Employment Hero

Professional Employer Organisation (PEO): Your Ultimate Guide 

A PEO, or professional employer organisation, is a co-employer that can manage payroll, benefits, and other human resources (HR) responsibilities on behalf of your company. A typical PEO will provide a selection of staff with extensive experience in HR, legal, tax purposes, client services, and accounting that can reduce admin costs, streamline payroll and help with expansion into international markets.

While there are many benefits to outsourcing roles like payroll, let’s dive into the advantages and further benefits of using a PEO.

Understanding a PEO

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A PEO is a cost-effective way for businesses to mitigate the challenges of a number of tasks associated with employment. For many small and medium sized businesses, hiring employees from outside their home country is a complex and expensive process, and often involves setting up separate entities. A PEO takes the guesswork out of hiring international employees by navigating local laws and regulations, compliantly hiring and onboarding employees and offering a range of benefits.

Comprehensive HR outsourcing solutions can be time-consuming and a PEO, which outsources certain functions, saves time, handles workers compensation and creates a broader range of benefits for your large or small business and staff. From recruiting and employee retention to better time management, it is suggested that a PEO will help a company to grow.

PEOs also assist with tax administration, compliance and other benefit costs for small and medium-sized businesses. While there are already many tools in place to assist with things like payroll, a PEO allows you to achieve much more without having to burden your in-house HR resources, or management team if they currently perform these functions.

How does a PEO work?

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A PEO can help manage important human resource functions like payroll, benefits, training, and guidance. This allows other vital resources to be freed up to focus on strategy, rather than HR admin. It can be difficult to ensure industry compliance with labour and employment laws. A PEO handles this and a range of other tasks, so owners and managers can focus on more essential services with peace of mind.

The process of using a PEO starts with the client company entering into a contract with a PEO of their choosing. This covers the following:

  • An agreement that the PEO will act as the administrative employer for specified tasks concerned with the employment relationship, with the client acting as the employer
  • The client company will remain responsible for hiring, managing staff and the non-employee related aspects of the businesses operations
  • The PEO is responsible for processing employee wages, benefits, and withholdings while also reporting taxes in accordance with the employees’ local legislation
  • Some relevant tasks may be shared between the client and the PEO as discussed

Some PEOs may also include additional features such as wellness perks like discounted gym memberships or other benefits to help boost workplace health, morale and employee engagement. Once in place, a PEO becomes the Employer of Record (EOR) for staff and is responsible for administering all payroll and related benefits.

What are the benefits for a business of using a PEO?

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The biggest hurdle for most large or small business owners in any industry in adopting a PEO is being comfortable with relinquishing the control over this aspect of their company to a third-party. If they do, however, a range of business benefits will be created by the PEO, making the action very worthwhile.

The most significant benefit is the time saved as a PEO frees up company resources and covers risk management. It also removes time-consuming tasks such as: payroll or new employee onboarding. By gaining this support for administrative services, some of the following can be removed from management’s to-do list:

  • Recruiting and hiring
  • Handbook development for worksite employees
  • Creating and managing a benefits package
  • Ongoing management training
  • Employee coaching
  • Creation of a privacy policy and terms of use
  • Compensation insurance
  • Dismissal processes
  • Unemployment insurance
  • Assistance with payroll taxes
  • Improving your workplace culture
  • And more

For an employer, a PEO can provide relief not only in the time commitment associated with these tasks but also a range of recruitment cost savings. A PEO offers greater buying power for workers’ compensation and health insurance, along with the peace of mind that all of these tasks are appropriately handled.

For employees, a PEO offers better benefits offerings by creating a competitive benefits package for a set term and more in-depth human resource service. This means happier employees and greater retention as they understand the message that the business cares for them.

What won’t PEO do?

While PEOs are a great way to ease your administrative burden and handle workers compensation insurance or payroll processing, they cannot, and will not, do everything. If you are considering a PEO for HR guidance, it is crucial to account for the things that will not be covered and understand what will still remain for the employer responsibilities.

The co-employment set-up of a PEO allows for a range of responsibilities to be handed over, the running of the business is still very much your responsibility, most notably the management of your team and their operations.

PEOs are not legal or tax advisors, and while they help with many related tasks, such as filing or the completion of relevant forms, you still have a responsibility as a business owner to be aware of all the applicable state and federal laws and compliance pertinent to your business and employees.

What are the differences between a PEO and an employee leasing company?

The primary difference between a PEO and an employee leasing company is that a PEO does not supply labour, only services and benefits management. A PEO works with their clients existing employees, focussing on the human resources tasks inclusive of hiring, remuneration, superannuation and various employee benefits.

An employee leasing service, in comparison to what a PEO provides, supplies a workforce on a temporary or project-specific basis. The leased employees will not remain with the client companies past the completion of a particular project. Instead they are reassigned by the staffing service to a different company for the next batch of work. This temporary employment arrangement can see staff assigned to a customer on a regular basis; however, the worker has no employment relationship with the client like in a PEO setting.

How much does a PEO cost?

There is a range of factors that will determine the cost of a PEO. This can include the size of your business, the services you choose, and the number of employees you have on the payroll. Most PEOs will charge a flat fee per employee or a percentage of your company’s total payroll regardless of whether you are a large or small business owner.

A good way to account for your company’s expected PEO costs, calculate the yearly expense for both pricing models and keep in mind that when starting a new contract, you may be able to negotiate. Knowing which option is financially better your business first will help you negotiate with a certified professional employer organisation.

How to choose the right PEO

PEOs provide a range of cost, time, and administrative savings, but it may not suit your businesses model. Consider how comfortable you are with outsourcing these tasks, and if it will truly provide a return on your investment. You can do this by considering how much time you currently spend on these HR duties and if there are any gaps in your process that a PEO can improve.

If you decide that a PEO can benefit your company and reduce employee turnover, you’ll need to make sure you choose the right one.

Your navigation of the options should consider the human resources outsourcing services and range of benefits they offer, along with the flexibility they provide in their service agreements.

A PEO will impact your employees and HR functions, so ask the question and take into account the following to find the right one:

  • Accreditations and auditing

PEOs are highly regulated as they handle sensitive employee data, documentation and cash flow. You will also want to confirm their compliance expertise as this is one of the most crucial tasks they will be taking over from you.

  • Their benefit offerings

Consider what benefits and programs the PEO offers and their associated costs. Are they something your employees will find value in or will a different PEO with varied employee benefits be better? Will these help your business?

  • References

It would be good if your potential PEO provider has an established track record with both professional and client references. Find a company that has experience in your industry, or with a company similar in size to yours. You can request case studies or speak to other customers who can comment on their performance.

  • Service-level agreements

A service-level agreement (SLA) explains the relationship you will have with your PEO. It will discuss not only the services provided but also the responsibilities of your PEO and what you should expect from them.

As an employer, a PEO that will help your business will offer clear and straightforward answers to your questions is favourable, as this will give you some idea about the working relationship to come.

Relieving yourself of your human resources, payroll, and capital management tasks can take a lot of the pressure off your management. It can also create an environment for happier employees due to the better benefits you’ll be able to offer. While the time and cost savings for your business are significant benefits, the primary goal is allowing you to focus on growth, making a good PEO an investment in your future.

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