Topic Risk Management,

The PEO Shield: Liability Reduction for Small Businesses

The PEO Shield: Liability Reduction for Small Businesses

An essential difference between a professional employer organizations (PEO) and other HR outsourcing services is the PEO's ability to reduce your business’ risks and liabilities. With a PEO as your backstop, you can feel confident that you won't be incurring any compliance penalties. If you want to maximize your liability reduction, consider going with an IRS-certified professional employer organization, also known as a CPEO. 

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How can PEOs reduce liability?  

Reducing your liability is possible with a PEO because of the co-employment agreement you sign at the beginning of your partnership.  

A co-employment relationship allows the PEO to take on administrative employer responsibilities like filing employment taxes or providing employee benefits like group health insurance.  

The PEO is the "employer of record," so taxes are filed under the PEOs Federal Employer Identification Number (FEIN) rather than your FEIN. And as the employer of record, your employees gain access the PEO's Fortune 500 benefits at a more affordable premium than if you tried to obtain the same coverage by yourself. This is because PEOs can negotiate for health insurance on behalf of all their client's worksite employees. These economies of scale mean less risk for insurance companies. The result is lower premiums. 

6 Ways PEOs Shield Your Business  

No matter how many years your SMB has been in business, you have a higher probability of closing your doors compared to your larger counterparts. Studies report figures as high as 20% closure in the first two years, 45% within five years, and an astounding 65% within ten years. In fact, only 25% of small- and medium-sized businesses make it past the 15-year mark. The problems most run into are cost and liability. Here are six ways your PEO can shield your business and reduce your liability.  

1. Payroll Processing 

PEOs have the time and expertise to handle all of your payroll administration services, including payroll processing. By doing so, they ensure you're not violating laws like the Fair Labor Standards Act by misclassifying exempt employees or miscalculating overtime. It only takes two payroll errors can cause up to 49% of employees to start job hunting. 

Keep in mind that if a regular PEO makes a mistake during payroll, the responsibility for the error is hazy. However, if a CPEO makes a mistake doing payroll, 100% of the liability falls upon the CPEO.  

2. Filing employment taxes 

Using the latest HR technology, expert insight, and best practices, your PEO partner can reduce your liability with employment taxes. PEOs do this by helping with two complex and deadline-driven components of tax filing: 

  • Providing employees with their W-2 forms and  
  • Making sure all your taxes are filled out correctly and in compliance with the most recent local, state, and federal tax laws and regulations 

Again, a PEO can make a difference, but a CPEO assumes full liability if employment taxes aren't filed on time or with errors.  

3. Ensure Compliance with Employment Law 

PEOs also ensure you comply with state laws and federal regulations like the Family and Medical Leave Act (FMLA) leave and various state-paid sick leave laws. Going the extra mile, PEOs will also: 

  • Train managers and employees in following anti-discrimination laws  
  • Handle recordkeeping requirements for you  

As a result, your SMB won't be one of the many companies contributing to the total yearly cost of noncompliance:  $14 million in fees, fines, penalties, business disruption, loss of revenue, and more.  


4. Implement Risk Management Best Practices 

Critical risk events can come with a host of negative consequences: declines in employee productivity (62%), operational efficiency (59%), employee safety (29%), competitive differentiation (29%), and strength in brand and reputation (28%). 

PEOs reduce your liability by implementing strong risk management strategies and best practices. This includes: 

  • Instituting a safety program into your business — specific to your company and industry — reducing the number of injuries and accidents you experience each year.   
  • Setting up a return-to-work program to lower the size of workers comp claims  
  • Providing workers' compensation insurance with a lower experience modifier rate (EMR) than might otherwise be possible. 
5. Inspection and Audit Support 

There are several audits and inspections your business must prepare for and pass every year. A PEO will help you prepare for the following: 

  • Department of Labor Inspections  
  • OSHA Safety Inspections  
  • Compliance Inspections  
  • I-9 Form Immigration Inspections  
  • Workplace Inspections 

PEOs will also handle any audits that you don't want to deal with, such as the annual Form 5500 that must be filled out based on your retirement plan offerings and yearly workers' comp audits. 

6. Human Resources 

Your employees count on you to make zero mistakes. A PEO partnership ensures all of your HR processes are completed timely and without error.  

  • PEOs provide HR support such as: 
  • Employee handbook creation 
  • Employee relations advice and, if need be,  
  • Referrals to legal support 

Go Beyond PEO Liability Reduction with a CPEO  

CPEOs reduce liability more than PEOs because their legal obligations have been clarified by the IRS. For instance, partnering with an IRS-certified PEO means: 

  1. The IRS has confirmed that the CPEO can pay federal employment taxes under its EIN 
  2. Customers have an additional layer of protection through the CPEO's sole liability 
  3. You and your CPEO have clear guidelines to follow 

Regular PEOs still lower your risk levels, but not as much as a CPEO. If you are currently partnered with a PEO, consider what you'd gain from making the switch to a CPEO. Your liabilities may also be PEO liabilities, but a CPEO can guarantee your small business's protection.  

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Please note that the information presented above is not intended to be specific, technical, or professional advice. Our aim is to educate and provide insight into relevant topics.