A Professional Employer Organization (PEO) is a co-employment alternative for small businesses that want to offer professional human resources (HR) and employee benefits options similar to larger companies. PEOs are best for small businesses looking for benefits such as low cost health insurance at group rates due to their buying power.
We’ll explain how PEOs work, what they cost, and how to join one. If you’re looking to get started right away, ADP TotalSource offers payroll and tax processing, benefits administration, compliance assistance, and other critical HR support. Click here for a free quote.
How a PEO Works
PEOs differ from other HR outsourcing firms in that they become co-employers of your employees. In other words, while you manage and run your day-to-day business, your workers have two employers — you as their direct supervisor and the PEO for legally-compliant HR, benefits, and payroll processing.
Businesses are typically pooled together in a PEO providing the PEO leverage to negotiate better rates on health insurance. PEOs have established partnerships with large insurance companies, and that also helps them negotiate more and better benefit plans and services. Therefore PEOs can offer a large array of services at reasonable prices, from commuter benefits to 401k plans.
Typically, they provide:
- HR, benefits, and payroll processing
- New hire paperwork and employee onboarding
- Compliance with state and federal employment law
- ACA-compliant health insurance plans at group rates
- Retirement savings plans like 401k
- Workers compensation
- Labor law posters
- Terminations and offboarding
- Some PEOs offer time keeping and employee scheduling tools
- Some PEOs can also handle recruiting and training
A PEO is a Co-Employer
Co-employment is when both organizations (your business and the PEO) share the legal responsibility for your employees. For everyday business decisions, such as marketing, customer service, or directing what work gets done, you maintain full control. However, anything that could raise HR-related legal issues, like safety, labor-law compliance, or employee discrimination is where the PEO will standardize procedures for you.
As a co-employer, the PEO ensures your company is set up in compliance with state and federal labor laws and uses HR best practices. That’s to your benefit, helping you and the PEO avoid risk. For example, one PEO client found after joining the PEO that they would need to get their payroll out of arrears because the PEO said it created liability and was not a best practice. In order to join the PEO, the company had to resolve that issue.
A PEO Has Buying Power
Because PEOs work as co-employers to potentially hundreds of different companies, they are able to negotiate group rates that save you money while offering employee benefits in multiple states. They may offer health insurance, life insurance, disability, workers compensation, 401k plans, and other benefits, like commuter benefits, at better rates by pooling your employees with others in similar industries.
A PEO Provides Legally-Compliant HR Services
PEO services provide more than just back-office paperwork processing for HR and payroll. They’re certified in HR and have the tools and experience to maximize employee effectiveness while minimizing risk. They know HR law, and their systems are programmed with tax tables and labor law tools so that they help you avoid legal mistakes or fines.
As a co-employer, a PEO works with you, very much like having your own HR, benefits, and payroll department. The services a PEO provides are much like a full-time HR professional would offer to your business in terms of HR consulting, onboarding, benefits enrollment, payroll processing, maintaining the employee handbook, and managing terminations.
However, the price of a PEO is much lower than hiring a full time HR person. In fact, according to PayScale, adding an HR generalist to your team would cost a little over $51,000 per year and you’d still have to pay for office space and software, as well as any benefits, like paid time off.
What PEOs Cost
PEOs charge a percentage of each employee’s salary or a flat rate per employee. Joining a PEO can start as low as $49 per employee per month with a vendor like Justworks, whereas a PEO vendor like Trinet might cost $125 per month. PEO membership fees depend largely on the average compensation of your employees and other variables, like the service offerings that we’ll review below.
PEO prices go up based on the service offerings you select, whether or not you choose to offer or contribute to employee benefits, the number of employees you have, and whether self-service options are offered to your employees. In addition, if your employees are mostly salaried you may pay as low as 2% of salary. If they’re wage workers, you’ll pay closer to 6%.
If you’re looking for a PEO that handles recruiting and training in addition to benefits, expect to pay a higher percentage or rate. PEOs with more comprehensive services can charge up to 11% of payroll, which makes them a bit costly for the typical small business owner.
