What Is A PEO & How Can It Help Your Business?

What Is A PEO

Businesses need to have a competitive edge to survive and prosper. Naturally, most business owners focus on customer service and product innovation to get this edge. However, these aren’t the only areas that can be looked as, as you can improve and sharpen your company in almost any area.

That leads to the question of how that can be done. While there’s a wealth of options, one that’s been growing in popularity recently has been the use of a professional employer organization (PEO). Despite this budding popularity, many people might not know much about PEOs.

Typically, the first question that comes to mind is ‘what is a PEO?’ As it turns out, they can be quite a benefit to most firms, regardless of their industry. That makes it worth getting into what they are and how they can help you, as they have been a popular service for quite some time and have helped some firms ensure continued success.

What Is A PEO?

This is the first question most people will have about professional employer organizations (PEOs), so it’s worth addressing first. These are companies that are responsible for hiring employees, whom they then co-employ with other firms. In that sense, they can be seen as a type of outsourcing company.

By entering into this kind of agreement, the business leasing the service can outsource its human resources functions. It also means that they can avoid paying employment taxes etc., as they’re not legally hiring these employees. The PEO will take care of all these matters.

With this kind of relationship, the client company can take advantage of economies of scale and can often see much faster growth. As there are quite a few cost savings, funds can be better spent elsewhere without needing to cut corners.

On the reverse side, the PEO can have hundreds, if not thousands, of employees at any given time. These will be spread out amongst dozens or hundreds of clients, which allows them to spread costs while maintaining a profit.

However, it’s worth noting that the agreement is what’s known as a ‘co-employment’ partnership. That means that the client company will be paying a portion of the employee’s wages too. Given that you wouldn’t be paying the full salary, however, there are some cost advantages to the model.

As such, it’s worth seeing a PEO as halfway between an outsourcing company and an internal human resources (HR) department. Your company will be co-employing your employees with them, although the professional employer organization will take on many of the liabilities.

How Do PEOs Work?

Mentioned above was a ‘co-employment’ model, although many people don’t know much about what this is. While it might seem simple based on the name, it can be much more complicated than you might imagine. That makes it worth getting into the misconceptions that many people might have about PEOs.

One of the more notable of these is that people assume PEOs take control of your business. They don’t. Instead, they stick to whatever your agreement says they should do. Typically, that will be your payroll and a few other human-resource-related activities.

While most agreements stick to the same services, there’s a certain amount of negotiation expected between PEOs and clients. That means that they’ll help manage your company’s employee administration, but you’ll keep full control of your company.

You might be assuming that a professional employer organization will replace your human resources department. They shouldn’t. Instead, they’re meant to complement your HR division and make its time much easier. That makes them a tool that your company can use to run much smoother.

All PEO firms will have certified human resource professionals on staff that should be available to you. As a client, these consultants can help you with:

·         Effectively addressing any conflicts;

·         Increasing engagement with employees, and;

·         Creating employment and compensation initiatives that benefit you and your employees.

One of the other larger myths about PEOs is that they’ll disrupt your workforce. That couldn’t be further from the truth. Generally, your employees aren’t going to notice anything outside of the paperwork. While it might be the PEOs name on their paycheck, they’ll still be devoting their work time to you.

While there might be some initial blowback to the agreement, once employees know what kind of benefits the relationship might bring, they could be much happier with it. However, it’s worth noting that starting an agreement with a PEO is – like all other large business changes – worth doing with care.

That means that careful planning, a lot of research, and a significant number of discussions are had beforehand. They’ll essentially be core features of your plan heading into the relationship. Doing so will make sure that everyone’s on the same page with the agreement and knows what’s expected and that any service is high-quality.

What Are The Benefits Of A PEO?

As more firms have been entering agreements with PEOs over the past few years, you’d be right in expecting that there are benefits to the practice. Perhaps the most obvious is the potential savings in costs, as the professional employer organization will be paying for most employee liabilities.

That includes employee taxes and similar expenses. While some of these can be relatively minor, they add up throughout the year, resulting in not-so-insignificant savings. New staff are also onboarded much quicker, saving in recruitment costs and other expenses.

There’s also the fact that you have a faster track to market. Staffing a company from the ground up can often take weeks, if not months. By using a PEO, you could have your company staffed in days. That’s especially true when combined with the speed of onboarding.

All PEOs will have a significant amount of expertise in employment and its related laws. That’s something that most of their clients will want, and possibly need, to take advantage of during their relationship. While a lot of this can be used for legal compliance, employee retention is an area where it can really help.

That’s because they can help create compensation packages and other initiatives designed specifically to maximize employee retention. As a result, you should see fewer employees leave long term while also seeing an increase in overall productivity. This should subsequently result in an increase in revenue, alongside more long-term growth. Naturally, that revenue growth is something that many people will want.

If you’re considering entering a market abroad, then you could still see some benefits. These are specifically centered around regulations and legal differences between your headquarters and where you’re targeting. A PEO can quickly and easily navigate these issues and ensure that your company is compliant from the start.

That’s also the same for your payroll functions. There will also be an increase in productivity, which should further enhance revenue. That’s especially true if people are dedicated to certain tasks, such as the phone or developing a sales plan, etc. You could also have people dedicated entirely to product development, email marketing, product experience, software development, and other areas.

It’s even better if you can have a dedicated customer success employee, which could help improve your customer service and company branding. A customer success manager, for example, could be perfect. You could essentially replicate your workforce and still be geared for success.

Some of this could also be on-demand, although that could depend significantly on your agreement. That could mean that any enterprise can benefit from the features that are built into PEOs. However, any participants in this kind of relationship will have to plan around a few disadvantages to the practice. After all, there is a limit to what you can do with a PEO.

What Are The Disadvantages?

While there is an extensive number of benefits to PEOs, there are also some drawbacks. Perhaps the most obvious is that you could be losing a certain amount of control within the firm. Though you’ll oversee daily operations, a professional employer organization can have more say with your employees than you might want.

That loss of control also extends to paperwork, as the majority of documents related to employees will now be controlled by the PEO. While that’s part of the benefit for some companies, it can be a negative thing for many others.

The move can also result in your human resources department becoming less important or authoritative. It could also result in the department being downsized, which would mean losing some institutional knowledge in your company.

Many business owners also might not want an outside company having too much influence on the firm. While that’s traditionally not the case with other vendors, the possibility is open here, as the PEO will have much more contact with and contractual control over employees.

However, it’s worth noting that a lot of this can be avoided and overcome in negotiations. You should be able to negotiate an agreement that makes you comfortable and avoids some of the issues above.

Wrapping Up

Over the coming years, fewer and fewer people will be wondering, ‘what is a PEO?’ That’s because the practice looks as though it’s going to become a more standard employment model. With the cost benefits, among others, that it offers to employers, it’s easy to see why they’ll want to take advantage of it.

Essentially, this is a cost-effective way of making a business more efficient. On the other hand, though, it’s easy to see why there might be some blowback. For the cost savings and additional benefits, PEOs do have their drawbacks, with a lack of complete control being one of the more notable.

Employee backlash is also a notable priority, and few employers will want to risk losing the staff that they’re not outsourcing. After all, PEOs are meant to complement your workforce, not replace it completely. That means that if you’re considering getting a PEO, then you’ll need to do so carefully.

Naturally, you’ll have to make sure that it’s right for your company first before ensuring that the professional employer organization is the right one for you. They’re not going to be the right fit for some companies, but most will cater their services to fit your needs to make sure that your firm runs smoothly.

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