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What is a Professional Employment Organization?

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A professional employer organization (PEO) is an organization that forms a joint employment relationship with an employer by leasing employees to the employer. The PEO shares and runs employee-related activities and liabilities.

PEOs allow employers to hand off HR functions—from employee benefits to employee taxes—so they can focus on other strategies.

What are the three types of PEO?

There are three common Professional employment organization: co-employers, traditional PEOs, and staffing companies. Co-employers serve as the employer of record for its clients’ employee handling aspects of employment from hiring and offboarding to payroll and benefits.

Traditional PEOs provide HR outsourcing services but do not function as the employer of record. Lastly, staffing companies provide clients with temporary employees and do not serve as the employer of record.

Why would a company use a PEO?

A company may use a PEO for a variety of reasons:

  • Benefits: PEOs provide employees with cost-effective benefits through PEO-sponsored benefit plans such as medical, dental and vision coverage, and life and disability benefits.
  • Payroll: PEOs can help companies automate the payroll process and decrease payroll processing costs. It’s important to choose a PEO with transparent pricing rates, avoiding those that charge hidden separate fees for each service.
  • Retirement plans: Not all businesses offer retirement savings plans. A PEO can provide access to a plan that includes a 401(k) and manage its administrative responsibilities, including compliance.
  • HR compliance: Falling behind current HR laws and regulations can cost businesses time, resources, and money. A PEO can guide employers on how to avoid noncompliance and make any appropriate adjustments.
  • Worker’s compensation: As a co-employer, a PEO can provide workers’ compensation coverage to employees through their workers’ compensation insurance program as well as handle compliance, audits, paperwork, and certifications needed to run these programs.
  • Lawsuits: A PEO shares liability for specific employment-related claims, including wrongful termination. With a PEO, employers can access experts that help mitigate damage from a settlement.
  • Recruiting: Many organizations don’t have time to focus on the ins and outs of recruiting. A PEO can offer services such as recruitment assistance or access to experienced recruiters who can meet the business’s employment needs.

What are some disadvantages of PEOs?

There are a few drawbacks to using a PEO, though businesses can minimize risk by choosing a reputable partner. Some risks can include:

  • A loss of control over important processes and people
  • An outside company’s influence on company culture
  • A lack of control over employee forms and paperwork
  • Security threats to the vendor’s system
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