What is a Professional Employer Organization?
A Professional Employer Organization (PEO) is a third-party organization that provides human resources services to companies. These usually include payroll, regulatory compliance, benefits management and human talent administration. PEOs work through co-employment arrangements, so they contractually share certain legal responsibilities with the employer.
What are the Benefits?
PEOs provide small and medium sized businesses with access to high-quality and comprehensive HR services. They can help small business owners minimize legal risks, stay ahead of regulations and maximize HR administration efficiency. This is extremely beneficial for entrepreneurs and small business owners who lack the training and resources to hire full-time HR managers. PEOs can help streamline processes, improve HR operations, contain HR costs and attract the best talent. PEOs are popular because they are a comprehensive solution that eliminates the need to manage multiple vendors, such as one for payroll, one for benefits and another for workers’ compensation. PEOs enter into a shared employment relationship when they become the official employer of record with the government. The company will be the work site employer and retain control of employees, but the PEO may be legally responsible for things like payroll tax compliance and processing unemployment claims.
Related resource: Top 25 Best Affordable Bachelor’s in Human Resources Degree Programs 2014
Who Monitors and Manages PEOs?
The National Association of Professional Employer Organizations (NAPEO), which was formed in the 1980s, is the national trade organization for PEOs. They enforce a Code of Ethics, best practices for members and accredit certain PEOs through the Employer Services Assurance Corporation (ESAC). This important accreditation authenticates things like financial integrity, regulatory compliance and adherence to industry standards. The IRS implemented the Tax Increase Prevention Act (TIPA) in 2014. This established a voluntary certification program for PEOs that verifies a PEO’s formation, finances, creditworthiness and tax compliance history. The voluntary certification program verifies the PEO has an actively approved surety bond, properly collects user fees and abides by service agreements. They also offer a public list of PEO certifications that have been suspended or revoked by the IRS. When selecting a PEO, always consider those that have IRS certification.
How to Choose the Right PEO
Selecting the wrong PEO may result in serious legal problems and financial consequences. Always thoroughly check professional references over the phone. Online anonymous recommendations from alleged customers posted on the PEO’s website are not valid. When talking with the PEO rep, ask questions about how employee benefits are funded, insured and processed. Verify that the company’s profile matches the PEO’s level of service and risk pool tolerance. Verify that participating employees qualify to receive coverage for benefits on their first day. Confirm that the PEO has met or exceed all regulatory requirements from the state or federal government. Ask about pricing structure, benefit options, online employee access and the number of states served. Accreditation through the Better Business Bureau (BBB) is just important as IRS and NAPEO certification.
Keep in mind that a Professional Employer Organization isn’t for everyone and comes with certain complications. Forbes magazine, which is one of the most popular business publications in the country, warns that PEOs come with health care administration challenges under the Affordable Care Act (ACA).
