Professional
Employer Organization
What It Is...and Is Not!
A
professional employer organization (PEO) provides outsourcing of
payroll, workers' compensation, human resources and employee benefits
administration.
It does this by hiring a client
company’s employees, thus becoming their employer of record.
It then
leases them back under contract to the original employer. This practice
is known as co-employment, employee leasing, or staff leasing.
Some
entrepreneurs have opted to meet their human resource demands by
enlisting the services of a professional employer organization.
The
primary reason PEO’s exist is to provide employee-related services for
owners of small to medium businesses.
This can be a valuable service
for business owners, especially for the owners of small businesses who
struggle to find the time to adequately cover their companies’ human
resource needs.
Instead of employing people
directly, you and your employee become legal employees of the
professional employer organization.
You retain all
the functions an employer in terms of hiring employees, setting wages,
etc. However the PEO handles everything else including payroll,
benefits administration, workers’ compensation, employer health
insurance, and
retirement accounts.
All you have to do is write
lump sum checks to the professional employer organization covering all
your payroll expenses and an additional fee for the PEO itself.
A
PEO serves as an HR
department, providing:
- Employment
Administration Relief
- Quality Employee Benefits
- Productivity Improvement
Resources
Your company enters into an agreement
with the PEO to establish a three-way relationship between you, your
employees and the PEO.
You and the professional employer organization
then become co-employers, instead of the traditional employer
company/employee relationship.
These services can
allow employers to systematically and strategically enhance the total
quality of the organization, which can result in greater efficiency and
productivity.
Professional employer organizations
might be a smart move for your business. Then again, they might not.
Here’s
a quick rundown of the advantages
and disadvantages of PEO’s so you can
make an informed decision:
Advantages
- The
advantages of PEO’s are somewhat obvious. You no longer have to deal
with human resources issues directly.
- That means you can say
goodbye to the days of maintaining:
- This
frees up time for you and your office staff to concentrate on growing
your company...which is why you became a small business owner in the
first place.
- PEO’s are able to negotiate better deals for
health insurance and other benefits because of the volume of business
they offer.
- There size also leads to economies of scale in
human resource staffing.
- Your savings comes in the money you save by
not having to staff human resources in-house.
Disadvantages
- There
are also some disadvantages with PEO’s that you need to know about.
Most importantly, you need to realize that legally your company no
longer has any employees (including you).
- When you transition
to a PEO your company legally terminates all of your employees, who are
then rehired by the PEO.
- Sure, you retain all of the same
employee decision-making power you had before, but paychecks will now
be issued under the name of the PEO.
- Furthermore, your
employees may need to identify the PEO as their employer on their tax
returns and when they apply for loans.
- This may seem like a
technicality, but unless your employees understand this ahead of time
it can create no small amount of concern for your staff.
- By
signing with a PEO, you also lose a certain amount of flexibility in
the compensation package your employee’s receive.
- Again, you
decide how much your employees will be paid. However, your options
regarding health insurance and other benefits may be extremely limited.
One thing to remember, a professional employer
organization is not a temp firm, a staffing agency, a simple
payroll service or placement agency.
For
more information regarding employer liability
insurance, such as the professional
employer organization section here, please be sure
to check out
the following
areas:
Similar to employer
insurance, employees also have
responsibilities and rights. To learn more about this, check
out the employee
rights section.
And don't forget to check out the various employment
background screening sections, especially if you are
interested in federal
government jobs.
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