Professional Employer Organization | PEO

What is Professional Employer Organization (PEO)?

A professional employer organisation (PEO) in an outsourcing company that offers services to small and medium-sized businesses (SMBS). Generally, a PEO’s services may consists of HR consulting, payroll processing, employer tax filing, compensation insurance, safety and risk mitigation benefits, health benefits, etc.  

What does the PEO services include?

  • Human Resource (HR) Consulting
  • Payroll processing  
  • Employee health benefits
  • Compensation insurance  
  • Safety and risk mitigation benefits  
  • Employer payroll tax filling
  • Retirement Transportation (401 (k))
  • Employer’s practice and liability insurance (EPLI)
  • Training and development
  • Regulatory compliance assistance

How do Professional Employer Organizations (PEO) work?

Clients and the PEO enter into a contractual co-employment agreement. The PEO becomes the employer of record (EoR) for tax reasons by reporting payroll taxes under its own tax identification numbers as a result of co-employment. The client company continues to direct the day-to-day activities of the personnel.

PEOs charge a fee for taking over the client's human resources and payroll activities, which typically ranges from 3 to 15% of total gross payroll. This fee is in addition to standard employee overhead expenditures such as the employer's contribution of FICA, Medicare, and withholding for unemployment insurance. An "administration fee" is the most prevalent term for this service charge.

Are PEOs legal?

The PEO, as a whole, is responsible for withholding the correct taxes, paying unemployment insurance taxes, and providing workers' compensation coverage as the legal employer.

Workers' compensation insurance coverage is one service that a PEO can give at a lesser rate than individual client companies can receive. In essence, a PEO acquires workers' compensation coverage for its clients by obtaining insurance coverage that protects both the PEO and the clients' businesses. This is legitimate because the PEO is the legal employer of the client companies' employees. PEOs can also provide basic background checks and drug screening services.

What are the advantages of Professional Employer Organizations?

Companies can profit from PEOs in a variety of ways. Workers' compensation insurance, for example, may be more valuable to a blue-collar company than it is to a white-collar company. Choosing a PEO could help the client company with numerous benefits:

  • Save time and money by handling payroll and benefits administration  
  • Decrease legal duties and obligations to employees.
  • Provide a stronger total benefits package, attracting more qualified staff.
  • Better compliance assistance
  • Easy administration of Family and Medical Leave Act  

As a result, small and mid-sized enterprises and associations find the PEO model appealing, and PEO marketing is often targeted towards this group.  

What are the disadvantages of Professional Employer Organizations?

Some of the disadvantages of PEO companies is reflected on the basic administration:  

  • Loss of control of essential processes and people.
  • An outside company's influence on your culture.
  • Diminished value of internal HR department.
  • Lack of control and security over employee paperwork.
  • A loss of institutional knowledge.
  • Security issues with the vendor's system.
  • Resistance from employees.

What are some PEO companies?

One of the largest PEO companies is ADP TotalSource; it is operating in over 140 countries. It has built a reputation for providing excellent customer service. The other known PEO companies, recognised by Investopedia, are also follows:

List of professional employer organisations (PEO)

  • Best Overall: Paychex.
  • Suitable for Small Businesses: Insperity.  
  • Suitable for Large Businesses: INFINITI HR.  
  • Suitable for Start-ups: Oasis Outsourcing.  
  • Best Customer Service: ADP TotalSource.  
  • Suitable for Industry-Specific Services: TriNet.
  • Best for Benefits: Just works.
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