In addition, some PEOs, like ADP TotalSource, price based on your business’ credit rating, your risk level (for worker’s compensation), and your health benefits history. Depending on those factors one employer might pay twice what another employer pays for the same services.
Where to Find a PEO
When it comes to PEO providers, the options can be overwhelming. We have reviews of several PEO companies, along with pricing. The National Association of PEOs (NAPEO) also has useful resources for choosing a PEO, as well as a search tool to find a PEO in your state. And vendors like PEOCompare allow you to do a free PEO search by choosing the exact services you want.
Our PEO buyer’s guide provides information and pricing comparing the best PEOs for small business. We’ll provide a quick look at three different PEOs for comparison.
Justworks is one of the newer PEOs and serves as an entry-level HR outsourcing company with HR, benefits and payroll services for companies with as few as 2 employees and up to 100 or more. Their prices start as low as $49 per employee per month for basic service with no employee benefits. Read our Justworks User Reviews and Pricing Guide for more information.
Trinet is an established PEO with thousands of business clients and provides outstanding benefits in all US locations, including small communities. It’s great for multi-state employers with 10 or more employees with pricing between $125-$155 per employee per month depending on variables like location and ratio of salaried to hourly staff. View our Trinet User Reviews and Pricing Guide.
ADP TotalSource is a PEO that offers HR onboarding, payroll and tax processing, benefits administration and insurance, and other HR services. Pricing is based on several factors, including your business credit rating and benefits experience. Click here to get a free quote.
For more information, read our ADP TotalSource Reviews and Pricing Guide.
How to Join a PEO
To join a PEO, you will likely have to go through an application process in which the PEO assesses the liability of your company to make sure they want to partner with you as a co-employer. The process of joining a PEO usually takes between three to six weeks. There are a few qualifiers they will look for:
- The financial and credit situation of your business, such as your business credit score
- Whether you’ve had any workers compensation claims in the past (if you work in a high risk environment you’ll likely be charged a higher workers comp rate)
- The percent of employees likely to participate in benefits, and any benefits usage trends
As a co-employer the PEO will also need access to information about your employees. Expect to show them I-9s, W-4s, and W-9s for all your workers, as well as any other demographic and identifying information needed, such as the age of your workers, whether they’re hourly or salaried, and what states they work in.
3 Tips When Joining a Professional Employer Organization
Here are a few tips to keep in mind when choosing a PEO to join:
- Verify that the PEO is certified by the IRS or ESAC, the Employer Services Assurance Corporation
- Consider a PEO that specializes in your industry, especially if you are subject to industry-specific regulations, like OSHA safety, DOT drug testing, or financial-services licensing
- Make sure your PEO will cover the tasks you want to outsource like payroll, but not those you want to keep doing yourself, like applicant tracking or employee training
3 Benefits of Using a PEO
Benefits of working with a PEO include HR legal compliance, which is important as your business grows or you hire employees in multiple states. A PEO’s buying power results in great health insurance rates for you and your staff. But the most important benefit might be helping you get out of the back office so you can focus on your core business.
Whether or not a PEO is right for your business depends mostly on these three factors:
PEOs Help You Manage More Employees as You Grow Larger
In general, having more than 10 but fewer than 100 employees could mean a PEO makes sense for your business. The logic here is that if you don’t have many employees, you can probably handle HR tasks yourself without too much strain, or you can add those tasks to an existing office manager or bookkeeper’s workload.
On the other hand, if you have several employees, it’s probably more economical to outsource your HR functions to an organization like a PEO, because you’ll likely start encountering issues like maternity leave requests, training or even discipline problems, that you’ll want to do right. You may even want to document policies or create an employee handbook to prepare for business growth. One HR consultant reminds us:
Jill Santopietro, Founder, 21Oak HR Consulting, LLC
“As soon as you have even one employee, you could begin having employee problems”.
