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Marshall Darr
Marshall Darr

Why small businesses are turning to Professional Employer Organizations (PEOs)

Updated:
April 20, 2022

Hint: they’ve figured out they can get better employee benefits through co-employment

First things first, what is a PEO?

A PEO (Professional Employer Organization) is essentially a large employer who becomes a co-employer with small businesses in order to extend to them large employer benefits (think affordable health insurance, beefed up human resources, and other risk reduction options like Worker’s compensation). It’s an old concept, according to the National Association of Professional Employer Organizations (thankfully abbreviated to NAPEO), PEOs first started popping up in the 1940s before really becoming fairly mainstream in the 1970s. There are 487 PEOs in the US with over 4 million employees being paid through them.

What do PEOs typically handle for small business owners?

There’s a lot of variability but broadly PEO services tend to include the following for small businesses:

  1. Processing payroll - as a coemployer, legally PEOs are often required to process payroll for the attached small businesses. In the process they handle payroll tax withholding and filing on behalf of their client businesses.
  2. Benefit administration - it’s no secret, larger companies tend to get a bit of a better rate on their insurance policies and PEOs use co-employment as a loophole to bring those benefit packages down market. They’re often the source of the lowest premium policies that small businesses can find when it comes to their health insurance, worker’s compensation, retirement savings like 401ks, and employment practices and liability coverage (EPLI). On top of just securing the policies initially, the PEO will manage your employee’s open enrollment and facilitating onboarding and offboarding employees to the polices midyear as they join and leave your company.
  3. HR services - this tends to be where PEOs really differentiate themselves. As a co-employer, they’re all incentivized to ensure that all employment practices that their clients engage in are legally above board but some go way above and beyond. It’s not uncommon for PEOs to offer real time support from HR experts and occasionally even employment lawyers that small businesses almost never have in-house. Typical HR services that PEO’s offer small employers include:
  • Onboarding and termination support - setting up new employees, employee retention, and dealing with employee turnover is complicated. It’s an area where PEOs tend to really lean in and help their clients.
  • Paid Time Off (PTO) policy design and tracking - this can be a whole ball of wax for small employers. Paternity, Maternity, Sick leave, Bereavement, and Vacation policies can all have their own accrual logic that can turn into a logistical nightmare. PEOs are known for helping out here since a misstep here often puts small businesses at odds with labor laws.
  • HR tasks like Employee Handbooks - these are some of the most classic services that PEOs offer. If you’ve ever owned a small business, you know the HR task list can be a long and spiraling one. PEOs tend to provide HR resources like frameworks that small businesses can use to pull together their employee handbooks.

How do PEO’s make money and how much do they cost?

Mostly, PEOs make money from their Administration Fees (admin fees) although this pricing isn’t always very transparent. Decent charges $25 per employee per month but this is by far on the low end of admin fees (which is possible for Decent because we also run the health plans we offer which is atypical for the industry).

Admin fees are often custom built for the employer based off of the services they need but typically their between $49 and $300 per employee per month. This will include the payroll services and hr compliance services but typically does not include the premiums on specific benefit packages for your employees.

Again, these rates depend on the complexity of the HR functions you are outsourcing but a good estimate is somewhere in the middle.

Should my business use a PEO?

Maybe! To be completely transparent, we’re a PEO so this isn’t the most unbiased thing you’ll read today but here are a handful of questions to ask yourself:

Are you interested in better benefits to attract top talent (that don’t cost an arm and a leg)?

  • PEO’s are great benefit aggregators for small to medium sized businesses that otherwise struggle to get access to things like guaranteed issued life insurance policies. Often times the cost savings of the lower premiums, and the simplicity of benefit administration vastly outweigh the overall cost of the PEO admin fees.

Is being the sole employer of record really important to you?

  • One of the wrinkles that comes with PEOs is that they’re technically the entity that “employees and pays” your (our) employees. PEOs help you manage that process but to be completely transparent, some small employers really, really hate that it looks like another company is paying their employees.

Are you an HR compliance wizard or could you use some risk management help?

  • There are a lot of little things you have to get right to keep your HR compliant and PEO providers geek out on new ways to streamline and simplify that for their clients. If you geek out on it too, obviously there’s a bit less of a cumulative benefit to your business than there would be for a business owner who, for example, could not read.

Is my company profile a good fit for PEOs?

  • A lot of this comes back to the number of employees you have and how mature your HR function is. If you have a built out and well resourced Human Resources team, odds are some of the impact a PEO can drive is a bit duplicative but if you look like normal startup who hasn’t gotten to that yet, it could be a great fit.

If you answered “yes, no, I could use some risk management help, and maybe?” great news! PEO’s could be a fit for you, and I promise to format my questions better in the future.

Which PEO is a fit for my business?

This depends on what you’re looking for. There are certain administrative tasks that are inherent to any co-employment relationship but hr needs and the corresponding correct hr outsourcing package vary company by company. Here’s a quick guide to where to start depending on your business:

  • My HR situation is a literal nightmare: this is where we should call in the big dogs. I’d recommend starting with Trinet, Insperity, or ADP if you think you’re going to frequently need a whole lot of HR help
  • We’ve got some wrinkles: Rippling has a really interesting offering especially if you’re looking to also outsource IT functionality. Justworks is another option in the light to medium need space.
  • HR is pretty simple for us right now and I’m mainly interested in savings: well hot damn, Decent might be the company for you.

Alright, you clearly want to talk about Decent. What’s Decent?

How kind of you to ask! Decent is a new kind of lightweight PEO. We have some of the lightest, most transparent admin fees in the industry combined with the lowest health insurance premiums available.

We’re the only PEO to own and operate the TPA administering our health plans meaning that on top of saving a boat load of money, your employees will receive a premium healthcare experience that features unlimited free primary care, $0 medical deductible plans, and premiums 30%+ lower than anyone in the market.

Save money, get happier employees, spend (much) less time thinking about the IRS or employment laws in general. It’s pretty sweet and you can get a ballpark quote in about four keystrokes here.