- One solution for your startup’s human resources tasks, such as payroll and benefits administration, is to hire a professional employer organization (PEO).
- A PEO provides robust employee benefits and expert HR administration to your startup’s employees through a co-employment relationship.
- In this co-employment relationship, a PEO serves as a professional employer of your startups’ employees.
- Although you share certain employment functions with a PEO, you still retain ownership of your startup and its operations.
- PEOs often get confused with a leasing or staffing company, as many older state statutes use “leasing” terminology when describing professional employment organizations. However, PEOs are not the same as leasing or staffing companies.
- PEOs are not a one-size-fits-all solution. If not vetted correctly you may end up with unhappy employees and cause irreparable damage to your startup’s culture.
- By outsourcing HR functions to a PEO, you are left to grow and manage your startup while having the peace of mind that the PEO is handling these critical tasks while sharing in the risk as a co-employer.
Running a business is no small task. You have plenty on your plate, such as product development, sales, marketing, and compliance. Once you hire employees, your tasks multiply, with payroll, employment taxes, benefits, workers’ compensation, and training, to name a few. One solution to managing the increased human resources functions that come with hiring employees for your startup is to hire a professional employer organization (PEO).
In the United States, there are 907 PEOs with industry revenue estimated at $270 billion, according to the National Association of Professional Employer Organizations (NAPEO). PEOs currently provide human resources services to 175,000 small- and mid-sized employers (including startups), representing 15 percent of all companies with 10 to 99 employees. Furthermore, “[s]mall businesses that use PEOs grow 7-9 percent faster, have 10-14 percent lower employee turnover, and are 50 percent less likely to go out of business.”
In this article, we’re going to explore the ins and outs of a PEO and why it may benefit your startup.
What Does PEO Stand For?
A PEO is a professional employer organization that is a “type of full-service human resource outsourcing known as co-employment. In this arrangement, the PEO performs various HR tasks, such as payroll and benefits administration, on behalf of a business.” Many startups and small businesses team up with PEOs for support with human resources tasks and strategies so they can focus on what they do best, building their business.
What is a PEO and How Can It Help My Business?
A PEO provides HR administration to your startup’s employees through a co-employment relationship. In other words, your startup and the PEO share specific employer responsibilities, such as processing payroll, submitting employment taxes, administering employee benefits, maintaining workers’ compensation policies, and providing other human resources tasks and strategic guidance.
In this co-employment relationship, a PEO serves as a professional employer of your startups’ employees. You’ll report your employees’ wages under the PEO’s federal employer identification number, not your own. By doing this, your “employee liability shifts to the PEO.” In addition, as a larger organization, a PEO may offer more substantial benefits to your employees than you could provide on your own as a startup.
Depending on your agreement with the PEO, you can outsource a few human resources tasks or as many as the PEO offers, depending on your employees, budget, and growth plans. Let’s look more closely at some HR functions that a PEO can provide.
Human Resources Tasks Commonly Provided by PEOs
- Payroll and Employment Tax Filing:
PEOs can process payroll for your employees as well as withhold and pay employment taxes, including federal income, federal unemployment, Social Security, and Medicare. Additionally, if your startup’s employees are subject to workers’ compensation benefits or state employment taxes, a PEO can deduct and pay those as well.
- Benefits Administration:
PEOs can also offer and administer competitive benefits to your employees, such as health, dental and vision insurance as well as retirement plans. Suppose you choose to provide benefits separately from the PEO, but you agreed to have the PEO provide payroll services. In that case, the PEO will still process the appropriate benefit deductions on behalf of your startup’s employees.
- Talent Management:
Depending on the PEO you choose, it may also offer talent management services, such as recruiting, hiring, training, and performance management.
- Risk and Safety:
Some PEOS offer safety training to your employees, such as annual training required by Occupational Safety and Health Administration (OSHA). PEOs may also help you with OSHA inspections.
- Additional Human Resources Support:
If your startup already has a human resources team, you can supplement your team with additional and strategic human resources support from a PEO.
As you can imagine, with 907 PEOs in the U.S. alone, you have many organizations from which to choose. One way to narrow your search is to research PEOs that are certified or have been recognized by the Employer Services Assurance Corporation (ESAC).
The Internal Revenue Service certifies PEOs with particular financial, business, legal, and compliance requirements. Additionally, PEOs that have received the ESAC certification have demonstrated best practices and reliability. Only about 5 percent of all PEOs have earned the ESAC certification.
Why Use a PEO?
When you’re launching a startup, you juggle many critical tasks, such as business development and sales. The “back office” administration is not always foremost in your mind. However, these human resources tasks are just as critical as developing and selling your products from both an employee and a compliance approach.
