Few entrepreneurs start their own companies because they love managing human resources. However, many become buried in the details of workforce management as their companies grow.
Small businesses with a headcount of 10 to 100 employees often find themselves in human resources limbo. They lack the time to address HR issues and also lack the resources to create an HR department.
Fortunately, many HR functions can be outsourced for a fraction of the cost of managing them in-house. Many small- to mid-sized companies hand those responsibilities over to professional employer organizations, or “PEOs.” The PEO market has grown rapidly as the Affordable Care Act and other legislation have made human resources more complex and time-intensive than ever before.
What is a PEO?
Put simply, a PEO is a third-party provider that can operate as your company’s off-site HR office. Just as an outside law firm might help your company with legal matters, the PEO can manage all HR-related jobs. Those functions include payroll, employee benefits, unemployment insurance taxes and worker’s compensation. The role of the PEO is to be an expert in all aspect of employing workers.
The PEO industry is only about 30 years old but has grown tremendously in the past decade. In 2012, PEOs generated an estimated $92 billion in revenue and provided services for 2.5 million U.S. workers, according to the National Association of Professional Employer Organizations.
Today, the federal government and all U.S. states recognize PEOs’ legal right to serve as an employer or co-employer. In December 2014, Congress passed the Small Business Efficiency Act. The new law authorizes certified PEOs to pay wages to worksite employees, as well as collect and remit payroll taxes.
Used in Many Industries
What kind of a company would co-employ its workers with a PEO? The practice has become common across a wide range of different industries. Almost any kind of business may find value in outsourcing its employment work. Even companies with as many as 500 employees enlist the help of a PEO.
Small businesses lacking resources or expertise to perform most HR functions can gain the most from hiring a PEO. A good PEO offers efficiencies, integrated technology and cost savings in managing employees. A PEO also makes sure its clients comply with complex and ever-changing employment laws and regulations. Also, handing over most of the employment responsibilities to a PEO frees company owners to spend more time on running and expanding their business.
A PEO appeals to many companies because it can help save money. Outsourcing employment responsibilities allows a business to maintain a scaled-back in-house HR department, or no department at all. The PEO’s economy of scale also reduces costs related to recruiting and hiring, and software technology for HR functions.
For some business owners, handing over so much responsibility to an outside firm sounds risky. Can using a PEO to handle payroll, worker’s comp, health care benefits and other functions mean possibly losing control of your company?
The short answer is no. The PEO’s client retains ownership of its company and control over operations. In a typical PEO contract, the PEO and client share employee responsibilities and liabilities as “co-employers.” The company still has control over maintaining its worksite and complying with safety regulations. Because it handles payroll, taxes and maintains employment records, the PEO does reserve a right to hire and fire. Generally, however, the PEO has no control over a client’s business operations.
A Regulated Business
There are an estimated 900 PEOs operating in every U.S. state. Most states have laws on the books that govern the licensing, certification and regulation of PEOs. The PEO industry also has its own regulatory body, the Employer Services Assurance Corporation (ESAC). Similar to the Federal Deposit Insurance Corporation in banking, ESAC has an accreditation program for PEOs and performs regular audits. When seeking a PEO, be sure to select one that is ESAC-accredited. The accreditation carries more than $15 million in surety bonds protecting that PEO’s clients.Sources: NAPEO.org, The Kansas City Business Journal, ADP, Employers Service Assurance Corporation