What Does PEO Stand for in HR? Meaning and How It Works
Handling complex human resource operations such as workers’ compensation, compliance assistance, benefits administration, payroll, etc. could be daunting, especially for small and mid-sized businesses. This is exactly where PEO services come in, to optimize your company’s workforce management.
More than 500 PEOs operate in the United States, helping thousands of businesses appoint reliable employees and manage critical HR tasks. But what is a PEO, exactly? What does PEO stand for in HR? Do these PEO services make life easier for businesses? Let’s find out!
What is a PEO?
A Professional Employer Organization, or PEO, provides co-employment services to companies needing support with critical and strategic human resource management. Some of the most common PEO services include:
Payroll processing
Talent recruitment
Tax filing
Benefits management
Compliance assistance
Risk and safety management
In just a few clicks, Compensation Software will be able to simplify your workforce’s entire compensation process. With this, complicated HR tasks such as payroll, benefits, and even bonuses will easily be accomplished.
How does a PEO work?
PEOs are commonly mistaken as other HR outsourcing service organizations such as staffing or leasing companies. However, they’re entirely different. PEO services don't include the supply of labor or manpower. It’s also not designed to take over the hiring and management of a company’s employees.
To make it simple—a PEO offers outsourced HR services such as expert advice and strategic guidance. This means that when a company signs a service agreement with a PEO, it only comes with specific HR functions such as the following:
HR administrative services: A PEO typically handles administrative functions like payroll processing, payment and withholding of taxes, worker compensation management, and administration of employee benefits.
Specialized HR guidance: PEO services include compliance with employment laws, risk management strategies, and handling employee relations issues.
In-house HR support: A PEO can also conduct employee training and collaborate with a company’s existing HR department to improve certain systems and policies concerning human resource functions.
PEOs take care of certain HR functions so you won’t have to. But this doesn’t mean that a company will give up its ownership or control to them. A PEO’s sole responsibility is HR administration. It will never take over the decision-making matters of the company, help with sales and marketing, or dictate the salaries, work hours, and schedules of employees.
3 types of PEOs
Now that we’ve answered the question “what does PEO stand for in HR?”, let’s discuss the three types of PEO to give you a clearer picture of its functions and at the same time eliminate confusion:
Staffing companies: This is a type of PEO providing HR services in contractual provisions. This is a more flexible option as they’re only activated as needed.
Co-employers: This is the job title given to individuals who are appointed to provide support in HR activities. They act as employees to the client but perform certain employer responsibilities to the existing workforce.
Professional employer organizations: Contrary to co-employers, this type of PEO doesn’t handle the usual first-hand HR activities such as hiring, payroll management, and terminations.
Partnering with a PEO: Pros and cons
Companies can expect to receive valuable advantages when they buy PEO services. However, just like any other, they also come with certain disadvantages. Let’s take a closer look:
Pros of PEO services
Companies can enjoy both significant time and cost savings by delegating complicated HR tasks to a PEO.
Organizations can give more time to growth-focused goals such as sales, marketing, and expansion.
Businesses can feel at ease knowing that they have a reliable support system to eliminate risks and comply with the latest employment laws.
Cons of PEO services:
Companies are usually required to use the benefits providers set by the PEO, taking away the flexibility of having other choices.
Availing of PEO services costs an average of 2-12% of wages. Depending on the size of the company and the impact of the PEO services, it may be deemed expensive by some.
The PEOs may not take full accountability in case they make mistakes regarding compliance with labor laws. This could lead to major drawbacks and consequences for the business.
How to choose a reliable PEO:
Organizations aren’t all built the same. Each has its own unique goals and needs that are supposed to be met by their chosen PEO. The same could be said for PEOs as well because they also have their respective weaknesses and strengths to offer. Below are some effective steps on how to choose a reliable PEO:
Determine your needs: Assess your workplace and identify the specific HR and risk management requirements needed to be addressed by PEO services.
Conduct a background check: Examine their profile to determine if PEO services are compatible with your work style and culture. You can also look over the PEO’s company reviews, social media accounts, and website to validate its brand history and reputation.
Check for memberships and certifications: Reliable PEOs are usually certified by the Internal Revenue Service (IRS) and accredited by the Employer Services Assurance Corporation (ESAC).
Study the service model: Figure out if the whole package being offered is compatible with your company’s current HR needs. You should also determine if it includes HR technology to streamline administrative functions. Speaking of technology, Compensation Software features cutting-edge HR Technology Integration to seamlessly adapt to your company’s unique HR needs. With this, you can easily secure top talents and make decisions with confidence.
Thoroughly review the contracts and service agreements: Before you fully commit to PEO services, make sure to carefully review the contracts and service agreements.
FAQs
Below are some common questions about PEO services:
Does a PEO provide employee benefits?
PEO services also offer high-quality employee benefits at affordable prices. These PEO-sponsored plans are comparable to those being utilized by Fortune 500 companies.
What is the difference between a PEO and a BPO?
A BPO or Business Process Outsourcing is also a type of HR outsourcing model like a PEO (Professional Employer Organization) and ASO (Administrative Services Organization). Unlike PEO services which solely focus on HR-related tasks, BPOs also take care of certain internal tasks for the company such as IT management, customer service, social media management, etc.
Who is the employer in a PEO?
You, the client, or the CEO of the company are still the employer. Upon availing of PEO services, you will be in a co-employment relationship with them where appointed individuals will perform HR services and certain employer responsibilities. Keep in mind that these individuals still act as employees to the client.
How is a PEO different from a payroll company?
PEO services include an all-in-one package including comprehensive HR services, strategic support, and guidance. On the other hand, a payroll company only focuses on payroll processing.
Streamline your company's payroll processing by utilizing Compensation Software. You can easily generate a Total Compensation Statement featuring a consolidated view of an employee's forecasted salary, benefits, taxes, and more.
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