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Most entrepreneurs turn to outsourcing payroll in the early stages of their business, but soon enough, HR demands grow quickly outside their expertise or infrastructure. Too much valuable time gets spent putting out fires or filling out paperwork. The logical solution for business owners who can afford it is to hire a dedicated, experienced HR manager; however, this places the entire burden of complicated payroll, benefits, and compliance issues on a single employee, in addition to recruiting, onboarding, and performance management. Research shows that only 20% of HR managers are confident they could perform the job without making mistakes. Understanding the ample benefits of outsourcing the functions of human resources for small-to-medium-sized companies can be incredibly effective in strategic growth planning.
What is a PEO?
A professional employer organization (PEO) is a firm that partners with employers in a co-employment agreement, which means that they share liability and assume partial responsibility for their employees. The employer retains control of the employees; however, for tax purposes, the PEO becomes the “employer of record,” providing the client with lower insurance costs and tax rates while improving employee retention and enabling them to focus on running their business. PEOs usually have teams of in-house specialists that help clients manage the costs and risks associated with employee management, such as payroll, benefits, recruiting, and safety training. Certain HR responsibilities, such as developing an employee handbook, may be shared between the client and the PEO.
PEOs are often mistaken for employee leasing providers. A leasing or staffing service supplies workers, usually on a temporary or project-specific basis. These leased employees return to the staffing service for reassignment after completion of their work with the client company. Upon termination of the staffing or leasing company arrangement, the worker has no continuing employment relationship with the client. Whereas, when a PEO co-employment agreement ends, workers continue as employees of the client.
What are the Benefits of using a PEO?
Any business can find value in a PEO relationship. The unique co-employment partnership agreement provides an umbrella of safety that is typically impossible for the average business (particularly SMBs) to attain. Clients of a PEO are able to support employees with affordable health insurance, life insurance, 401(k) packages, and even ancillary benefits like dental, vision, and even pet insurance. Plus, as co-employer, PEOs often manage claims on the client’s behalf and offer legal guidance for protection from lawsuits. For time-and-energy-strapped business owners, working with a PEO can help free up a considerable amount of company resources. Outsourcing HR helps management reclaim those hours spent on workforce issues, allowing them to be invested in other critical business needs.
Research shows that these comprehensive PEO HR solutions pay off in the long run. A recent NAPEO survey found that 98% of current clients would recommend the use of a PEO and that the annual return on investment (ROI) from using a PEO is 27.2%. This means that for every $1,000 spent on PEO services, an average client would save $1,272, yielding a net (cost savings) benefit of $272 for every $1,000 spent. Furthermore, according to this study by noted economists Laurie Bassi and Dan McMurrer, businesses that use PEOs grow 7-9% faster, have 23-32% lower employee turnover and are 50% less likely to go out of business than companies that do not use PEOs.
How do PEOs compare to ASOs?
An administrative services organization (ASO) offers a la carte HR support and services. In this arrangement, you can choose which processes you want to outsource and which ones you prefer to keep in-house. The key difference between the two is that unlike a PEO, an ASO does not fall under a co-employment agreement, meaning that the client remains the “employer of record” and retains their tax ID number, along with the employment-related risks and liabilities.
How do PEOs help businesses survive the ongoing pandemic?
The operational shift in 2020, caused by COVID-19, created unprecedented economic challenges for almost all employers. In the early months of the pandemic, a primary form of assistance that PEOs provided to their clients was in facilitating applications for Paycheck Protection Program (PPP) loans from the federal Small Business Administration (SBA). According to NAPEO, professional employer organization clients are not only 119% more likely to have received PPP loans, but 71% more likely to have received them in Round One. The nationwide percentage of comparable small businesses that received PPP loans is 30.1%, and PEOs reported that an average of 65.9% of their clients received PPP loans. Additionally, as of September, PEO clients were 91% less likely to still be temporarily closed and 60% less likely to have permanently closed. In conclusion, with the constantly changing legislative updates, it pays to have a PEO on your side to help you navigate these difficult times.