Back to Basics: What is a PEO?

Originally published October 5, 2020

A Professional Employer Organization (PEO) helps companies streamline their operations and improve workplace efficiencies. Their cost-cutting options complement your existing HR team to empower them to achieve more and focus on what's essential to your business – your people and your profits. Nearly 200,000 small and mid-sized companies in the United States work with a PEO.

In this post, we'll go over some of the many reasons why PEOs are so popular with businesses while reviewing the basics of what a PEO is and how they can help your company.

What is a PEO? 

A PEO is a company that helps your business grow by providing access to better benefits at a reduced cost and reducing administrative burdens. PEOs specialize in managing complex HR and payroll functions so your HR team can focus on driving the needle and taking your company to the next level. 

Businesses that use a PEO grow 7-9% faster and have 10-14% less turnover than companies that do not use a PEO. Nearly 4 million employees in the United States currently fall under a PEO.

Your business can add to this and access the benefits and protections provided when you partner with the right PEO. 

Why Use a PEO? 

Providing competitive benefits can weigh down a company's budget, especially considering the annual increase of providing healthcare. Partnering with a PEO will give your business access to a better benefits package at a lower cost – stabilizing the yearly costs of benefits. Because a PEO has already negotiated rates, you may see a reduction in your administrative costs while gaining access to higher-quality healthcare options. 

A major part of a PEO's relationship with your business involves reducing your HR team's administrative burden – the HR-related tasks that your business must conduct but do not drive profit. Furthermore, these tasks continue to pile up and become more complex as your business grows. A PEO will relieve your HR staff of this burden and unlock their potential so they can focus on what is important: growing your business. 

Software is an enormous expense for businesses. You may have one onboarding software, another for payroll, another for HR files, and yet another for reporting. Outsourcing software to so many entities is inefficient and increases costs. With a PEO, you get access to consolidated software, putting all of your HR data into one easily accessible location. 

Labor laws also constantly change, and fines are costly. Even a mistake made with good intentions can cost your business significantly because ignorance is not a defense, despite the effort and challenge of keeping up to date with new laws. PEOs – however – are HR experts and keep up with these changes as part of their business. In partnering with a PEO, you gain access to their expert analysis to help keep your business compliant by preventing simple mistakes. You also get access to a handbook, policy resources, and advice on safety programs. 

How Does a PEO Lower Costs? 

A robust benefits package is a major factor that potential employees consider. You can attract the best talent in your industry if you offer a high-quality benefits package. Quality benefits can also help you maintain competitiveness if you're unable to compete heavily on wages.

Many business owners worry about the upfront costs, but partnering with a PEO gives you access to all the benefits the PEO has negotiated, whether with healthcare providers or retirement brokers. Because the PEO negotiates on behalf of all their clients' employees, these benefits are less expensive than what you could find on your own and are more cost-effective over the long term.

If you have an existing HR team, you can assure them you are not looking to replace them. All you want to do is make them more efficient and productive by removing the mundane and repetitive tasks from their plate. Giving them that time back lets your team focus on core business needs, helping you grow by keeping money in your company and improving efficiencies. 

Working with a PEO can also increase your retention. Your employees will feel more cared for by having an HR representative always available to them, but they will also see the added benefits and efficiencies added by the partnership. Engaging your existing staff helps them feel heard, which increases retention rates and keeps skills in your company. 

Do PEO Alternatives Exist? 

Your business can align with vendors to get all the benefits a PEO provides – yes. But what you lose out on when you do that is the efficiencies you get from consolidation. PEOs will provide many benefits at a lower total cost because you only pay overhead for one company. They will also save you time and hassle by letting you check in with one entity for all your needs.

A PEO combines all of the following vendors into one solution for you: 

• Payroll provider 
• Benefits administration 
• Administrative services 
• HR consultant 

None of these options on their own can offer more affordable benefits or remit payroll taxes themselves. Another key selling point of PEOs is how they take on risk management. While you can find other entities to handle the individual tasks, they will not be in your court like a PEO.

The Right PEO Can Cut Your Costs While Providing Better Benefits 

When you work with best-in-class PEOs, you do not have to use all the services provided. You can customize a plan that works for your business. While you do need to use payroll services, everything else is optional. Regardless of your needs, a PEO can give your existing team additional support while taking administrative burdens off their shoulders. 

The right PEO can provide benefits, compliance, and payroll functions for your business to complement your HR team. That allows you to allocate business resources to sales and growth. A PEO can be the solution you need to take your business to the next level.