What is a Professional Employer Organization and How Does it Work?

The term professional employer organization (PEO) is not widely known—but for businesses, it should be! Partnering with a PEO allows companies to outsource employee administration tasks, freeing up time to focus on growing the bottom line.

Read on to learn more about what a PEO does, how the PEO relationship with businesses works, the benefits of working with a PEO , and how much PEO services cost.

Don’t let HR get in the way of your business

As any manager or business owner knows, employing people is tougher than it looks. You go from growing your business to growing your team and before you know it, you’re up to your neck in paperwork—payroll, workers’ compensation claims, and a never-ending list of compliance issues.

Last time you checked, you didn’t get into the HR business.

Despite its necessity, human resources administration will never generate revenue for your business or deliver value to your customers. That’s why outsourcing these tasks to a single, expert provider may be a smart decision for your business.

Enter the professional employer organization, or PEO.

What is a Professional Employer Organization (PEO)?

A professional employer organization (PEO) works with companies to handle the administrative tasks related to employee management and human resources. This includes payroll, benefits, workers’ compensation, taxes, safety training, employee handbooks, industry-specific compliance issues and more.

How does a PEO relationship work?

The contractual relationship with a PEO is known as co-employment, or shared employment. Both you and the PEO allocate employment-related responsibilities, risks, and liabilities under the PEO’s federal tax ID. Engaging in a shared employment relationship will not disrupt your daily operations nor will it interfere with key business decisions.

The PEO becomes the employer of record for tax and regulatory purposes, while your company maintains full operational control as the worksite employer. That means you still call the shots on who to hire, what job duties are assigned, who gets paid what, how employees are managed, etc.

With a PEO, all areas of your human resources administration can be handled by a single provider for a single fee—making the business of being in business simple.

What are the benefits of working with a PEO?

Whether you take a DIY approach to employment administration, outsource pieces of the HR administration pie to various vendors, or do a little of both—your company can realize tangible business benefits by working with a PEO.

1. Cut labor costs with stabilized rates

Claims and utilization can cause your insurance rates for health care, workers’ comp, and other labor-related coverages to skyrocket in a single year. However, because PEOs have the ability to negotiate lower group insurance rates and limit rate increases for their own policies, cost savings get passed on to you.

2. Free up time to focus on strategic HR initiatives

HR is more than just paper pushing. It’s about leveraging your company’s most important asset: your people. With back-office administrative tasks being handled by the PEO, you and your HR team (if you have one) can focus on more strategic areas of HR like hiring for fit, employee engagement and retention, talent development, organizational culture, and more effectively managing your employee’s everyday work.

3. Expand employee benefits without increasing costs

Under the shared employment relationship, your employees become the employees of record of the PEO . Combined with their other clients, the PEO has a stronger buying power with benefit providers. This gives your business (and your employees!) access to more robust benefits packages than you’d be able to obtain on your own—an advantage which is invaluable in Hawaii’s tight labor market.

4. Mitigate risk and liability

The business of being an employer grows more complex every year—new state and federal laws, revised forms, and new reporting requirements. Even if you have HR professionals on staff, it can be tough to stay on top of it all. Plus you have to be ready to prevent and put out serious HR fires that inevitably occur. Working with a PEO streamlines your company’s employment practices, provides more efficient processes, and improves compliance.

5. Leverage the power of technology

A reputable PEO should be able to provide an integrated HR information system (HRIS) that will make life easier for you and your employees. Your company saves time and money through streamlined access to payroll, time and attendance, benefits, and employee records. For businesses dealing with a hodgepodge of administrative systems, the advantages of vendor consolidation provide a practical boost to daily operations—a true game changer.

6. Gain a competitive edge

A PEO takes the stress of employment administration off your shoulders. The result? You spend less time worrying about things like tax filings and payroll processing and more time strategizing ways to find new customers and retain existing ones.

Realizing these benefits depends on several things, like your type of business, number of employees, current HR administration costs, employee turnover, employee issues, lost opportunity costs, and any compliance issues. More importantly, though, it comes down to selecting the right vendor and appropriate service plan.

Related: Is HR Outsourcing Right for Your Business?

How much does it cost to work with a PEO?

The cost of working with a PEO depends on the services you select and varies widely by provider. Typically, PEOs charge in one of two ways: a flat, per employee rate or a percentage of total gross payroll.

Flat, per employee rate

Flat, per employee rates can range anywhere from $500 to $1,500 per employee, per year. A company with 10 full-time employees can expect to invest between $5,000 and $15,000 per year. Though more predictable in terms of budgeting, per employee rates are less favorable when you have lots of part-time employees.

Percentage of payroll

Some PEOs may charge a percentage of payroll–typically 2 to 8 percent–and are less ideal when you have large fluctuations pay cycle to pay cycle (e.g. overtime, commission, and bonuses). At a rate of 2 percent, a company with 10 full-time employees taking home a total of $10,000 in gross wages biweekly can expect to invest about $200 per payroll cycle–or roughly $5,200 per year.

As with most products and services, you get what you pay for. PEOs are no different. In fact, some PEOs say they do the same thing as other providers, but this isn’t always true. Be sure to compare PEOs carefully.

If you need help evaluating PEO providers, download our free buyer’s guide on HR Outsourcing in Hawaii.

Why outsource through simplicityHR?

simplicityHR is not your typical PEO. We’ve been a leader and innovator in the outsourced payroll and HR industry for over 50 years! Here’s what you can expect when you work with simplicityHR:

• Expertise and trust of an industry leader
• Unmatched customer service with local, on-the-ground support
• Financial protection and assurance of an Employer Services Assurance Corporation (ESAC) accredited company
• Top-notch education and training services to promote safe, successful workforces

Watch these success stories to find out why we’re Hawaii’s premier HR outsourcing company.

This article is for informational purposes only and does not constitute legal advice. Readers should first consult their attorney, accountant or adviser before acting upon any information in this article.