A Professional Employer Organization (PEO) is a co-employment alternative for small businesses that want to offer human resources (HR), payroll, and employee benefits – similar to what larger companies provide. PEOs charge based on headcount and can run from under a hundred a month per employee to tens of thousands of dollars a year.
If you’re looking to get started right away, consider working with Justworks. They’ll provide payroll compliance and tax processing, plus benefits, HR support, workers’ comp, and consulting services for a low monthly per-employee rate.
How a PEO Works
Professional employer organizations 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 leverage to negotiate better rates on insurance. PEOs have established partnerships with large insurance companies. That helps them negotiate more and better benefit plans and services than a small business could obtain on their own. Therefore, professional employer organizations can offer a large array of services at reasonable prices, such as commuter benefits, 401(k) plans, and workers’ compensation insurance.
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 they will standardize procedures for you.
As a co-employer, a professional employer organization ensures your company is 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 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 professional employer organizations work as co-employers for 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, 401(k) plans, and other perks, like commuter benefits, at better rates by pooling your employees with others in similar industries.
A PEO Provides Legally-Compliant HR Services
PEO services offer 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 compliance tools to help you avoid legal mistakes or fines.
Who a Professional Employer Organization Is Right For
Professional employer organizations are best for smaller businesses that don’t have in-house HR, benefits, or payroll expertise, as well as those that want to reduce their employment risk, labor costs, or offer benefits. By using a PEO, a small business can provide employees with all the perks larger employers offer.
Here are the kinds of businesses that may find a PEO serves them well:
- Start-ups that want to provide employees with full benefits
- Small businesses that want to keep their workers’ comp costs low
- Forward thinking companies that want to improve their employee experience, employment brand, and ability to recruit top talent
- Any small business that wants to ensure accuracy without hiring HR and payroll experts
- Any business that wants to reduce compliance risk
Costs of a Professional Employer Organization
Professional employer organizations charge a percentage of each employee’s salary or a flat rate per employee. Joining a PEO can start as low as $39 per employee per month with a vendor like Justworks, whereas a vendor like TriNet might cost $125 per month for each worker. PEO membership fees depend largely on the average compensation of your employees and other variables, like the service offerings that we’ll review below.
Some of the fees and pricing factors that may affect your PEO costs include:
- Setup fees
- Training and consulting fees
- Monthly service fees
- Health insurance premium contributions
- Workers’ compensation premiums
- Other company-sponsored benefits
PEO prices go up based on the service offerings you select, whether 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 professional employer organization 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 pricey for the typical small business owner.
In addition, some, like ADP TotalSource, price based on your business’ credit rating, your risk level (for workers’ compensation), and your health benefits history. Depending on those factors, one employer might pay twice what another employer pays for the same services. For more information, read our complete article comparing the best PEOs.
We recommend working with a PEO broker like The Huldisch Group that will talk with you to determine which provider might be best for your industry. There’s no charge to you, as these brokers are compensated by commissions paid by the PEO vendor, similar to how insurance companies pay the commissions of insurance brokers. Get a free consultation.
As a co-employer, a professional employer organization 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.
Typically, a professional employer organization will 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 401(k)
- Workers’ compensation
- Labor law posters
- Terminations and offboarding, including COBRA for benefits
Depending on the PEO and the software they employ, you may have access to timekeeping and scheduling tools, recruiting software or applicant tracking systems (ATS), and a learning management system (LMS) to help manage employee training. If these are features you need, it’s best to ask about them before you sign up.
How to Join a PEO
To join a professional employer organization, you will likely have to go through an application process in which they assess the liability of your company to make sure they want to partner with you as a co-employer. The process of joining usually takes between three to six weeks.
There are a few qualifiers a professional employer organization will look for, including:
- 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
- Your current employment practices and how compliant they are
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, 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
Before you sign up for a service that’s going to take on employment of your staff, it’s good to talk with experts, like those at The Huldisch Group, and ask solid questions about the services you need, the industries they have experience with, and their PEO certification.
Here are three tips to keep in mind when choosing a professional employer organization to join:
- Verify that the company is certified by the IRS or the Employer Services Assurance Corporation (ESAC).
- Consider one 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.
Where to Find a Professional Employer Organization
When it comes to providers, the options can be overwhelming. Our PEO buyer’s guide provides information and pricing comparing several of the best professional employer organizations for small business. In fact, we have reviews of many PEOs in our reviews section. Working with a PEO broker is also an option.
Here are the most common ways to find a professional employer organization:
Find a National PEO Online
You can search for a professional employer organization online. The National Association of PEOs (NAPEO) also has useful resources for choosing a PEO, as well as a search tool to find one in your state. And vendors like PEOCompare allow you to do a free PEO search by choosing the exact services you want.
Here are three PEOs we recommend for small business:
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 two employees and up to 100 or more. Their prices start as low as $39 per employee per month for basic service with no employee health benefits.
