A professional employer organization (PEO) is essentially a business which offers services such as human resources, employee benefits, payroll and workers' compensation. Companies who take advantage of such services by outsourcing these tasks enjoy a wealth of advantages including, most notably, reduced labor costs.



In addition to lower labor costs, these companies also benefit from being free to focus on other aspects of their business, specifically revenue generating areas. This is possible because in enlisting the services of a PEO, the company receives the benefit of having an entire staff of qualified human resources personnel including risk managers, benefits administrators and payroll specialists. While the previously mentioned benefits are critical to the success of a business, for many the advantage of not having to handle complicated human resources issues in-house is enough reason to outsource these services.

To fully understand how a company saves money by outsourcing human resources related responsibilities, it is imperative to consider typical labor costs. The following is a list of some of the costs associated with hiring, retaining and terminating employees:

• Advertising job openings

• Screening employee candidates

• Social Security / Medicare taxes

• Federal Unemployment taxes

• State Unemployment taxes

• Workers' compensation insurance and administration

• Administrative overhead

The majority of these costs do not vary significantly across different types of businesses. However, there are some businesses which experience increased costs in some areas. For example, jobs which are considered high risk such as construction or other forms of manual labor have higher workers' compensation costs. Another exception may be increased costs for advertising and screening candidates for positions which require elevated levels of expertise or extensive background screenings. Both of these costs can be reduced through the use of a PEO. While all businesses can certainly benefit from outsourcing human resources in simplifying a complicated process, those who have elevated labor costs enjoy financial savings through this practice. Still another cost savings which results from outsourcing human resources activities is that it can also lead to increased productivity. This article will offer explanations for these three cost savings benefits.

Opting for the assistance of outside experts in fields where qualified candidates must possess highly specialized skills is a wise decision. In this scenario, finding qualified candidates can be an arduous process and hiring a candidate who is not properly qualified can be costly to the company. Rather than risk such a costly error it makes sense to invest in the services of a professional employer organization for assistance in the process of finding the right candidate at the right time. This will not only reduce the amount of time required of onsite personnel to find and screen candidates but will lessen the chances that the chosen candidate will leave the company after only a short time due to poor performance.

Workers' compensation is another area in which a company may greatly benefit from enlisting the assistance of a PEO. The cost associated with workers' compensation coverage may be relatively low for employers who have personnel who work in an office environment but these costs could increase dramatically for employers who have employees working in more dangerous situations such as construction. Outsourcing human resources tasks to a PEO can help these companies save money on their labor costs because the organization may be able to negotiate better rates for these services. One reason these more affordable rates are possible is the PEO will have more experience in this industry and this greater level of experience leads to more favorable rates. Additionally, PEO's have working relationships with policy providers. These business relationships can translate to better rates for the company if the policy provider works closely with the PEO to evaluate the situation and determine the most economical policy.

Finally, a PEO can result in reduced labor costs for a company by increasing productivity. In many smaller companies, there is not a dedicated human resource staff and many of the responsibilities are often handled by staff members who are available when tasks need to be completed. This is not an ideal situation for a couple of reasons. First, the staff member completing the task may not be qualified to do so and therefore may not make the most economical decisions. Additionally, a staff member who is inexperienced may take longer than necessary resulting in decreased productivity. Not only will the staff member have a low productivity rate while assuming the responsibilities of a human resources staff member, but he will also be spending time away from his usual responsibilities.

Kristian Svindland, President of Sales for HROplus, a national sales brokerage firm representing over 200 PEO's nationwide, explains that while one PEO may be a great fit for one company it may not necessarily be a good fit for another. Many factors go into choosing the correct PEO for each individual business such as type of Industry, location, company size, benefits desired and services required just to name a few.

Reducing labor costs is one of the most noteworthy benefits to employing a PEO. Some service providers are able to save a company more than $200 per employee per year. This can be a significant cost savings for small companies, even more monumental for larger companies who employ considerably more employees. Companies both large and small benefit financially from utilizing a PEO.