What is a PEO, what do they do and how do they work?

By March 17, 2017Business, PEO

Over the last two months, I have written a few different blog posts about different aspects of PEOs and how employers may (or may not) benefit from using one.

It took me until now to realize that there is a large portion of the population that does not know what a PEO is or how they operate. This, and the fact that I’m running out of interesting things to say about PEOs, led me to write this piece that should educate you about what a PEO is and how a PEO works.

Let’s get started.

What is a PEO?

First off, you should know that PEO stands for Professional Employer Organization. A PEO is an organization that is in business to provide HR Solutions for small and mid-size businesses. Typically, PEOs serve employers with 20-500 employees. Regulation of the PEO industry is fairly light due to how young the industry is. However, regulation will only become more stringent as time goes on. Currently, PEOs are subject to State Regulations and the IRS is working on ways to give their stamp of approval for PEOs that meet their guidelines.

That is about all I can say about what a PEO is before I have to get into what it is that a PEO does. So, here’s the stuff you really want to know.

What does a PEO do?

I mentioned above that a PEO provides HR solutions for small and mid-size businesses. Let’s narrow that down a bit. Here are the specific HR solutions that a PEO will usually provide:

  • Employee Benefits Administration

Using a PEO provides employers with the ability to offer affordable Health Insurance to employees. In addition to this, PEOs will usually offer retirement plans to employees. Not only do PEOs offer health benefits and retirement plans, but they will also track and manage them for employers to ensure that everything runs smooth and employees can get answers to any questions they have.

  • HR Support

This one is a little broad, but what HR Support  really means is getting answers to those type of questions that start with “Can I do this…?” or What if this happened…?”. Managing employees is no easy task and PEOs know this. Many PEOs have HR Support lines or a dedicated support representative to help Employers effectively manage employees without getting themselves into trouble. What is encouraging to Employers is that PEOs have their own interest to protect, so any good PEO will actively seek to help Employers do the right thing.

  • Payroll Processing & Tax Filings

An “absolute must” for PEOs is to be able to process payroll for their clients’ Employees. For a fee (usually a percentage of gross payroll) PEOs will process a client’s payroll, issue employee checks and ensure that all withholdings are taken care of. Last, but not least, a PEO will file federal and state payroll taxes on behalf of their client. Essentially, using a PEO should eliminate the need for a payroll department.

  • Safety/Risk Management

PEOs offer a nice package of Safety and Risk Management services to clients. These packages are meant to keep employees safe and ensure that Workers’ Comp claims are at a minimum. PEOs also have an interest in keeping safety at the forefront of their clients’ agendas. Whether it is implementing an IIPP, Safety Trainings or just offering advice on how to deal with OSHA, PEOs are generally a big help for Employers seeking help with Safety.

  • Workers’ Compensation

Another “absolute must” is that the client company utilizes Workers’ Comp coverage provided by the PEO. The great thing about Workers’ Comp coverage provided by PEOs is that it is setup on a Pay-As-You-Go system which helps minimize cash-flow issues, eliminates audits and keeps down payments to a minimum.

How does a PEO work?

I’ll keep this one short.

Luckily, the relationship between a PEO and its clients can be summed up in one word; Co-Employment.

Co-Employment is a relatively new concept that carries its fair share of gray area.

The basic idea of PEOs and Co-Employment is that the PEO takes on a fair share of liability and duties with respect to a client company’s employees. As mentioned above, things like payroll and Workers’ Comp are an absolute must when using a PEO. Since a PEO is able to take on these portions of the employee-employer relationship, they are labeled as a Co-employer to their clients’ employees.

Because of this relationship with clients’ employees, a PEO is legally allowed to extend their own Workers’ Comp Coverage to protect their client and its employees. Also, as a result of this co-employment relationship, a PEO has a shared interest in providing great Safety/Risk Management, HR Support and Benefits to employees of their clients.

There you have it!

You should now have a basic understanding of PEOs. Though, as you dive deeper into learning about particular PEOs, you will learn that they each come with their own unique offerings and nuances that are important to know.
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