Professional Employer Organization (PEO)
What is a PEO?
PEO is a term that first arrived on the HR scene in the form of “employee leasing,” as made popular in the 1960s by Marvin Setler. Over the next 20 years, the term morphed into the current Professional Employer Organization (PEO) model. This type of company:
- Becomes a co-employer with your SMB
- Is contracted to conduct specific HR services on your company’s behalf
- Reduces an SMB’s potential employment tax liabilities
A PEO should not be confused with a SaaS (Software as a Service) company. PEO services help small businesses with various human resource activities, including:
- Payroll and payroll taxes
- Employee benefits and benefits administration
- Recruiting and employee leasing, among other services
Why does an SMB owner need to know about PEOs?
As the owner of a small to medium-sized business, you are juggling a multitude of different responsibilities. The many tasks associated with key HR services involve:
- Accurate payroll processing
- Precise employee tax withholding, recording, and filing
- Stringent compliance expectations, including reporting
- Maintaining correct recruiting practices and recordkeeping
- Appropriate employee HR file management
- Complete training recordkeeping
- Meticulous employee benefits management, among other functions
Although there are SaaS companies that will allow you to host their software on your company’s servers, they are a different arrangement than you would have with a PEO. When you contract with a SaaS company, you are still entirely responsible for your employees’ information input, completion, and processing.
How does this work?
When you enter an agreement with a PEO, that company becomes your staff’s hiring and payment entity. Your company doesn’t directly employ the team members working for your company — your PEO partner company does. Your company is responsible for the day-to-day management and oversight of the employees. As the actual employer of the team members, the PEO is responsible for complying with all HR-related compliance requirements and tax deadlines. That can free up a lot of time, allowing you to focus on other business-related functions and responsibilities. A PEO essentially takes on the majority of the HR-related back-office functions that can sneak up on a busy business owner. To do this, they typically charge a percentage of your overall payroll expense or a flat fee applied to your company’s total headcount. Similar to your finance department, your HR department is not an area where you want to cut corners, as the resulting regulatory fines brought by the DOL could be significant.
What is the history of PEOs?
Professional employer organizations first started meeting employer needs in the middle of the 20th century. In the 1960s, Marvin Setler hired and then leased employees to a Californian physician’s office. His model was different from a temporary agency in that the employees were intended to be long-term solutions for the company rather than stop-gap problem solvers. The model continued to change over the next 20 years, so that by the 1980s, payroll management processes were also part of the overall solutions. Unfortunately, appropriate infrastructures and checks and balances were not in place at the time, so compliance with employment laws became problematic. As a result, Congress enacted more stringent legislation to ensure businesses took employment processes seriously. To ensure compliance with tighter regulations, PEOs began contracting with companies to become co-employers. The PEO files employment taxes under the PEO’s employer ID number (EIN). Even so, your business is still on record as being in partnership with the PEO for specific services and remains accountable for how the PEO treats and manages your staff members, including ensuring their positions are correctly classified under the Fair Labor Standards Act (FLSA).
Summary
A PEO is responsible for taking on the full HR functions you and your company contract with them to complete. As part of that agreement, your company signs a co-management agreement giving the PEO the authority to conduct those services on behalf of your company. Studies have indicated that a PEO can free up nearly 25% of management’s time and reduce turnover by 10%–14% by taking over specific HR functions.
