It's the $51 billion industry you've likely never heard of: PEOs. Private Employment Organizations, or PEO's as they're known, were deemed the fastest growing business service during the 1990s by the Harvard Business Review. Currently over 700 PEO's operate in all 50 states and provide service to approximately 100,000 small to mid-sized businesses. So what exactly is a PEO, and how can your business benefit by using one? Following is an introduction to the basics of PEOs.



What is a PEO? A PEO is not a temp or staffing agency and it is not a payroll service. As defined by the National Association of Professional Employer Organizations (NAPEO), a PEO is an “organization that provides an integrated and cost effective approach to the management and administration of the human resources and employer risk of its clients, by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the client's employees.”

In other words, a PEO legally hires a company's employees, which makes the PEO the “employer of record” for tax and insurance purposes. The employees are leased back to the original employer under a co-employment contract. The PEO is then responsible for administration of payroll, workers compensation, employee benefits, and workers compensation. Numerous duties such as 401 (k) administration, risk management, employee counseling, and training and development can fall under these categories depending on the terms of your contract.

Why use a PEO?

Being an employer can be a headache: there are over 60 different employment-related governmental regulations with which a business must comply. The U.S. Small Business Administration reports that owners of small or mid-sized businesses now spend up to a quarter of their time on employment-related paperwork. By outsourcing to a PEO, employers can focus on operating and building their business. Employees gain improved, comprehensive benefits. Some other benefits to consider:

• Improved human resource practices can increase your profitability. PEOs handle basics like employee handbooks or more delicate HR tasks such as sexual harassment training.

• Comprehensive employee benefits makes your business a more attractive place to work.

• State of the art HRIS systems better serve you and your employees with on-line access to payroll and employee information.

• Coverage under a PEOs master workers comp policy means insurance is more affordable. PEOs yearly shop for the best insurance rates, and since they have an interest in keeping claims low, they conduct risk management training.

• Progressive PEOs offer benefits such as college tuition reimbursement programs and travel services

Who can benefit from a PEO's services? Businesses from numerous industries—medicine, automotive, construction, retail, manufacturing, hi-tech— outsource to PEOs. According to the NAPEO, their member PEOs average client is a small business with 17 employees. PEO clients are small enough that they do not have the need or ability to staff a human resource department. Even large companies with a dedicated HR department can benefit: they get access to supplemental HR expertise, competitive health insurance, and state of the art HR information systems. PEOs work in cooperation with larger companies' HR departments.

When is your business ready to outsource to a PEO? Industry experts advise careful preparation when deciding if your business should contract with a PEO. Do your homework. Here are some questions to consider (courtesy of StaffMarket.com):

Are you spending too much for workers' compensation insurance?

Are your employees asking for benefits you can't offer?

Are you paying too much for health insurance?

Is your company compliant with state and federal regulations?

Is your turnover rate adversely affecting your company's performance?

Is your HR department as effective or as efficient as you believe it could be?

If the answers to these questions lead you to believe that a PEO is in your future, appoint a team to the task of conducting thorough market research, attend conferences, and read case studies about HR outsourcing. Utilize their findings in your PEO search.

How do you choose a PEO? First, make sure the PEOs you consider are accredited by the Employer Services Assurance Corporation (ESAC), a nonprofit organization which protects the interests of businesses contracted with PEOs. Accreditation means a PEO meets ESAC's ethical, financial, and operational standards.

In addition, Make sure your PEO meets state licensing and registration requirements. The following states have licensing laws: Arkansas, Florida, Illinois, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas, Utah, and Vermont. The following states have registration laws: Kentucky, Louisiana, Maine, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Rhode Island, and Virginia.

Here are some more guidelines provided by the NAPEO:

1. Assess your workplace to determine your human resource and risk management needs.

2. Make sure the PEO is capable of meeting your goals. Meet the people who will be serving you.

3. Ask for client and professional references.

4. Check the firm's financial background, and ask for banking and credit references. Ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.

5. Check to see if the company is a member of NAPEO, the national trade association of the PEO industry.

6. Investigate the company's administrative and risk management service competence. What experience and depth does their internal staff have? Do any of the senior staff have professional training or designations? Check to see if the PEO's risk management services have been certified by the Certification Institute at www.certificationinstitute.org.

7. Understand how the employee benefits are funded. Is the PEO fully insured or partially self-funded? Who is the third-party administrator (TPA) or carrier? Is their TPA or carrier authorized to do business in your state?

8. Understand how the employee benefits are tailored. Determine if they fit the needs of your employees.

9. Review the service agreement carefully. Are the respective parties' responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?