The Smarter Startup

PEO Services to the Rescue

PEO services allow startups to outsource & streamline their HR and benefits, while potentially saving money. Here are useful tips on working with them.

HR Responsibilities Weighing You Down? PEO Services to the Rescue

First, what is a PEO? Professional Employer Organizations are companies that allow small-to medium-sized enterprises to outsource and streamline their HR and benefits administrative tasks, while potentially saving money. Some of the benefits that PEOs offer to startups on the HR side of the business mirror the benefits that Burkland’s CFO services and accounting services offer on the finance side.

Before we discuss these organizations in greater detail, let’s first describe what life was like for small companies before PEO services were around.

Do It Yourself – Without PEO Services

In our example, the DIY HR process starts with a new hire onboarding.  On day one, the new employee is provided a pile of forms to complete, including basic payroll input, W-4, I-9, health insurance, life insurance, 401(k), etc.  Potentially some of these forms could be prepared electronically, but eventually they have to find their way to various separate payroll and insurance providers, and the confidentiality of personal information could be at risk.  Changes in one area – for example, insurance elections – needs to be manually updated in all the other areas, like as payroll deductions.  Keeping everything in sync with various carriers is an ongoing battle for administrative and HR staff. While these issues may be routine to most larger companies with specialized staff, thinly staffed smaller ones often struggle with these challenges.

In addition to the administrative overheads, small companies typically pay higher premiums for insurance coverages because they have smaller risk pools.  Also, group life and disability coverages beyond a minimum level are often not available to the smaller firms, i.e. those typically under 20 employees.

The PEO Services Model

Enter the PEO, whose mission is simple: Address the DIY pain points in a cost-effective model.  To do this, the business and the PEO enter into a co-employment arrangement, which means the business’s employees also become the PEO company’s employees.  Given the PEO is likely working with broad base of companies, these employees thus become part of a much larger risk pool for insurance purposes, reducing overall benefits costs, and/or allowing the business to offer enhanced employee benefits. An added benefit is streamlined tax reporting and withholding processes.  PEO offering will include certain core services, such as:

  • Payroll – calculating and distributing payroll, filing payroll taxes, correctly categorizing employees, and providing a myriad of management reports. They will also provide greater assurance of compliance with government rules and regulations than a stand-alone payroll service because as co-employers, they are legally liable.
  • Benefits Outsourcing – providing access to a wide range of medical, dental, retirement, and other insurance offerings that give clients competitive, well-organized package options that help them attract talent, boost employee morale and retain their best employees. The client business still maintains control over what benefits are offered and what contributions they will make to their costs.
  • HR Outsourcing – monotonous paperwork, monitoring employment regulations and reporting requirements, assisting in hiring/firing and interviewing, creating company-specific employee policies and manual, and providing access to HR experts for a range of other issues. Again, the business maintains control over the specific services and all strategic HR decisions.
  • Company and Employee Portal – a direct internet link allowing employees to communicate directly with the PEO in regard to all payroll and benefit elections, freeing the company from this burden. The company processes all its payroll and benefits transactions through this portal, and is typically billed for all payroll, taxes, benefit, and service charges with each payroll, avoiding the need to keep these pieces in sync.

Some other services which may be offered by a PEO, typically optional at extra charge, include workers comp insurance, recruiting assistance, background screening, employee training, evaluation and performance management, and outplacement services.  In general, charges for services are based on a fixed fee or percentage of payroll per employee per pay period.  The rates are determined by the package of services contracted for by the company.

Selection & Recommendations

There are some potential downsides to utilizing a PEO:

  • Since all your “HR eggs” are in one basket, it becomes more difficult to change any one part of the package if need be. For example, if the PEO’s health benefits costs increase dramatically after year one, it may be more difficult to change PEO’s than it might have been just to change your insurance carrier.
  • The PEO is liable for filing and paying all payroll taxes in various jurisdictions. Should they fail to perform their duties, the sponsoring company would become liable unless the PEO is a Certified Preferred Employer Organization (CPEO) under an IRS program. You should only consider selecting providers who are active CPEOs, and you can check their status online.

TriNet and Justworks are two reputable PEOs that serve the small company sector, but there are many other reputable firms as well.  No one PEO is right for all companies, so you need to follow the same process you would for selecting any important vendor: define your needs; speak with several firms about their offering and their ability to address your needs now, and as you grow; understand their pricing structure and calculate what your costs are likely to be; and check references.

To aid your analysis, numerous internet sites claim to rate the best PEOs in the country.  However, they don’t provide any recommendations until you answer an online questionnaire, and then return a short list of PEOs.  I suspect that most of these sites are underwritten by a few PEO’s as lead generation mechanisms, and that only those underwriters will be on the short list.  This might not be true for all these sites, so if you go this route, use several of the sites with the same profile information, to make sure you have covered enough of the possibilities.
Happy hunting!