Choosing a Professional Employer Organization (PEO)

What is a PEO?

Under a co-employment model, a PEO can “employ” hundreds of thousands of employees across thousands of businesses in the U.S., driving down health insurance costs and making HR standardization an easy process. 

Here are the basic human resource services that PEOs manage: 

• Benefits administration
• COBRA
• Government compliance
• HR administration
• Insurance plans
• Payroll administration and processing
• Recruiting and outplacement support
• Safety programs (OSHA compliance)
• Section 125 plans
• State unemployment insurance
• Tax compliance
• Training and development courses
• Workers’ compensation
• 401(k) retirement plans 

We recommend that you look for a PEO that provides a dedicated team of experts to handle your HR, payroll processing, benefits and risk management needs. This guarantees that you’ll get one-on-one support when you need it and that you can work with specialists to ensure you’re getting the most out of your service.

How to choose a PEO service

There are several PEOs out there – some great and some not so great. If you think your business needs a PEO, we recommend that you do your homework. The first step in your research process should be to establish your needs so you know exactly what features and services you want before you start talking to different companies. 

Consider the top players, but look regionally as well – just because a PEO isn’t a national organization doesn’t mean it can’t provide you with the services you need. A good place to start is the National Association of Professional Employer Organizations (NAPEO), where you can search PEOs by state and view whether or not they are accredited. 

If you’ve already done this and are considering several companies, here are 10 questions and ideas to keep in mind as you narrow your search: 

1. Is it an industry-accredited PEO? There are two main types of accreditation that prove the PEO is in good standing financially and has the resources to offer you good service: IRS certification and accreditation by the Employer Services Assurance Corporation (ESAC).
2. As your business grows, will the PEO service be able to grow with you? What kinds of services can you add as you grow?
3. What is the contract structure and cancellation policy? Does the PEO require a long-term contract, or can you cancel anytime?
4. Does the PEO have a team trained in knowing federal, state and local labor laws?
5. What kind of user access does the PEO offer? Is there an online payroll portal or mobile app?
6. What is the cost structure? Does it charge per employee or a percentage of your total payroll?
7. How can the PEO tailor its services to fit your business’s needs?

Editor’s note: Looking for the right PEO service for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

1. What kind of customer service does it provide? Will you have personal access to a team of skilled professionals? Is there an IT support line you can call in case you have technical problems after hours?
2. What support channels does it offer? Some companies offer live chat in addition to email and phone support. Which communication method would your business prefer?
3. Does the PEO have positive referrals? Combing through online reviews and talking with other business owners can help you understand if the PEO practices what its sales team preaches. 

As you consider PEOs, try to focus on the facts about each service rather than your interactions with the PEO service’s sales representative. If an organization is accredited by the ESAC and IRS, and has good customer reviews, that is a good starting point. In our reviews, we’ve listed whether the PEO is accredited, and if so, by whom (ESAC, the IRS; we’ve also indicated if it’s a Better Business Bureau-accredited business). We’ve also thoroughly researched the services the PEO offers and the pricing structure it uses. 

How much does a PEO cost?

The cost of a PEO depends on the specific features you need, the number of employees you have and what type of pricing structure you sign up for. 

There are two pricing structures PEOs use. The first involves charging businesses on a per-employee basis; the second involves charging businesses a percentage of their total monthly payroll. In our research, the average per-employee fees ranged from $40 to $160 per employee per month, whereas, under the other model, the average rate ranged from 3 percent to 12 percent of a company’s monthly payroll. Although many PEOs offer only one type of pricing structure, some let you choose whichever option works best for your business. 

Another factor that influences pricing is the plan structure of the PEO. Most PEOs offer features that are bundled. You pay a set fee for a set number of features or services. Some PEOs, however, give you the option to create a customized plan, choosing the exact features you want. Customized plans can be great for businesses with unique HR needs, but most businesses can benefit from the HR features offered in the bundled plans. 

