What is PEO?

Very few business owners and founders go into business because they want to be an employer, yet their employees often become the lifeblood of their organization. Simply having employees comes with a whole host of regulatory and administrative burdens that can distract business owners from the core revenue-generating reasons that they are in business for in the first place.

The professional employer organization (PEO) exists so these small-to-midsize businesses can offload a lot of these burdens, allowing them to focus on their core competencies and service their customers. Specifically, the PEO supports businesses in four main areas:

1. Technology/HRIS system. Leverage the vast resources of the PEO to utilize an HRIS and payroll system that is typically reserved for much larger organizations.
2. HR and compliance support. PEOs support their clients on a whole host of HR and administrative support functions, and can provide guidance on constantly changing employment regulations and compliance concerns. The PEO HR Business Partner essentially becomes a part- time HR partner that the business can call upon when needed, providing expertise and administrative relief in areas that often require it.
3. Employee Benefits. A PEO provides a Fortune-500 array of employee benefits that the small/mid business can’t get on their own or through their broker, while also handling all the benefits administration, enrollment, and compliance that comes with all benefit programs.
4. Workers Compensation. A PEO provides exclusive access to their unique worker’s compensation pool, with pay-as-you-go billing and safety/OSHA support to go along with the insurance.

WHY CAN A PEO OFTEN SAVE MONEY ON BENEFITS?

Due to the unique co-employment nature of the PEO model, a PEO can pool the collective employees of all their clients together and leverage those economies of scale to offer exclusive access to insurance markets that small/mid-size businesses (or their brokers) don’t have access to on the open market. As a small business, there isn’t much you can do to impact the open market medical rates that are quoted due how the market prices small groups – you often get what you get. However, with a PEO you no longer are a “small” business, you’re a part of a much larger pool of employees that have the buying power to negotiate from a much stronger position with the carriers. This classic “buying in bulk” notion is why a PEO can often provide lower premiums on the insurance lines they quote, while providing more stable rate increases from year to year as there is more stability in larger numbers. Keep in mind that a group must qualify for access to this exclusive club, as the PEO will often have criteria on who can enter in order to keep the rates low for those who do qualify.

WHAT IMPACT DOES A PEO HAVE ON MY BUSINESS?

According to the National Association of PEOs (NAPEO), “businesses that work with a PEO grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business. The return on investment of using a PEO, in costs savings alone, is 27.3 percent.” Moreover, NAPEO research has found that businesses save up to $1,775 per employee per year in HR-related costs when using a PEO, while saving 37% on average on employee health benefit costs and 30% on average on unemployment insurance. On top of these financial benefits and ROI metrics, PEO clients often have fewer concerns about attracting, retaining, and motivating employees. Employees feel more valued and supported through the PEO support and development programs, and thus costly turnover is reduced.

For more information on PEOs and their financial impact, visit the NAPEO website.