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While most companies choose to develop their human resources department internally, many business operators are choosing to hire an external entity called a PEO.
In this post, we’ll cover the basics of Personal Employer Organizations and how the model changes how companies interact with their employees.
What are PEOs?
A PEO or Personal Employer Organization is a 3rd party hired to perform essential employee-related services such as payroll, benefits, worker’s comp, and other human resource-related services. The PEO enters a joint-employment relationship with the organization’s employees, known as a client service agreement (CSA). Every CSA will be different due to the needs of the client and the services provided by the PEO.
Companies turn to 3rd parties to handle HR to free up internal resources and focus on non-human related services such as marketing and customer service.
Services offered by Professional Employer Organization
PEOs differ from other HR outsourcing solutions because they are more comprehensive. In addition, the relationship between the employees and the PEO is more hands-on than different types of outsourcing. The most common services include:
- Payroll, Taxes, and Withholdings – PEOs handle payroll and pay local and federal taxes.
- Compliance – The PEO will protect businesses from penalties concerning payroll tax, reporting, unemployment insurance, and worker’s comp.
- Health Insurance and Benefits – Most co-employment agreements include health, dental, retirement, and other employee benefits as part of the arrangement.
- HR Support – Most organizations have an in-house HR team, PEOs collaborate with them for strategic and administrative support.
- Risk and Safety Management – The PEO can provide safety assessments and training to improve employee well-being and ensure compliance with regulatory agencies.
- Recruiting – In some cases, a PEO will provide employee recruitment, hiring, training, and performance management services.
Pros and Cons of Using a PEO
Whether a small or medium-sized business needs to expand its HR department, or a corporation needs to outsource its people operations completely, companies are increasingly utilizing the new model. According to the National Association of Personal Employment Organizations, 173,000 business co-employee with a PEO.
Below are some reasons why companies are outsourcing HR and the challenges of bringing a separate entity to handle human-related services.
- Time – PEOs bring businesses peace of mind and the resources to focus on other aspects of the company.
- Cost saving over time – Outsourcing with a PEO typically costs less over time.
- Experience – Organizations can add a dedicated HR team with a PEO.
- Business development – PEOs can help businesses scale by leveraging a 3rd party HR department.
- Access to benefits – Many PEOs can access Fortune 500 quality benefits packages.
- Limited access – Moving HR out of the office can reduce the quality of essential human services.
- Impacts on company culture – Outside firms are susceptible to failing to integrate with a business’ culture and work experience.
- Excessive upfront costs – The initial costs of outsourcing HR with a PEO are expensive.
- Rigid benefits packages – While PEO can offer excellent benefits, the plans are usually not customizable.
Choosing a PEO – When to Outsource Your HR
Human resources is a vital part of every business’ foundation. Deciding to outsource personal interactions with employees to a 3rd party firm can have dramatic consequences if not executed successfully. As a result, many companies opt to keep HR in-house but leverage software like Zenefits to free up company resources while improving the employee experience.
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