Updated: March 17th, 2021
As a company grows, its staff members may find themselves overwhelmed by payroll handling, or unable to afford the competitive benefits that help attract good employees, or lacking the expert knowledge to stay on top of constantly changing compliance regulations, among countless other HR challenges.
That’s when a professional employer organization, or PEO, can help.
A PEO is a company that partners with small to medium-sized businesses to provide comprehensive HR services, such as payroll processing, benefits administration, regulatory compliance, tax filings, staff recruiting and training, and more. Basically, a PEO functions as a company’s outsourced HR department, providing access to affordable expertise and services that the company would not be able to secure on its own.
Co-employment: How PEOs Get It Done
PEOs can offer such services and rates because they are co-employers with the companies that engage them. This contractual, business-to-business, co-employment relationship enables PEOs to assume greater employer responsibilities than what can be achieved through some types of HR outsourcing.
Co-employment allows PEOs to pool employees from multiple smaller companies to offer services and benefits on the same scale as a large company or organization, resulting in better rates on health insurance, workers’ compensation, and state unemployment in the U.S., and similar cost savings internationally.
As a strategic partner, a PEO can also take on shared employer risks. For example, a PEO can ensure employee terminations have legal grounds and help resolve disputes, and it might provide additional protection for a business facing an employee lawsuit.
In contrast, payroll providers, for example, are not co-employers; they are independent service providers. Although they process payroll and file government taxes on behalf of a client, that client’s employees do not become the provider’s employees, and so they do not share risk in the same way as PEOs. They operate on behalf of their clients to provide greater efficiency in one of their HR processes.
What Is the Company’s Role with a PEO?
When a company partners with a PEO, the company continues to control its operations and employee functions, while the PEO takes on the company’s HR-related employer responsibilities, such as payroll, benefits, and tax remittance, as specified in a service agreement.
From the employees’ perspective, mostly, they will just see the PEO’s name on their paychecks and in HR-related communications and paperwork.
Services PEOs Provide
Every PEO is different in terms of its specific service offerings and flexibility to customize to client needs. PEOs may offer the following services:
- Employee benefits, with access to a wider variety and higher quality of benefits than a small to medium-sized business could obtain on its own, from medical and dental to adoption and educational assistance.
- Payroll processing, including payroll compliance and record maintenance.
- Workers’ compensation administration (in the U.S.).
- Compliance assistance, with access to experts who stay current on ever-changing labor laws and employment requirements.
- HR administration, supporting a company’s in-house HR personnel with a range of services, including managing employer liabilities, risk mitigation, termination assistance, leave administration (for family and medical leave, organ donor leave, or other types), and more.
- Employee training and development.
- Recruiting and hiring.
- Strategic HR planning, such as planning how to attract talent and manage HR costs.
Although PEOs offer many services, clients can usually select only those services they need, and this could lower a PEO’s rate.
Drawbacks of Using a PEO
Although there are many benefits of using a PEO, there are some drawbacks, too, including:
- Loss of control. If a company’s employees are happy with their current benefit provider, but the PEO wants to change plans, there isn’t much the company can do about that, as the PEO controls those choices.
- Unexpected changes. If the PEO, as its own company, decides that its partner company is too much of a liability, it could move that company to a higher risk category, making its price for services higher.
- Cash flow issues. A PEO may request certain payments up front to meet their own deadlines, and this may impact the partner company’s cash flow in unexpected ways.
- Potential financial risk. Because a PEO becomes co-employer of a company’s workforce, the company still retains some legal liability for employer responsibilities (such as reporting unemployment claims). If audited, a company can still face related fines and penalties for certain employment responsibilities, even if working with a PEO.
EOR: An Alternative to a PEO
If a business does not wish to engage in a co-employment arrangement, or it does not want to outsource its entire HR function, partnering with a company that provides Employer of Record (EOR) services may be a better choice.
An EOR offers some services similar to a PEO. But an EOR becomes the full legal employer (not a co-employer) of a business’ payrolled workers, handling payroll, taxes, payroll compliance, benefits administration, unemployment claim reporting, and related tasks.
This distinction is relevant, particularly as a business expands into additional countries or U.S. states, because employment laws and regulations become more complex for companies operating across borders. If a company engages a PEO, the company must still establish the required presence in every state where it has employees. In contrast, if a company’s EOR partner is already set up in those states, the company can legally engage workers in those states through the EOR because the company does not retain responsibilities of co-employment.
At iWorkGlobal, our high-touch EOR services help get workers up and running quickly, wherever they are needed in the U.S. and the world.