Just What Is a PEO?

A professional employer organization is often considered a cost-effective alternative to hiring a large HR department. The model is simple: The PEO is legally considered the co-employer of all your workers, and it takes care of services including benefit and payroll administration, workers' compensation, and employment taxes.

Many different kinds of companies work with PEOs, but the ones that benefit most are businesses with 10-125 full-time employees. Depending on the business's needs and what it chooses, it may find that PEOs can:

• Allow them to offer higher-quality employee benefits, including medical coverage, retirement matching and 401(k) plans.
• Manage payroll records and documentation, issue pay stubs and tax forms, and provide paid time off.
• Design job descriptions, conduct salary and wage surveys, and assist with the interview processes.
• Provide workers' compensation coverage by managing and resolving claims, conducting loss prevention reviews, and helping with the design of return-to-work plans.
• Support them in performance reviews and in conducting appraisals via advancement and reward program designs and leadership coaching.

Although PEOs can solve a lot of problems, you may have some concerns: Will you face a loss of control over your people? Is the PEO's security up to your standards? Will your employees resist the change? Talk to the PEO in advance to address these issues.

Choosing a PEO

You have a lot of options in deciding which PEO to partner with. In each prospective PEO, look for:

• Relevant experience — PEO personnel should have qualified expertise in handling HR activities in your area of business.
• Regulation compliance — It should be able to handle the myriad federal and state regulations in your area.
• Technology use — What human capital management software does it use? Is that software compatible with the programs you have in place or plan to use?
• Professional memberships — Is it a member in industry trade groups like the National Association of Professional Employer Organizations?
• Benefits — Does it offer fully insured employee benefit plans? If it offers partially self-funded benefits plans, make sure that the third-party administrator it uses is fully authorized to do business in your area.

Small and medium-sized businesses get better liability status when they join PEOs because the organizations offer workers' compensation and employment practices liability insurance. Some PEOs offer coverage for tax liability and penalties. You may find that a PEO provides better coverage with lower premiums than traditional business insurance does.

Deciding which PEO offers the best service, the greatest value and the type of expertise your organization needs isn't always simple. Make sure you meet the people who'll be servicing your account. Ask about the organization's staff support ratio — the proportion of the number of service team members to the number of client companies' employees. Ask how much you should expect your PEO service fee to increase each year, and find out how much the service fees have increased over the past few years. The best-value PEOs keep annual service fee increases down.

Look for a certified professional employer organization or CPEO. Organizations like that are certified by the IRS and are solely liable for the payment of federal employment taxes on the wages it pays to worksite employees. But your business retains the ability to obtain certain tax credits in a CPEO relationship so that there's no longer a double payment of taxes.

By doing your due diligence and working closely with your employees, you can find a PEO solution that frees you to concentrate on your business.