A Professional Employer Organization (PEO) is a full-service human resource outsourcing solution that operates under a co-employment model. In this arrangement, the PEO takes on various employee administration tasks, such as payroll processing and benefits management, on behalf of your business. While some PEOs offer strategic services, their capabilities can vary widely, so it's essential to research and compare providers.
Why Consider a PEO?
Partnering with a PEO can help your business grow while providing peace of mind regarding compliance and risk management. PEOs typically assist with:
Payroll and Tax Filing: PEOs handle payroll processing and can manage local, state, and federal employment taxes. Many integrate payroll with time and attendance systems to minimize errors and duplicate data entry.
Benefits Administration: A co-employment relationship often grants access to high-quality, cost-effective health insurance, dental care, retirement plans, and other employee benefits. The PEO manages employee enrollment and claims processing.
Compliance: PEOs have compliance experts to help protect your business from fines and penalties related to payroll tax laws, unemployment insurance, workers’ compensation, and HR regulations.
Risk and Safety Management: Besides providing workers’ compensation insurance, some PEOs offer safety audits and training to help reduce claims and assist with OSHA inspections.
Human Resource Support: Many PEOs employ HR professionals who provide various HR services. If you have an in-house HR team, the PEO can collaborate with them strategically and administratively.
Talent Management: Some PEOs offer comprehensive talent services, including recruiting, employee training, and performance management.
ADP's PEO encompasses all these services and more, including strategic guidance from a dedicated HR business partner.
PEO Benefits for Small Businesses
Small and mid-sized business owners often turn to PEOs for essential HR management support, allowing them to focus on their core competencies—creating and selling their products and services. Here’s how a PEO can benefit small businesses:
Reducing Employer Liability: By partnering with a PEO, you can mitigate some employer-related liabilities. For example, ADP TotalSource® offers support during unforeseen circumstances and provides legal defense benefits under specific conditions.
Going Beyond HR Administration: Some PEOs provide data analytics and benchmarking services to offer insights into your workforce, helping answer critical questions such as:
How do your employee salaries compare to the market?
What skill sets best match available jobs?
Which departments require additional staffing?
How does your turnover rate compare to industry peers?
This information can help improve employee retention and reduce turnover.
How PEOs Operate
In a co-employment arrangement, both the business and the PEO share specific employer responsibilities. The PEO typically manages payroll, tax withholding, workers’ compensation coverage, employee benefits administration, and HR guidance. This allows you to focus on core business operations, such as delivering products and services and making hiring decisions.
Choosing the Right PEO
When selecting a PEO, treat it as any other strategic business need. Look for providers that:
· Have a proven track record and financial stability.
· Can meet the specific needs of your business and workforce.
· Provide references from clients in your industry.
· Offer comprehensive support and compliance expertise.
· Have services and coverage in your operational areas.
· Are accredited by ESAC or certified by the IRS.
ADP's PEO holds both ESAC accreditation and IRS certification, ensuring your business is well-supported.
Who Benefits from PEOs?
PEOs are particularly advantageous for small and mid-sized businesses, but larger organizations can also reap benefits. PEOs are suitable for a wide range of industries, including:
· Real estate and property management
· Computer services and technology
· Securities brokers and dealers
· Engineering and health services
· Legal and management consulting
· Accounting, manufacturing, and trades (plumbing, HVAC, electrical)
· Nonprofits and wholesale businesses
Limitations of PEOs
While PEOs handle HR administration, they do not take over ownership or complete control of your organization. A PEO will not:
· Make independent business decisions.
· Assist with marketing, sales, or product distribution.
· Dictate employee pay rates, hours, or schedules.
Cost of PEO Services
PEOs typically charge a percentage of payroll, though some may base fees on employee count. When evaluating PEO costs, consider:
· Reputable providers usually offer a cost analysis detailing how payments are allocated among payroll, benefits, and workers’ compensation.
· Additional services, such as data insights or talent management, may come at a higher cost but can yield a better return on investment.
· Your time is valuable; managing HR independently can distract you from revenue-generating activities.
Types of PEOs
Though there is only one type of PEO—co-employment—confusion exists due to the misuse of terms like employee leasing. Some state legislatures even refer to PEOs as leasing entities in their laws.
Certified PEOs
Certified PEOs (CPEOs) meet stringent financial, legal, and reporting standards set by the IRS. Partnering with a CPEO can provide financial protections and tax benefits, such as the ability to pay federal taxes on your behalf and avoid double taxation.
Benefits of Working with a CPEO
· Financial Guarantee: CPEOs must post a bond annually to guarantee federal employment tax liabilities.
· Tax Restart Elimination: Certification removes the wage-base "restart" for certain federal payroll tax purposes when joining or leaving a CPEO midyear.
· Trust: CPEOs must periodically renew their certification, demonstrating consistent adherence to fiduciary standards.
ESAC Accreditation
In addition to IRS certification, PEOs can be accredited by the Employer Services Assurance Corporation (ESAC), indicating financial stability, ethical conduct, and compliance with operational standards.
Partner with ADP's PEO for peace of mind, as we are both ESAC accredited and IRS certified, ensuring your business is in capable hands.
