Understanding Professional Employer Organizations

Understanding Professional Employer Organizations

March 2, 2018 | By Tailored Solutions

What is a Professional Employer Organization and what does a PEO do for small businesses? The short answer: PEOs help small businesses overcome some of their biggest obstacles.

Small businesses, which are defined as having fewer than 500 employees by the SBA, have a big impact on the economy. Small businesses make up 99% of US business and employ approximately 56 million people, or 48% of the private workforce.

But small businesses often face big challenges, as well.

Unlike large corporations, small businesses often struggle with cash flow, managing employees, hiring and retaining qualified employees, and managing benefits, just to name a few of the obstacles they face.

And that’s where Professional Employer Organizations (PEOs) come in. PEOs give small businesses some of the advantages that larger corporations have - allowing them to be more competitive and providing an opportunity for their business to survive… and thrive.

What is a Professional Employer Organization?

Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEOs provide to growing businesses across the country, according to the National Association of Professional Employer Organizations (NAPEO).

PEOs provide small businesses with payroll, benefits, HR, and compliance management, which allows these businesses to spend more time and resources focusing on growing their business.

According to economists, small businesses that use PEOs have a distinct advantage over their non-PEO peers:

  • 7% - 9% faster growth
  • 10% - 14% lower employee turnover
  • 50% less likely to go out of business

PEOs can also help free up cash flow for cash-strapped businesses.

Keep reading to find out how a PEO works and the many benefits a PEO relationship brings to an employer.

How Does a Professional Employer Organization Work?

Small businesses (employers) enter a contractual co-employer relationship with a PEO company. The employer and the PEO share employer responsibilities as outlined in a client service agreement.

  • Employer: Retains ownership of the company and control over operations.
  • PEO: Focuses on employee-related issues, such as payroll, benefits, taxes, and compliance.

Business owners continue focusing on the “business of doing business” while the PEO focuses on the employment side of the business.

Small Business Solutions

Benefits for the Bottom Line

Employers who partner with a PEO can experience a big improvement to their bottom line. The annual median revenue growth for PEO users was twice that of comparable non-PEO firms, a distinct advantage no matter the industry.

Reduced HR and Payroll Costs

PEOs are a cost effective alternative to hiring qualified employees that can effectively manage your human resource, training, payroll, accounting, risk management, insurance and benefit management, and compliance needs. Employers can choose to maintain a very simple in-house HR infrastructure, or none at all, with the help of a PEO.

With a PEO servicing your business’ HR needs, you can focus on hiring for positions that directly impact revenue growth, rather than non-revenue generating HR positions.

PEOs are able to provide small businesses with a greater array of HR offerings at a lower price than their clients would normally have to pay to receive less comprehensive HR services. According to NAPEO, a conservative estimate is that PEO clients enjoy a 21% savings on HR services, and for many clients, this savings is actually much higher.

Reduced Workers’ Comp Premiums

Many employers are introduced to the idea of a PEO partnership not because they are seeking out HR help, but because they’re looking to save on workers’ compensation premiums.

PEOs use economy of scale to shop for and obtain workers’ compensation. PEOs can often get a business significantly lower workers’ comp premiums. Employers with a high experience mod often join a PEO for the benefit of taking on the PEO’s lower mod score, resulting in immediate premium savings.

Because they can tie comp to payroll, PEOs often provide a pay-as-you-go model for workers’ comp, allowing their clients to accurately pay their premiums from month-to-month and eliminating the potential for an end-of-year audit.

Workers’ compensation can be a complex program that demands significant time and resources. PEOs can help employers get coverage, save on premiums, manage claims, and even help with safety compliance and risk management.

Benefits for Employees

Employers aren’t the only ones who benefit in a PEO relationship; employees also experience very tangible benefits.

Most PEO clients are small companies with bare bones HR functionality. These companies typically only focus on the most basic HR needs, which could still be time-consuming and inefficient.

Not only does a PEO bring more expertise to these HR services, they bring a host of additional services and offerings, as well.

PEOs enable small companies the opportunity to provide the same best-in-class benefits that employees typically only find at large, Fortune 500 companies. One of the most valuable benefits a PEO can bring to a company is employer-sponsored retirement benefits and healthcare benefits for employees.

While a PEO provides an employer the chance to essentially “outsource” HR and employee duties, employees still have more positive associations with their HR experience compared to non-PEO employees.

NAPEO used comprehensive survey data to examine both PEO and non-PEO employees in an effort to better understand the impact that PEO has on the industry. Survey results confirmed that, indeed, PEOs help companies improve practices and management on the “people side” of their business.

NAPEO also found clear results illustrating that PEOs help to improve their clients’ HR policies and practices, employees’ work environment and satisfaction/engagement, and businesses’ ability to focus on factors that drive business success.

PEOs bring big benefits to small business owners across a wide variety of industries.

If you want to spend less time working on non-revenue generating activities that are necessary for the survival of your business and, instead, devote more time and resources to focusing on that which helps your business grow and thrive…

If you want to compete with the biggest companies for the best employees, by offering competitive, best-in-class benefits packages…

If you want to free up cash and increase your bottom line…

...then you would benefit from digging a little deeper to see if a PEO is right for you.

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