One of the main challenges that small and mid-sized businesses face is managing and caring for their employees. Factoring in payroll, taxes, and insurance costs, employee-related costs can be one of a company’s largest expenses.
During recent years, Professional Employer Organizations (PEOs) have become a viable new way for smaller companies to save money on their human resources costs. A PEO manages all your employee-related functions — payroll, taxes, insurance — very cost effectively, freeing you to focus on your business.
Once you hire employees, you are required to pay them a salary, pay unemployment fees, and take out workers’ compensation insurance. Depending on the number of employees, larger companies normally delegate employee-related functions to a dedicated human resources department. But what should a company do when it has too few employees to justify creating a formal HR department?
This problem has given rise to HR outsourcing firms that companies contract with to take over certain employee-related tasks. Outsourcing takes the HR burden off smaller businesses and transfers them to an outside firm that specializes in the various areas of human resources: payroll administration, benefits, and employee orientation and training. The benefits HR outsourcing can offer include:
- Skilled professionals to do the job
- Improved employee relations
- Money saved by cutting overall expenses
A PEO takes the concept of HR outsourcing one step further. Rather than specializing in certain areas, a PEO becomes the employer of record, and as such takes on all legal responsibilities for your employees. In practice, the PEO will legally hire all of your current employees, making it responsible for taxes and insurance. When you hire a PEO, you enter into a contract that defines 1) powers, 2) responsibilities, and 3) liabilities.
The services of a PEO come under four basic headings. These are:
- Payroll. Mainly this involves keeping track of employee work time, deducting federal and state taxes, and issuing checks.
- Human Resources Compliance. Ensuring that all of your employee procedures comply with federal and state laws, including race or gender discrimination laws.
- Benefits Administration. This can include things such as health benefits, vacation, sick leave, and retirement.
- Risk Management. A vital area that has to do with insurance, primarily workers’ compensation insurance.
Although sometimes aligned with temporary employment agencies and staff leasing firms, a PEO provides a much different type of service. Unlike a temp agency, your employees are intended to be permanent and not moved around to a variety of different jobs. In terms of staff leasing, you are not just leasing any employee, you’re leasing your own employee. Everything is the same, except that your employee receives his or her checks and benefits from an outside firm. The employees still work for you, but all their taxes, benefits, and insurance are handled by an outside source.
A PEO can save your company money. For example, a PEO can offer you the advantages of group insurance. They can do this because they handle a variety of small businesses that they pool together, getting better rates for all the businesses involved. When looking for a PEO, do some comparison shopping as to their differing fees and responsibilities.
For more in-depth information on PEOs, be sure to check out the AllBusiness.com Buyer’s Guide to Outsourcing Your HR Using a PEO.