PEOs For Beginners
I recently read an insightful CNN Underscored article about Professional Employer Organizations (PEOs) and their value for certain businesses. It prompted me to remember that - while we at the Compass are very familiar with PEOs - many people haven’t yet been acquainted. So today, we're going back to PEO 101, offering a general overview of how PEOs work and their benefits for small business operations across various sectors.
What is a PEO?
In an era where small businesses face numerous challenges, from complex regulations to fierce competition for talent, PEOs have emerged as a rapidly-growing business solution. But, what exactly is a PEO? David Feinberg, vice chair of the National Association of Professional Employer Organizations (NAPEO) and senior vice president at Justworks, explains it clearly in the aforementioned CNN Underscored article: "It handles the compliance, HR and benefits needs of small businesses. Effectively, it brings large company scale across all of those levels to small-business owners."
The PEO model operates on a unique co-employment arrangement. While this might sound alarming to some business owners, it's precisely this structure that allows PEOs to offer their most significant benefits. Under this model, the PEO becomes the employer of record for tax purposes, enabling small businesses to access big-company benefits and HR solutions no matter their employee count.
Consider the case of TechStart, a fictional 30-person software startup. Before partnering with a PEO, the company struggled to offer competitive health insurance and had no 401(k) plan. The founder, Sarah, spent countless hours each week dealing with payroll and compliance issues. After partnering with a PEO, TechStart now offers premium health insurance, a matching 401(k), and Sarah has reclaimed valuable time to focus on growing her business.
The numbers back up the PEO advantage. According to NAPEO (The National Association of Professional Employer Organizations), PEOs provide services to 17% of employers with 10 to 99 employees in the U.S., translating to roughly 200,000 small and medium-sized businesses. This widespread adoption hints at the value PEOs provide in today's complex business environment.
Why Choose a PEO?
Key services offered by PEOs include:
Payroll processing and tax filing
Benefits administration
Compliance management
Recruiting and onboarding assistance
Training and development programs
One of the most significant advantages of PEOs is the access they provide to Fortune 500-level benefits. By aggregating employees from multiple small businesses, PEOs can negotiate better rates for insurance, dental plans, vision coverage, and more. This levels the playing field, allowing smaller companies to compete for top talent against larger corporations.
However, the PEO model isn't all perfect. Some business owners may prefer complete control over core HR processes. There's also the potential for employee confusion, as paychecks will come from the PEO rather than the company they work for directly. As NAPEO Nice Chair Feinberg notes in the CNN Underscored article, "For some small-business owners, it's a visceral feeling of 'Those are my employees; it should be my name on the paycheck.'"
Costs can also be a concern. While pricing models vary, businesses can expect to pay either a flat fee per employee (ranging from $40 to $160 per employee per month) or a percentage of payroll (typically 2% to 12%). Despite these costs, many businesses find that the savings in time and resources, coupled with access to better benefits, make PEOs a worthwhile investment. A 2024 Paychex report referenced in the source article notes that “64% of companies spend over 570 hours a year (14 weeks) on HR Administration”. With the potential to reclaim valuable hours of work for a relatively low cost, it’s no wonder so many businesses are choosing to go PEO.
Moving to a PEO
The decision to partner with a PEO should not be taken lightly. Experts recommend thoroughly vetting potential PEOs, checking for IRS certification (known as CPEOs), and speaking with current clients. It's also crucial to carefully review the client service agreement, which outlines the responsibilities of both the PEO and the client business.
As the business landscape continues to evolve, PEOs are positioning themselves as a crucial support system for small and medium-sized enterprises. By offloading complex HR tasks and leveraging economies of scale, these organizations are helping smaller businesses punch above their weight in an increasingly competitive marketplace.
While not a one-size-fits-all solution, for many small business owners drowning in administrative tasks or struggling to offer competitive benefits, a PEO partnership could be the key to unlocking new levels of growth and success. As the CNN Underscored report suggests, it's an option well worth exploring for businesses looking to thrive in today's challenging economic environment.
Please visit our expert partners at Libertate Insurance Services, LLC to help decide if a PEO is right for you!
Author: PJ Hughes
Link to original article: https://www.cnn.com/cnn-underscored/money/what-is-peo
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The PEO Compass is a friendly convergence of professionals and friends in the PEO industry sharing insights, ideas and intelligence to make us all better.
All writers specialize in Professional Employer Organization (PEO) business services such as Workers Compensation, Mergers & Acquisitions, Data Management, Employment Practices Liability (EPLI), Cyber Liability Insurance, Health Insurance, Occupational Accident Insurance, Business Insurance, Client Company, Casualty Insurance, Disability Insurance and more.
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