PEO Systems: Your Complete Guide to HR Outsourcing

A professional employer organization (PEO) provides human resources outsourcing services for businesses. The PEO system can be particularly well-suited for small and medium-sized companies.

Employees are the backbone of any company. HR operations help businesses operate smoothly, keep employees engaged, and comply with payroll, tax and employment-related rules and requirements. However, small and medium-sized companies may lack the resources to devote to HR.

Outsourcing HR functions to a PEO can be the solution. This enables companies to help save time with less hassle and optimize cost from less staff to maintain for a full-fledged internal HR department. By outsourcing instead, small and medium-sized companies can gain more time and take advantage of potential savings to devote to their corporate strategy and core business goals.

Because a PEO works with many businesses, it enjoys economies of scale. A professional employer organization can provide its client businesses access to premium employee benefits otherwise usually available only to larger companies. PEOs also provides leading-edge HR technology tools that may be out of reach for small and medium-sized firms.

This guide to the PEO business model will provide a comprehensive introduction to the professional employer organization system. It will answer several questions, including:

• What does it mean to be in a co-employment relationship?
• What services do PEOs provide?
• What fee structures do PEOs use?
• What should I look for in PEO accreditation?

We'll also show the positive effects of working with a PEO on a business's organizational development and workplace culture.

What Is Co-employment?

PEOs and their client companies are in a co-employment relationship. In a co-employment relationship, PEO responsibilities are allocated pursuant to a client service agreement. Typically, the PEO may:

• Calculate, process and distribute payroll that is processed in the PEO system.
• Withhold and remit employment taxes for payroll processed in the PEO system
• Provide access to and administer PEO-sponsored benefits and other employee benefits.
• Offer expert HR best practice guidance.
• Provide workers’ compensation insurance and claims support.

A PEO will be the employer of record for payroll tax purposes.

The client company’s owners retain full control of the company’s business management and day-to-day operations. The company continues to manage its employees and makes all final hiring and termination decisions.

The PEO will not make any decisions about the business. Its focus is on HR administration, providing access to employee benefits and risk mitigation. The PEO does not get involved in the company’s strategic planning, marketing, sales or product distribution.

Some companies choose to outsource most of its HR functions to a PEO and have no internal HR department. However, if a company does retain an in-house HR team, the PEO will work with it to provide best practice guidance on dealing with challenging HR concerns and to help the client enhance the workplace.

One of the PEO myths that lead people astray is the inaccurate description of them as a type of employee leasing company. However, they are quite different. An employee leasing company, also known as a staffing firm or a temp agency, is the sole employer of its workers, which it leases to other businesses. A PEO is a co-employer, not the sole employer, of a business’s workers. Unlike a leasing company, a PEO also provides expert best practice guidance to its client companies on tough HR concerns and help with risk mitigation.

What Does a PEO Provide?

PEOs use economies of scale to provide services that small and medium-sized businesses would find difficult to provide for their employees on their own. This is possible because each PEO works with many client businesses. One of the benefits of co-employment is that it gives the PEO collective strength to access the same caliber of benefits as other larger companies. The size of PEOs also helps them to invest in more modern technology and hire teams of HR experts to provide best practice guidance to their clients.

Software, portals, and mobile apps

High-quality technology can make a big difference in the accuracy and efficiency of your HR functions. It can be difficult for small and medium-sized companies to afford top technology on their own. They’d have to buy or lease software and maintain and periodically update it, as well as troubleshoot and resolve software problems. In addition, if they are running the software locally, they'd have to buy, maintain and update the hardware.

PEOs can provide their client companies with cutting-edge, cloud-based HR technology that processes HR functions with efficiency and ease, while helping to save their clients time and may be more cost effective. The PEOs take care of the updates and maintenance, providing their clients with a less hassle experience. These human resources information systems (HRIS software) generally come with self-service employee portals so your people can get information, enroll in benefits, and update their own employee records. The software also runs on mobile apps, so employees can access it anytime from any internet-connected device.

Some PEO’s software also provides comprehensive data analytics that give your company a competitive advantage in market research, employee management and business development.

When evaluating PEO technology platforms, look for those that handle the essential HR functions. Look for advanced features and a user-friendly interface that is intuitive for all levels of employees, managers and leaders.

Payroll processing

Payroll processing involves multiple tasks that must all be performed accurately, on time, and in compliance with local, state, and federal employment and payroll tax rules and requirements. This can be challenging, expensive and time-consuming for a small or medium-sized company that does not have the luxury of a large business’s full-fledged HR department.