Another issue to know before you begin researching PEO services is that many have employee minimums (typically five employees) and contract requirements (typically one year). Most PEOs give you the option to cancel services with 30 days’ notice. 

Pros and cons of using a PEO over in-house services

While the PEO model is a unique option for small businesses looking for services generally afforded to larger companies, it is not without its pitfalls. By educating yourself on the benefits, drawbacks and limitations of PEOs, you should be able to find the right organization with minimal drawbacks to your business. 

Pros

• Fewer administrative tasks: If you partner with a PEO, all the humdrum administrative tasks of managing your business are out of your hands. This gives you more time to focus on the day-to-day operations of your business.
• Better benefits: The PEO model provides small businesses the opportunity to enroll in benefits that are usually available only to large corporations. Your employees often have access to health plans at lower costs compared to dealing directly with insurance companies. This means better healthcare, retirement and workers’ compensation coverage for your business and its employees.
• Legal compliance: PEOs have trained professionals whose job is ensuring your business complies with state and federal regulations. This includes tax structures, HR law changes, worker safety compliance and other risk compliance factors. Knowing that your business complies with federal, state, and industry rules and regulations can give you peace of mind.
• Talent acquisition: With better benefits and stronger HR policies, you can attract top talent in your field. If you need help hiring, onboarding or even terminating an employee, PEO services can help. They also provide other resources for posting job openings online and managing the interview process.
• Legal protections: Most PEOs provide civil defense and employment liability insurance in case a former employee sues your company for discrimination or wrongful termination. 

Cons

• Surrendering responsibilities: PEOs are designed to lift some of the weight of managing a business off your shoulders. If you’re a small business owner who is hands-on and involved with every aspect of your company, partnering with a PEO may be an adjustment.
• Health insurance changes: While you gain access to better health benefits, you and your small business are at the mercy of the PEO’s choices. Depending on what state you operate in, your insurance provider could change throughout your contract with a PEO. PEOs are seeking out the best deals, which in turn affect your company and the coverage you and your employees receive.
• Impersonal: The hope is that the PEO you select treats your company and employees with personalized attention and service. While this is great in theory, many PEOs are large companies that serve thousands of small businesses. It’s possible that your business and workers could be lost in the shuffle at some point. As you look for a PEO, get a sense of the company’s commitment level and how attentive it can be in providing you with services you and your workers need. Remember, you can usually cancel your services if you provide the proper notice.
• Setup and transition: When you bring on a PEO, some of your company operations will change. It could take time for you and your employees to adjust to new methods and processes. 

Best PEO service providers

Ready to choose a PEO solution? These are some of our top recommendations for PEO service providers for small businesses:

• JustWorks: JustWorks is an IRS- and ESAC-accredited PEO service that offers competitively priced services even small businesses on a budget can afford. Read our Justworks review to learn more.
• Rippling: Rippling offers PEO services with custom pricing dependent on the size of your business and your needs. The company also offers a range of other HR software and services, making it a scalable choice for growing businesses. Read our Rippling PEO review to learn more.
• TriNet: If you work in an industry where specific knowledge of the space is a priority, TriNet is a strong choice. They match you with HR professionals who have niche expertise that can apply to your industry so that you know they’re making the right choices. Read our TriNet PEO review to learn more.
• ADP: ADP is one of the best-known payroll and HR companies out there, and its PEO services live up to the brand’s reputation. Read our ADP TotalSource review to learn more.
• Insperity: Insperity is an IRS- and ESAC-accredited PEO service that offers tailored support to businesses small and large. Read our Insperity PEO review to learn more.

PEO services make managing employees easy

When you work with a PEO service, everything from payroll to human resources is streamlined, removing the burden from you so that you can focus on growing your business. As you scale with a PEO service, you can even extend benefits to your team without the hassle of benefits administration. So, if you want to outsource the process of onboarding, running payroll and compliance reporting, consider working with a PEO service today.

Tejas Vemparala contributed to this article.