Professional Employer Organizations

Many small to midsize companies face internal dilemmas while trying to run a successful company and increase profits. A solution to this problem is hiring professional employer organizations (PEOs). A PEO can offer a variety of services and support for a company. For a small business, a PEO can significantly ease its administrative burden and provide compliance and risk management for the absorbed services.

How It Works

When hiring one of these organizations, the company and its employees become employees of the PEO, and the company delegates many of its responsibilities to the PEO. The PEO can handle, payroll, benefits administration, workers’ comp, medical insurance, and retirement accounts. The company pays the PEO for its services along with the amount to cover the payroll for the employees.

PEO Services

A typical PEO provides the following four main services:

Human Resources Associate

  • A PEO acts as an off-site HR department; FMLA, hiring, firing practices
  • Conducts background checks
  • Recruits employees through advertising, resume screening and interviewing
  • Provides customizable employee handbooks and detailed job descriptions
  • Conducts performance reviews
  • Provides employee training

Employee Benefits Administration

  • Seeks out cost-effective benefits plans
  • PEOs can spread their medical claims over a larger premium base
  • Typically have benefit plans: health care, dental, vision, disability, life insurance

Payroll Administration

  • Employee taxes
  • Quarterly reports
  • Workers’ compensation insurance
  • Premium audits
  • Claims management
  • Benefits procurement

Risk Management

  • PEOs manage any workers’ comp or unemployment claims that may arise

Advantages and Disadvantages of Hiring a PEO

As with anything, there are pros and cons to working with a PEO. One of the major advantages of hiring a PEO is the effect it has on the HR department. Employers no longer have to spend time on HR tasks and duties, not hire as many in-house HR professionals, or handle the legal intricacies regarding HR. The time saved by outsourcing these tasks can be used towards focusing on their core business.

A few of the other advantages are PEOs can provide consistent administration and often improve technology resources. They are also able to negotiate better insurance coverage rates because of the larger volume of business they cover. The PEO assumes its client’s payroll into its own accounts, including the liability. PEOs also assume the liability of adhering to the legal tax and workplace standards. 

Some of the disadvantages of hiring a PEO is the company no longer has employees, the company essentially fires all employees then the PEO rehires them. The company forfeits control and flexibility concerning compensation packages. Though the company still can decide how much pay the employees receive, they have a limited say on the benefits plans offered. Employees might be confused about their true employer and who to voice their concerns to regarding compensation or benefits; the PEO or the company.

Exiting a PEO

There may come a time where a PEO is no longer necessary for your company to run smoothly. As your company grows and evolves, exiting a PEO might be the right choice for your company. A few of the reasons for leaving might be the desire for customization of employee benefits, cost, service, and full management of employee culture. A vital component to leaving a PEO is to ensure all systems are in place and operational. Here is a checklist that focuses on the critical considerations when leaving a PEO:

  • Payroll

Your company will need to have a payroll system in place before the transition begins to ensure uninterrupted services for the employees; on time and accurate paychecks. Hiring a payroll expert or vendor can help implement a successful payroll system. 

  • Timing and Taxes

There are a few tax consequences when exiting a PEO mid-year. Employees are new employees for tax purposes during a mid-year switch. FICA and FUTA taxes paid on each employee’s wages for the year under the PEO are nontransferable and the wage base will restart at the time of transfer. However, employees can reconcile excess payroll taxes on their individual tax returns. If your company is leaving a certified PEO, a mid-year exit will not cause the tax consequences above because you are a successor employer in this context.

  • Establishing Your Own 401k Plan
  • HR Policies

There are several considerations regarding HR duties, staff, policies, and procedures to consider when leaving a PEO. It will be necessary to update the employee handbook and any policies that might have changed. Your company will now have the responsibility of keeping up to date with employment laws and regulations; FMLA and FLSA. Retaining a legal professional to help draft the employee handbook and implement new policies and procedures can help streamline the transition. 

  • Employment Practices Liability
  • Workers’ Comp

The ease of the transition will depend on your company’s risk profile and the workers’ compensation carrier. Coverage must be in place at the time of transition with no interruption. 

  • Technology

Exiting a PEO may mean exiting their integrated solution for technology too. The company will have to decide on replacement systems, whether it’s a single-source solution or multiple systems. This can affect the HR and benefits functions. 

  • Benefits

After leaving a PEO, you will need to implement a new benefits package. Finding a good employee benefits advisor is key for a successful transition. There are several legal requirements that go along with the implementation of an employer-sponsored plan:

  • Structuring a health plan
  • Cobra administration
  • Health care reform compliance
  • Reporting and disclosure requirements of ERISA
  • HIPAA compliance
  • FSA funds
  • Commuter benefits

This is not an exhaustive list of all the legal requirements to keep in mind when leaving a PEO and these requirements go into further detail. 

Alltrust By Your Side

When dealing with a PEO, it’s best to have an insurance consultant by your side. Whether it be to discuss hiring a PEO, if your company will benefit from it, or how to successfully leave one without interrupting your day-to-day operations. Our team at Alltrust Insurance can guide you through this process and its complexities. Contact Alltrust today to learn how we can help your company succeed. 


More Alltrust Resources