A PEO has the expertise to keep up with changing payroll and payroll tax rules and requirements and the technology to help process payroll efficiently. A PEO's payroll processing services will include calculating and distributing paychecks and/or direct deposits to hourly and salaried employees for payroll that’s processed through its system, and maintaining payroll records and distributing pay stubs and Form W-2s to employees. Services may also include calculating, withholding and remitting payroll taxes for those payrolls processed through its system.

Risk mitigation

From the time your company hires its first employee, you are may be at risk of having to deal with employment-related claims. There may also be concerns with complying with complex rules and requirements governing employee pay and benefits. It’s difficult for small and medium companies to put all the measures into place that will help mitigate these concerns.

PEOs provide the expertise and best practice guidance to help prevent employment-related claims. They also may provide employment practices liability insurance (EPLI). This insurance helps mitigate your risk by providing certain coverage for defense costs in the event of an employment-related claims against your company.

Employee benefits

Large companies have an advantage over small and mid-sized companies when it comes to obtaining good employee benefits. Big companies may be able to get a more comprehensive benefit plans because they may have more leverage with benefit providers. Smaller companies, unfortunately, may have a harder time to compete on their own and may have to settle for less robust benefits.

PEOs can help level the playing field with their HR services for startups and small businesses. PEOs can provide access to large-group health insurance and other benefit plans that their client companies may have a difficult job obtaining on their own. PEOs then provide each client company with access to these premium plans, which the company can then offer to its employees to help attract and retain top talent.

PEOs also handle the administrative end of benefits, including open enrollment, renewals, employee benefits education, and required filings. This saves their clients the time, expense, and mitigate risks of handling these tasks in-house.

HR Compliance

Businesses are required to comply with a dizzying array of federal, state, and local employment-related rules and requirements. Just learning the rules once is not enough because they may frequently change due to new legislation and administrative agency. It would be costly for a small or medium-sized business to hire in-house experts to stay on top of all of the changes. Failure to comply is also potentially expensive, as compliance mistakes could cost the company steep fines and penalties.

The HR experts at PEOs help their clients keep up with these changes and provide best practice guidance to your company so you can comply. In addition, PEOs will make required filings relating to payroll taxes, provide access to PEO-sponsored benefits and EPLI and help with risk mitigation.

Onboarding

When employee onboarding is done well, it helps new employees get up to speed and become productive quickly. It also sets the tone for how engaged they will feel in their new jobs. Unfortunately, small and medium-sized companies may not have the resources, time or expertise to provide an optimal onboarding experience.

PEOs can use their HR expertise and technology to provide efficient and effective onboarding experiences so your new hires are productive and enthusiastic employees, setting a foundation for excellent ongoing employee relations.

Recruitment

The ability to find and attract top talent is a key element in driving your company’s continuing success. Small and medium-sized businesses may not have the time or expertise. PEOs can help. With their teams of HR experts, knowledge of the latest recruitment techniques and advanced technology, PEOs can provide a welcome boost to your recruitment strategy.

By working with a PEO that provides recruitment solutions, you can attract great candidates to your company by reaching out to them in more effective ways, streamlining the application process, and effectively tracking how each applicant does at every stage of the process. When you combine PEO-assisted talent acquisition services with PEO-assisted onboarding tools, you’ll be in a great position to attract and keep the talent your company needs to thrive.

Career development

Helping employees develop their skills and careers can lead to better job satisfaction and engagement. This can help to reduce costly employee turnover. However, busy small and medium-sized companies may struggle to find the time to devote to career and leadership development.

Some PEOs use their HR expertise to help their clients more effectively develop their employees’ talents by providing access to an online learning management system, creating seminars, or arranging training with outside providers. PEOs can also help optimize your performance evaluation system to identify top performers as well as employees who could benefit from assistance.

The PEO System's Business Model

PEOs provide HR outsourcing services to client companies for a fee. The PEO industry is successful because the fees they charge are for bundled services and solutions and may be less than the money the businesses may save, producing possible ROI for clients. As a result, the interest in working with PEOs continues to increase as more small and mid-sized businesses learn about the many advantages.

It all starts with a service contract.

Service contract

The service agreement between a company and the PEO is a comprehensive, agreement that governs all aspects of their working relationship. It should include the responsibilities, obligations, and roles of both parties, list the services that the PEO will provide, and describe the fee structure. Make sure that you agree to all the terms before you begin working with the PEO.