She notes that even family businesses who often use the phrase, “we’re a family” as code to mean they haven’t yet established policies and procedures, often run into HR issues, such as “how do I fire my uncle or sister-in-laws son?”
PEOs will keep you compliant with federal and state employment laws and handle things like proper termination documentation and worker’s compensation claims and audits.
PEO Benefits Can Help You Attract & Retain Staff
PEO benefits usually include a wide array of options such as health, dental, and vision, 401K plans, life insurance, and more. These benefits are administered by the PEO. This can be especially useful if you have your business in a place like Chicago or Los Angeles, where providing benefits might otherwise be cost prohibitive.
You can learn more about the options for providing benefits and how to compare costs in our full guide on how to provide benefits, but this is certainly an area where a PEO can be helpful because they have more options and better prices than you could negotiate on your own. Our own research shows that health benefits are one of the top perks employees want.
Fit Small Business is part of a PEO for these very reasons. Our PEO, Trinet, handles a wide array of benefits that our employees enjoy – health insurance, payroll, compliance, and more – including self service options that let employees look up their own information online, such as on health insurance costs and FSA balances. Here’s what PEO expert Mark Sokol says:
Mark Sokol, Founder, PEOCompare
“Having worked with and for a PEO – I am sold on the benefits of ‘getting you back to your business’ because the PEO’s business is ’employment’ responsibilities. I have seen each PEO that I worked with (and one PEO I worked for in the past) bring HR professionalism to the small business. Allowing us to compete for talent – which was challenging at that software company so many years ago. It continues to be a viable option.”
A PEO Reduces Your Administrative Workload & Risk
A PEO can handle the HR administrative tasks like onboarding, offboarding, providing an organizational chart, administering health benefits, payroll, and paid time off. This reduces the workload on your end and takes some HR and labor law liability off your shoulders.
Again, if you’re able to do these things yourself without too much trouble, you probably don’t need a PEO, but if you find yourself spending 5-10 hours a week or more on HR tasks, or racking up payroll or labor law fines, it might be worth it to work with a PEO.
Drawbacks of Using a PEO
The main drawbacks of using a PEO include potential loss of health benefits tax savings, a realization that you’re not completely free of all HR paperwork, or concerns that you’re no longer able to manage your own employees. Let’s look at each of these to help you weigh the drawbacks relative to the benefits above.
You May Feel a Loss of Control Regarding Employee Management
When you join a PEO, you and the PEO become co-employers. In order to hire or fire someone, or make any HR-related changes, you have to consult the PEO. This can be a good thing, since you’re essentially getting a partner who’s professionally trained and can stop you from making legal mistakes.
But it can also slow you down and takes away full control over how you manage your staff. As with any business partner, you want to have a good working relationship with the PEO staff, and a high level of trust. You’ll also want to be sure the PEO can respond to your concerns on short notice.
You Will Not Eliminate All Back Office HR Busywork
A common complaint from business owners is that they have busy work even after hiring a PEO. Despite the PEO handling HR tasks, managers had to send in paperwork and serve as a link between employees and the PEO. Of course, even if you hired a full time HR person, managers would be expected to help with employee scheduling, and conducting performance reviews, as examples.
A PEO can’t interview final candidates, manage employee feedback or process weekly time cards. That work belongs to you and your managers. The amount of work you have to do, however, will depend greatly on the PEO you choose and the service level offered. For instance, PEOs that provide employee self-service options let employees update benefits or download paystubs on their own, saving you from being the go-to person for these requests.
You Could Lose Health Benefit Tax Savings
If you join a PEO, you won’t likely choose health insurance from the government-run SHOP Exchange, since you will have to go with the PEO’s insurance providers.
You will therefore miss out on getting any tax credits that you could have received if you were to buy insurance through the SHOP Exchange. However, in many cases, the benefits available through the PEO are less inexpensive. Ultimately you need to do your own cost comparison to weigh the administrative and premium costs saved by outsourcing to the lost tax benefits.
