What is a PEO and why should you use one?

[aa_subtitle_display]A Professional Employer Organization (PEO) is one of the best-kept secrets of many successful small businesses. These vendors manage all of your HR needs, including payroll and administration, employee health and retirement benefits, workers' compensation insurance, state and federal compliance issues and even worker training.  

According to the National Association of Professional Employer Organizations, there are over 700 different PEO vendors in the United States.  Many of those focus their HR expertise on various industries.  Or they will cater their knowledge to better service a certain type of workforce like manufacturing or blue-collar industrial.  Some are publicly-traded, massive, organizations.  Others are regional and privately-owned firms. 

PEOs come in all shapes and sizes.  Like other service-based industries, specialization develops as a byproduct of competition and the need to differentiate.   Each PEO will do something slightly better, and sometimes worse, than another one.

Once you’re using a PEO, all you have to do is hire, supervise and promote (or fire) your employees as you see fit.  Obviously there is a cost for contracting out your HR department, but consider this list of positives.

• PEOs manage thousands of employees and can use their clout to purchase insurance and benefit plans at a significant savings or allow you to offer higher-quality plans to attract and retain skilled employees.
• Experienced professionals in HR, benefits, payroll, risk management and other aspects of employee administration are on the job. Want to institute a 401(k) plan or flexible spending account? The PEO will do it. No need for you to figure it out yourself.
• The PEO will provide HR manuals for your employees, and the policies and procedures will be maintained in compliance with ever-changing state and federal laws and regulations.
• A PEO will help with employment-related regulatory compliance (ADA, payroll, OSHA, EEOC, etc.), a huge advantage that can be worth more to your business than the money saved on benefits costs.
• The PEO can provide effective management and access to payroll records, benefits, personnel data, vacation and sick-time accruals and specialized reports.
• If you have an HR-related employee claim, such as a discrimination allegation, a PEO will know what to do and will take the lead on managing the claim process.

How much does this all cost?  Normally the savings a business realizes on group health and benefit plans will more or less outweigh the cost of hiring a PEO to tackle these duties.  So it’s worth taking a look.  Also, don't forget about the peace of mind that a PEO offers.

For example, what would happen if you opened a new office or a new location in a another state?  Would your staff have any idea how to administer payroll, reporting, etc. in the new state?  If you hired a national PEO, or a regional PEO who serviced that state, then you’d be able to make the process of opening offices and hiring employees in other areas painless and risk-free.

The most important bit of advice when it comes to hiring a PEO: Do your due diligence.  Shop around.  Get multiple bids from different PEOs. You want your vendor to be financially responsible and stable.  You want them to be a good match for your business.  The best are accredited by the Employer Services Assurance Corporation and have a current Statement on Standards for Attestation Engagements No. 16 audit (formerly known as an SAS 70). Make sure they have a deep presence in your industry, and get references.  Or better yet, use an experienced PEO consultant from Aliere Advisors.  They know how to find the right vendor for the best rate.

When does your business need a PEO?  It depends - every situation is unique.  However, an obvious clue is the moment your accounting department (or person) asks for a dedicated HR person (even a part-time one) to help handle all the paperwork. The sooner they can offload that important (busy) work to someone who really knows what they're doing and return to managing your balance sheet, the better.