3 Types of PEOs: Payroll, Tax, Admin, HR, Compliance, and More
Published October 5, 2022.
Payroll is a crucial aspect of business, but managing it can become overwhelming, whether it's ensuring tax compliance, monitoring compensation, or filling out forms to ensure the HR department is confirming the company's compliance with local labor laws.
This is why it can be imperative to hire a professional employer organization, also known as a PEO. But what is this anyway?
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What Is a PEO?
A professional employer organization (PEO) is a type of human resource outsourcing service where the PEO performs employee administration tasks such as payroll and benefits management on behalf of a business. Certain PEOs may offer additional strategic services, but their core concept is to provide HR-related services to existing businesses. PEOs generally cater to small and medium-sized businesses. The arrangement is referred to as co-employment.
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Why Utilize a PEO?
There are several reasons why businesses may choose to utilize a PEO. It ensures enterprises properly abide by their payroll requirements by ensuring the functions of employee benefits, compensation and payroll, worker's compensation, and employment taxes are handled appropriately while fulfilling all legal obligations.
PEOs can offer significant support to businesses that may not have the necessary HR expertise or systems capabilities to manage essential functions such as payroll and employee benefits efficiently. Some companies simply do not have the staff or the time to focus on transactional HR functions. By using a PEO, these businesses can relieve some of their HR-related burdens:
- Benefits administration
- Payroll management
- Worker's compensation administration
- Unemployment administration
- Family and medical leave act administration
While using PEOs can be beneficial for small and medium-sized businesses, it's important to keep in mind that if not managed properly, using a PEO can result in loss of control of essential processes such as payroll. Therefore, it's important to ensure that the PEO used is reputable and legitimate, as they will have access to internal documentation if an agreement is completed. Additionally, choosing the right type of PEO is also very important. Otherwise, there is a risk that an outside company could potentially influence the existing traditions and culture of a business.
Finally, if there is an HR department already, the employees may feel diminished if an outside co-employment arrangement is made. The employees may also not be satisfied that a third party handles crucial functions related to their wages and benefits.
All these issues must be considered before choosing to use a PEO or selecting the type of PEO agreement.
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3 Types of PEOs
1. Classic PEO
A classic PEO is one where employee taxes are reported and deposited under the PEO's federal employer identification number (FEIN). Hence, the employees of a business are covered under the PEO's master policy, and the PEO is responsible for managing any claims. Under such an arrangement, a PEO requires the employer to sign a client service agreement to define each party's responsibilities and terms of coverage clearly.
2. Administrative Services Organization (ASO)
An ASO agreement with a PEO gives companies the option to utilize some outsourcing benefits without entering into a co-employment arrangement. Hence, only selected HR functions are outsourced with an ASO. Since the agreement with an ASO doesn't work under a co-employment model, the organization remains the employer of record. It's also responsible for all the legal obligations associated with such a role.
ASOs are highly flexible and will only step in when a business requires them to and will only manage the aspects that a company allows them to administer. In addition, ASOs are primarily used when firms want to free up some time or resources, consolidate multiple functions with a single vendor, or do not have the expertise to handle tricky HR administrative issues.
3. Human Resources Outsourcing Organization (HRO)
An HRO agreement allows a third party to administer and manage HR and payroll-related functions for a business. The goal is to allow that business to focus on other growth-related objectives while ensuring the payroll function is handled appropriately by people with more significant expertise and capability.
Different HRO agreements can range from fundamental HR services to strategic planning and administrative support. HROs offer various services depending on a business's requirements:
- Payroll and tax administration
- Employee training and development
- Workplace safety and policy management
- Hiring and recruitment
- Compliance and risk management
HROs are often beneficial as they allow businesses to selectively outsource certain functions and retain those they wish to maintain themselves. As a result, HROs can be highly flexible for businesses, enabling these entities to retain control where needed.
While a PEO can serve specific needs, businesses still need to find one that can carry out their needs and requirements. Indeed, not all companies share the same suite of demands, and not all PEOs are one-size-fits-all operations. Because of this, it requires in-depth research and due diligence of PEO providers. Make inquiries and find one that is tailored to your budgetary constraints and corporate demands.
» Still unsure about outsourcing to a PEO? Optimize your in-house team instead by reading TBR's payroll software reviews