TriNet is an established PEO with thousands of business clients and provides outstanding benefits in all U.S. locations, including small communities. It’s great for multi-state employers with 10 or more employees with pricing that may fall in the range of $125 to $155 per employee per month depending on variables like location and ratio of salaried to hourly staff.
ADP TotalSource 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.
Work with a PEO Broker
Working with a PEO broker like The Huldisch Group is typically free. They’ll meet with you to understand your business needs and then provide you with a list of professional employer organizations that are the best fit for the industry, company size, pricing, and services you need. Get a free consultation.
Find a PEO Near You
Using NAPEO, you can search for a professional employer organization in your area. Typically, these will be smaller PEOs and may not have the buying power of national companies. However, the benefit is that you can meet with them in person if you have an employment issue.
Pros & Cons of a Professional Employer Organization
The benefit of working with a professional employer organization include labor law compliance, which is important as your business grows or you hire employees in multiple states. Their 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. Read more if you’re interested in the best PEOs.
Pros of a PEO
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.
Here are the pros of working with a professional employer organization:
- Helps your business grow: Makes it easier for you to add and manage employees
- Reduces compliance risk: Assists you in managing labor law and tax compliance
- Improves employment brand: Helps you attract and retain employees
- Fewer headaches: Reduces your administrative overhead and back-office paperwork
Here are what two HR experts add:
“As soon as you have even one employee, you could begin having employee problems.”
She notes that even family businesses that 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-law’s son?”
PEOs will keep you compliant with federal and state employment laws and handle things like proper termination documentation and workers’ compensation claims and audits.”
– Jill Santopietro, Founder, 21Oak HR Consulting, LLC
“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.”
– Mark Sokol, Founder, PEOCompare
Cons of a PEO
The main drawbacks of using a professional employer organization include the 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 make decisions about your own employees.
Here are the three downsides of partnering with a PEO:
- You may feel a loss of control: The co-employer has a stake in how you manage employees and will need to be consulted on hiring, terminations, and HR changes.
- Not all HR work is eliminated: You’ll still manage employee schedules and performance feedback, as well as serve as the onsite contact for your staff.
- You may lose tax savings: If you currently receive tax benefits for health insurance provided through the government-run SHOP Exchange, you’d lose those.
Alternatives to Partnering With a Professional Employer Organization
There are several alternatives to professional employer organizations 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 HR and payroll software programs such as Gusto or Zenefits that offer HR and payroll compliance features without the co-employment commitment.
Here are three cloud-based software alternatives to partnering with a PEO:
- Payroll software: Payroll software is used to calculate paychecks, but may not provide HR support and consulting services. You, as the employer, maintain employee files.
- HR software: HR software maintains employee files and assists with HR compliance. Some offer payroll services and consulting for an additional fee.
- Payroll service: Payroll services offer payroll processing as well as administer your employee data and compliance. Many offer employee benefits and consulting too.
Gusto is an example of payroll software that comes with employee data features, such as online document storage, e-signature, benefits offerings, and even HR consulting services. Prices start as low as $45 per month for one employee with $6 per month for each subsequent employee. Gusto provides a free 30-day trial.
Frequently Asked Questions (FAQs) About Professional Employer Organizations
Professional employer organizations are a newer concept in the employment realm that many startup businesses may not be aware of. Here are some questions business owners may have.
When is the best time to switch to a professional employer organization?
For some PEOs, it’s best to switch at the start of a new calendar or your business fiscal year. That simplifies year-end reporting and tax filings. Others, like Justworks, make it possible to switch any time of year and maintain all account balances up to date.
Are ADP & Paychex PEOs?
ADP and Paychex are the two of the largest payroll processing companies in the U.S. Both offer multiple payroll platforms, from online payroll software to full-service payroll with consulting. Both also have PEO offerings. ADP TotalSource is ADP’s PEO tool. Paychex offers two PEOs: one is called Paychex PEO and the other is a recent acquisition, Oasis Outsourcing.
How does a PEO make money?
Professional employer organizations make money by charging their client firms per employee or by charging a percentage of payroll. Unlike payroll or HR software companies that may have add-on fees for features like tax filings or mailing checks to employees, PEOs are typically higher priced, but all-inclusive.
Is it better to hire an HR manager or work with a PEO?
Larger companies hire HR managers, payroll managers, and benefits experts. Smaller companies can’t typically afford to hire all these experts. And, the price of a PEO is much lower than hiring a full-time HR person. In fact, according to PayScale, adding one HR generalist to your team would cost a little over $51,000 per year, and you’d still have to pay for office space, software, and any benefits, like paid time off.
The Bottom Line
A professional employer organization can be a great option for a small business owner who is willing to pay for peace of mind, reliable HR and 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.
If you’re looking for a proven payroll provider like ADP offering a PEO that works in all 50 states, consider partnering with ADP TotalSource. ADP brings decades of industry experience and expertise to your small business. Get a free quote.