A Professional Employer Organization or PEO, is a company that specializes in handling Human Resource and Payroll issues for clients.
The easiest way to think of it is as outsourced Human Resources and Payroll Departments for your business. Businesses today need help managing increasingly complex employee-related matters such as health benefits, workers’ compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Enguaging a PEO enables companies to share these responsibilities and provide expertise in human resource management. This allows PEO clients to focus on the operational and revenue-producing side of their business.
The problem for small businesses is that on their own, the cost of having that expertise is simply too high. A PEO allows a business–no matter the size–to have all of the HR and Payroll tasks handled expertly and at a cost per employee that is less than the national average for even very large employers.
PEO companies provide an integrated service to effectively manage human resource responsibilities and employer risks for their clients. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client’s worksite and by contractually assuming certain employer rights, responsibilities, and risk.
The PEO relationship involves a contractual allocation and sharing of employer responsibilities between the PEO and the client; this shared employment relationship is called co-employment. When evaluating the employer role of either the PEO or the client, the facts and circumstances of each employer obligation should be examined separately, since neither party alone is responsible for performing all of the obligations of employment. Each party will be solely responsible for certain obligations of employment, while both parties will share responsibility for other obligations. When the facts and circumstances of a PEO arrangement are examined appropriately, both the PEO and the client will be found to be an employer for some purposes, but neither party will be found to be “the” employer for all purposes.
Why should I use a Professional Employer Organization?
The short answer is to save time, money and headaches. When you started your business you didn’t do it to become an unpaid tax collector for state federal and local government or deal with ever changing government employer regulations. You started it because you wanted to do something that you were good at and make a profit while you did it. So why not turn over those required duties that don’t have anything to do with your core business to a company that specializes in them?
According to the Small Business Administration the average annual cost of regulation, paperwork, and tax compliance for firms with fewer than 500 employees is $5,000 per employee, compared with $3,400 per employee for firms with more than 500 employees. We can reduce the cost for small businesses to an amount at or below that of large employers.
The SBA also has reported the average small business owner spends between 7% and 25% of his or her time handling employee-related paperwork. We should be able to reduce that figure by 85 to 90%. Leaving you more time to carry out tasks that actually make your business money.
In a recent survey1 the average PEO client saved $12,000 per year (an average of $600/ employee) and 9 hours per week because they use a PEO. The survey further shows that. The study goes on to break out the savings by number of employees.
- Clients with 1 – 9 employees saved $5,000 per year and 7 hours per week.
- Clients with 10-19 employees saved $10,000 per year and 13 hours per week.
- Clients with 20-49 employees saved $18,700 per year and 23 hours per week.
Survey of 515 current PEO clients had an average employee count of 21, but more than half of all clients surveyed had 10 or fewer employees.