How PEOs get paid

One thing to look for when evaluating potential PEO providers is whether their pricing is clear. Before entering into an agreement with a PEO, you should understand the pricing models used and what fees you may be charged.

Fees should be delineated in your service agreement and, depending on the pricing model, may be based on the number of employees you have, how much your employees are paid and/or which HR functions you have contracted to outsource to the PEO.

Most common pricing models

The two most common pricing models that PEOs use is:

• Flat fee per employee. You pay a flat monthly to the PEO for each employee. With this model, your expenses are more predictable.
• Percentage of total payroll. If you use this pricing model, the amount you pay will be based on the total payroll of employees.

A PEO may charge extra for some services, such as training programs or background checks. There may also be one-time set-up fees. Be sure you understand and agree with all the fees described in the service contract.

FAQ on PEO costs

Q. Are there any discounts available for PEO fees?

PEOs may offer or negotiate discounts for long-term contracts or volume. They may be willing to waive set-up fees or be flexible in negotiating other fees and costs.

Accreditations

When a PEO has the following accreditation, you can be assured that you are dealing with a more trustworthy organization.

ESAC accreditation

The Employer Services Assurance Corporation (ESAC) provides accreditation to PEOs that meet the industry’s high standard for financial stability, business ethics, and regulatory compliance.

Organizational Development and Culture

The client company is responsible in developing and nurturing the company’s workplace culture. However, a PEO’s HR consultants are experts in organizational behavior and can help provide consultant needs. They can help clients drive strategies to enahnce positive cultures and boost employee engagement and job satisfaction. PEOs can help companies with their employees’ professional needs, in many ways:

• Employees feel that their employers care about them. PEOs help their client businesses provide access to premium benefits for their staff, which matters a lot to employees, especially when it comes to health insurance. When they receive top health plans, employees feel that their company is investing in their personal well-being. This makes them feel more engaged with and loyal to the company.
• Employees appreciate the ease of accessing information about benefits and other HR matters. User-friendly employee portals and mobile apps in PEO technology platforms, along with phone and online support, make it easy and convenient for employees to get the information they need, which increases their satisfaction with their employer.
• Employees believe their company is reasonable. PEOs provide best practice guidance on workplace policies and employee manuals. When workplace rules are clear, employees feel that they are on solid ground. That helps mutual respect grow between employees and their employer.
• Employees find challenge and satisfaction in career development. A PEO can help its client companies keep employees engaged and motivated by supporting career development through providing tools to help with training, performance reviews, team building, and improved communication. With a PEO’s help, a business can promote a spirit of entrepreneurship that keeps employees challenged and engaged.
• PEOs free up company leaders to focus on their core missions. When PEOs take responsibility for time-consuming HR functions, the leaders of their client companies have more time to spend on their products and services, profit, business growth and the things that got them into business in the first place. In turn, this energizes and engages their employees, who find fulfillment in working for a mission-driven organization.
• PEOs help you find candidates for jobs. Small and medium-sized companies may not have the in-house HR expertise to find the top talent between employees’ existing or developing skills and the skill sets required in the companies’ current or newly created jobs. PEO experts can provide best practice guidance to managers on how to find and develop the right people for their job to optimize productivity while also providing employees with engaging challenges and the chance to grow.

A Business Case for HR Outsourcing

TriNet’s PEO system combines a top-quality software platform with personalized best practice guidance from our HR experts. We service over 20,000 small and medium-sized companies, with a combined total of approximately 333,000 worksite employees, and provide access to outstanding employee benefit packages, the latest tech and seasoned expertise.

By working with TriNet, you will receive a complete HR solution tailored to your industry, including payroll administration, access to competitive benefit packages, benefits administration and powerful and user-friendly software — all that is cost-effective. We’ll also provide expert best practice guidance on complex and changing employment-related rules and requirements and help you navigate employee concerns. Additionally, we will help mitigate risk and offer resources that help prevent employment-related claims from happening in the first place, but also supports you in the event of a claim with insurance coverage and claims management expertise. We’ll free up your time so you can focus on your business operations, growth and development.

We’ll help your company with consultant needs so you can maintain or develop a positive organizational culture that makes your employees feel valued and engaged. We’ll help you find, attract, and keep the best employees and help them reach their peak productivity.

Our PEO is one of several HR support services we provide. Need a business case to outsource your HR? Build one now with our interactive tool.