over the years, the state of Florida has played a role in the growth of the PEO industry to address many concerns of employers here, including high employee turnover rates in the state, elevated insurance costs, coverage mandates, and compliance issues related to employment.

What Is A PEO?

A professional employer organization, or PEO, is a company that supports human resource functions by sharing certain responsibilities with small and mid-sized business (SMB) clients. As co-employers, PEOs handle payroll administration, payroll taxes and withholding, all under the responsibility of the federal employer identification number (FEIN) of the PEO.  This is a major distinction from a traditional payroll or software provider.  

The PEO shares responsibility for the employees, while taking a back-office role under the direction outlined in a client service agreement between the business owner client and the PEO. Existing employees are transferred with original dates of hire denoted. The business owner (or manager) continues to conduct hiring, set rates of pay, assign employee job duties, and deliver terminations when applicable. Many PEOs make available comprehensive human resource information systems (HRIS), enabling central communication capability for scheduling, paid time off (PTO) tracking, employee self-serve earnings reports, and even open enrollment for benefits.

PEOs Explained In 30 Seconds

The Benefits of Using a PEO for Florida Small Businesses

Great Payroll Experience 

Like so many businesses, a PEO is a specialist in the products and services they provide.  In order to provide a valuable, cost-effective relationship with clients/employers, PEOs must perform the payroll administration function better than the incumbent method of any new prospective client company.  While payroll administration may not be the reason to choose a PEO, it must transfer in order for the PEO to share in the employee-employer relationship. The human resource information software (HRIS) supporting client companies using a PEO is instrumental in the delivery of every other service under the PEO umbrella. PEOs strive to provide an accurate, robust, secure processing environment to deliver satisfaction for all users and operate as if their business model depends on it.

Hassle-Free Workers’ Compensation

The PEO is considered a co-employer, thus sharing in the responsibility for the employees and can combine all clients served under one workers’ compensation insurance policy. The volume discount for annual policy premiums totaling millions of dollars is more than any single client can achieve independently. Clients only pay premiums when payroll is run, and premium calculation is done to the penny each pay cycle.  The risk management services, real time premium calculation, certificate management, and when needed, claims processing are provided by the PEO. Multistate workers’ compensation is already in place for the client using a PEO, making expansion easier and faster for industries like construction, technology, franchises, and companies with employees who work from home (WFH). 

Superior Employee Benefits

A PEO has a shared risk in the employees and can use the aggregate employee population of clients to procure employee benefits. The thousands of employees included can oftentimes open carrier relationships, drive aggressive premium discounts, and create a more level buying experience from year to year. Health insurance carriers like Aetna, BlueCross and Blue Shield, Cigna, United Healthcare and others are all available in a PEO client service agreement. Additional benefits, including life, dental, vision and disability insurance are available with billing, enrollment, and COBRA administration handled by the PEO.  There is only one invoice to manage with employee eligibility, enrollment and termination tied to the human resource information system (HRIS) for timely debits and credits.

Employee Attraction and Retention

Attracting, rewarding and ultimately retaining the best employees for any organization is tied to the satisfaction of both the employee and employer.  There is a relationship between employer and employee that can be nurtured beginning with a smooth new hire onboarding experience.  PEOs endeavor to provide a paperless atmosphere where documents can readily be accessed by the necessary audiences, and missing information is identified and followed up behind.  Employee benefit information, retirement plan documents, policy manuals, and compensation records can be shared and stored electronically.

Tax benefits, like high deductible health plans (HDHP) with Health Savings Accounts (HSA) are made seamless with the co-employer relationship.  Plan documents for IRS Section 125 and other applicable plan sponsor reporting are provided by the PEO.

Adding a tax deferred 401(k) retirement savings plan integrated with payroll under the PEO entitles the client employer to certain multiple employer plan discounts, reduced fiduciary liability, flexible plan design, and plan participant income testing. Most plans allow for employers to offer just participation to employees, so no matching contributions are necessary if certain conditions are met. 

Continuing Human Resource Support 

PEOs employ internal human resource personnel to support the client companies they serve with expert compliance advice for help in navigating the ever-changing landscape of employment law. Specialists in wage and hour; healthcare reform; workers’ compensation; risk management; unemployment claims; and employment policymaking are available for the mutual benefit of all parties. Things change, and brand-new exposures to employers develop with the changing times. Businesses now care about company-related social media posts by employees. Rules for working from home (WFH) were not on the radar for many employers just a few years ago. Savvy employers know employment policies need to keep pace.

Common Questions About Professional Employer Organizations

Small business owners interested in a working with a PEO ask questions first.  Here are some FAQs.

What Is A PEO?

A professional employer organization (PEO) is an organization that provides human resource services to small and mid-sized businesses. By transferring existing employees and certain employer responsibilities, PEOs provide economies of scale for the necessary fulfillment of payroll administration, workers’ compensation insurance, employee benefits, and other HR functions so business owners can focus on their business operations.

How Does A PEO Work?

PEOs establish a co-employment relationship with client companies using a client service agreement to outline the rights and responsibilities for each party. Typically, both sides commit to a one-year term of service. The client company retains control over day-to-day business operations, and it shares certain employer responsibilities with the PEO. By using well designed, integrated systems, HR management takes much less time and employers have peace of mind knowing things are being handled by a professional firm sharing the responsibility.

What Are The Benefits Of Using A PEO?

Partnering with a Professional Employer Organization provides many advantages for small businesses:

• Access to Fortune 500-style benefits at an affordable cost. PEOs leverage their size to negotiate competitive rates on health insurance, retirement plans, and other benefits.
• Reduced administrative burden. PEOs handle time-consuming HR tasks like payroll, benefits administration, workplace compliance, and risk mitigation.
• Cost savings. PEOs help companies save on HR expenses through economies of scale and optimized processes.
• Compliance peace of mind. PEOs help companies remain compliant with labor laws and regulations, avoiding potential fines and penalties.
• Employee satisfaction and retention. Comprehensive benefits and HR support lead to higher job satisfaction, morale, and employee retention.

How Much Does A PEO Cost?

PEOs are all different, and business client needs vary. Sometimes the replacement of existing cost with a PEO model results in net savings to many categories. PEOs typically offer a cost plus administration model based on a small percentage of payroll ranging from 1 to 5%. Other PEOs offer their administrative fee on a per employee per month (PEPM) basis.

Call Sam Bond Benefit Group Today

Partnering with a PEO can bring great advantages to companies by allowing them to focus on profitable business operations.  The value of using a PEO for payroll administration, workers’ compensation coverage, employee benefits, and human resource advice is enjoyed by millions. Using an independent agent allows for comparative cost evaluations, industry insights and knowledgeable representation during the length of the service relationship. Call Samantha Bond Richman (Sam) at Sam Bond Benefit Group at 877.426.6320 for a needs assessment to identify the best suited, most competitively priced PEOs for your business.