As NAPEO states, “[b[usiness owners want to focus their time and energy on the ‘business of their business’ and not on the ‘business of employment.’” As you grow, many human resources tasks can get pushed to the back burner, such as employee training and regulatory compliance. However, if these tasks aren’t addressed, your startup could be facing employee complaints or governmental compliance issues.
Although you share certain employment functions with a PEO, you still retain ownership of your startup and its operations. A PEO will not focus on your product or sales. That’s still your legal foray. The PEO will assist you with human resources issues based on the client service agreement you executed with them, which also helps you mitigate risk.
What is the Difference Between Employee Leasing and a PEO?
PEOs often get confused with a leasing or staffing company, as many older state statutes use “leasing” terminology when describing professional employment organizations. However, PEOs are not the same as leasing or staffing companies. A leasing company retains the sole employment of the employees but “leases” these workers out to other companies for specific jobs. Staffing companies recruit workers for particular jobs for their clients, other companies. A staffing company typically retains the sole employment of its workers.
For leasing and staffing employees, they return to their agency for reassignment once the job or project ends. Many staffing companies place workers in temp-to-perm positions, meaning that the client company may hire that staffed worker after a period of time, assuming the sole role of employment at that point. Additionally, if the leasing or staffing company’s agreement with their client employer is terminated, then the leased or staffed workers stop working for that specific client, returning to their leasing or staffing company for reassignment.
Even if a worker is on assignment at the client company, the leasing or staffing company pays that worker while also withholding employment taxes and offering benefits, such as health insurance. The client company does not provide these services for leased or staffed workers.
Although PEOs may assist you with recruiting and hiring, they are not staffing your company or otherwise leasing employees to you. Instead, PEOs assume specific human resources and legal responsibilities, such as withholding and paying employment taxes, making them co-employers with your and your startup.
What is the Benefit of Having Employees Through a PEO?
We know that having employees through a PEO relieves startups of many administrative and legal burdens, such as payroll administration, recruiting and hiring, benefits administration, workers’ compensation administration, and other administrative or compliance tasks, such as drug testing or FMLA compliance. But PEOs can benefit startups in other ways as well.
For example, your employees “gain access to big-business employee benefits such as 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company.” Also, “when a company works with a PEO, job security is improved as the PEO implements efficiencies to lower employment costs. Job satisfaction and productivity increase when employees are provided with professional human resources services, enhanced benefits, training, employee manuals, safety services, and improved communications,” according to the NAPEO.
By outsourcing these tasks to a PEO, you are left to grow and manage your startup while having the peace of mind that the PEO is handling these critical tasks while sharing in the risk as a co-employer.
Disadvantages of a PEO
PEOs are not a one-size-fits-all solution. If not vetted correctly — both on your pain points and the PEOs solution —you may end up with unhappy employees and cause irreparable damage to your startup’s culture.
For example, when deciding which PEO to hire, you need to start with some basic fact-finding and research. Understand what tasks you need help with and whether the PEO provides a solution that fits your startup’s goals and culture. Understand what you’re purchasing and how that purchase will be implemented. Don’t just hire a PEO because you think you’ll save money (which you may). It would be best to look at the full impact of hiring a PEO on your employees and your startup.
Mitigating your legal and compliance risks is another top reason startups and small businesses hire a PEO. When researching various PEO providers, make sure they are up-to-date on applicable regulations while having a process in place of notifying you of any changes that may impact your business. One of the main reasons to hire a PEO is to handle these compliance issues in a timely manner and not to get your startup into hot water because the PEO is not prepared.
Additionally, a PEO’s business structure and internal dynamics can directly or indirectly affect your startup. For example, if a PEO has high turnover, you may be working with various contact people within the PEO, having to build a relationship from scratch each time. You and your employees are working with a separate company through your PEO, potentially giving you a “[l]oss of control of essential processes and people” along with an “outside company’s influence on your startup's culture.”
Once your startup is large enough, you may want to pursue HR on your own terms, internally. However, untangling from a PEO contractual relationship can be lengthy and frustrating, as you’ll have to change over payroll administration and benefits, just as an example. Since you have been outsourcing these tasks, you also may risk losing institutional knowledge as you grow. As with most business decisions, the more you are prepared in vetting and hiring a PEO, the more you will limit these potential drawbacks.
We can help!
At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most — your business. If you're looking for help in vetting or hiring a PEO, we help by overall shepherding the process to ensure it's done right. Sign up to get started.
Like our content?
Subscribe to our blog to stay updated on new posts. Our blog covers advice, inspiration, and practical guides for early-stage founders to navigate their startup journeys.
Note: Our content is for general information purposes only. AbstractOps does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.