How PEOs and Their Software Have Evolved
We chatted Sokol, quoted above, as he runs a website that compares PEO services. He shared insights with us on how PEOs have evolved:
“PEOs have evolved in their software and are now a platform on which to scale your business, by offering employee self-service, and easy-to-use apps. PEOs also save you from having to purchase, implement and manage data on multiple HR, benefits, timekeeping and payroll systems.
And if you have employees in more than one state, that complicates your payroll and tax processing. Some companies try to work around this by hiring 1099 contractors instead. Whereas a PEO lets you expand into other states and hire the best talent nationally.
In addition, PEOs offer HR consulting so you don’t need to hire your own HR manager. Even if you have as few as 10-15 employees, a PEO helps you avoid expensive employment mistakes and reduce labor law and payroll risks.”
Good Alternatives to a PEO
If you want to offer the benefits a PEO provides, without the condition of co-employment, you might be interested in one of the newer HR outsourced service providers. They provide HR, benefits, and payroll as a cloud-based software or service.
However, by using a software or service, you will most likely be giving up other advantages that a PEO provides. You may have to pay for each service separately — like garnishments, or benefits enrollment training — which can get costly. And most of the companies below do not have the buying power that PEOs have.
In addition, you’ll be more accountable for risks like verifying an applicant’s work history or managing sexual harassment claims. And if you have a payroll problem, it’s going to be on you to resolve. If the laws around workers compensation, for example, change, no one is going to be advising you on how to comply with new requirements like a PEO would.
Tanya Bourque, Co-Founder, Untappt
“My experience with PEOs hasn’t been the best. One client with 15 employees was quoted a price of $16,000 a year, and that didn’t include basic features like recruiting, which would have been an upcharge. I’ve found a small business will often save up to 75% in costs if they build out their own systems. For example a company with fewer than 10 employees might use Gusto for HR, benefits and payroll and then use BreezyHR for applicant tracking. Or a company that plans to grow rapidly, might consider BambooHR with BreezyHR, and then hire a part time contract HR consultant to assist them in setting everything up.”
Bourque suggests an east-coast based HR consultant might charge between $100 to $150 an hour, or offer a new business start up package to provide everything from creation of company policies, a employee handbook and systems set up. A one-time HR consulting start-up package might cost between $5,000 to $12,000 depending on how much help the business needs to implement, and would save you from paying high PEO rates in the long run.
3 PEO Alternatives With Similar HR, Benefits & Payroll Features
There are several alternatives to PEOs that offer tiered services to give you the level of HR, payroll, or benefits administration that you need. PEOs, in contrast, provide less flexibility. Consider software programs such as Gusto, BambooHR, or Zenefits that all offer HR, benefits, and payroll without the co-employment commitment:
Gusto is also a great alternative to a PEO. Like BambooHR and Zenefits, Gusto does not become a co-employer of your employees, so you remain in control. They currently offer affordable group benefits in 19 states, onboarding, and even HR consulting in addition to their payroll and compliance services. Read our Gusto review and Gusto comparisons for more information.
BambooHR does payroll, compliance, PTO tracking, and adds recruiting and performance management software to its services. However, while you can link health insurance and other benefits like life insurance through BambooHR, it does not have Gusto’s buying power. Check out our BambooHR review and BambooHR comparisons.
Zenefits is a great alternative to using a PEO. Like Gusto and BambooHR, Zenefits offers a platform for managing and administering HR, including payroll, health insurance, time and vacation tracking, retirement plans, and much more in one place. You can use your existing service providers or they can connect you with their vendors. View our Zenefits review and Zenefits alternatives articles.
The Bottom Line
A PEO can be a great option for a small business owner who is willing to pay for peace of mind, reliable HR / payroll services, and wants to provide a wide range of benefits to their employees. We at Fit Small Business believe the benefits of using a PEO outweigh the costs, which is why we use one ourselves — it helps us to attract and retain better talent.