Should You Partner With a PEO?

As a business grows, so do the complexities of managing employees. Hiring more workers means spending more time setting up and administering employee benefits, overseeing details like payroll, and making sure the business is in compliance with an ever-growing list of employment-related laws. These jobs can sap precious time from a business owner’s schedule, and hiring full-time human resources professionals can be costly. One option for owners who are interested in outsourcing some HR details is to use a professional employer organization (PEO).

How It Works

Essentially, a PEO provides one-stop shopping for employee benefits and human resources services. When a company decides to contract with a PEO, most or all of the company’s employees actually go on the payroll of the PEO. PEOs provide employee benefits such as medical and dental care coverage, 401(k) plans, employee assistance programs and many other benefits usually offered only at larger companies. The PEO also takes on responsibilities such as payroll taxes, workers’ compensation coverage, and benefit and employment compliance responsibilities in areas such as the FLSA (Fair Labor Standards Act), FMLA (Family Medical Leave Act), HIPAA (which governs health-care privacy) and COBRA (which allows employees to continue group health benefits under certain circumstances). PEOs can also assume a wide range of other administrative functions, such as employee file maintenance, unemployment claims processing, workers’ compensation claims management and employee handbooks.

Of course, the business owner or manager isn’t out of the picture. Recruiting, training, motivating, retaining and managing the work performance of an employee is all overseen by the business itself, although many PEOs have programs to assist clients in those areas as well.

The Advantages of a PEO

One of the biggest advantages of PEOs is the access they provide to a comprehensive employee benefits package, ranging from health-care choices, including vision and dental care, to 401(k) programs, employee assistance programs (EAPs) and even adoption assistance. Many of these benefits would probably be otherwise unavailable to smaller businesses. PEOs handle the regulatory requirements and the details of plan enrollment and administration.

PEOs also enable workers to take advantage of benefit options that are frequently not offered by many smaller employers, such as Section 125 cafeteria plans. These offer employees the opportunity to use flexible spending accounts to offset medical expenses with tax-free dollars. Many small businesses lack the expertise or management time to establish and administer such a program.

“Our PEO offers access to six different medical plans and several dental plans, which gives our employees an excellent set of choices,” says Art Benson, controller of Paris Gourmet in New Jersey. He contracts with Compensation Solutions (www.compsolutionsinc.com).

PEOs can also provide additional human resources services. They can develop and document workplace policies and procedures in accordance with state and federal employment laws. Many assist in developing an employee handbook and provide related guidance and training. Most also offer training programs to help clients decrease their exposure to liabilities from harassment, discrimination, wrongful termination and other employment legal claims. Some PEOs also equip their clients with recruiting tools to find the best applicants, as well as sophisticated employment screening resources such as skill evaluations, psychometric tests, background checks and in-depth interviews.

PEOs can be especially convenient for businesses with employees scattered in different states; they’re well suited to handle the different employee compliance and recordkeeping tasks demanded by different jurisdictions.

The Costs of Convenience

A PEO is undeniably convenient, but as with all conveniences, there are costs attached. An informal poll of New York–area PEOs done by The New York Enterprise Report found that the most common administrative fee structure was a flat-fee-per-employee charge. Fees ranged from $100 to $150 per employee, per month.

Keep in mind that this does not include the cost of benefits such as health insurance plans or other insurance. Some PEOs charge a percentage of payroll, ranging anywhere from 1% to 3%. Many, although not all, also impose a one-time start-up fee. While many firms are willing to negotiate, remember that in many cases you get what you pay for.

Most PEOs will serve a wide range of company sizes, from sole proprietors to companies with as many as 700 workers. However, if your business is very small, you may be required to pay a minimum annual or monthly fee. One company’s minimum monthly charge was $500, regardless of the number of employees.

The Downsides of a PEO