Key takeaways:

• What is a PEO? PEOs help small and mid-sized businesses with HR solutions, and they enter into a co-employment arrangement to take on some of the risks.
• When did PEOs start? An earlier version of the PEO started in the 1960s and 70s when employers had trouble managing compliance, risk, benefits, insurance and payroll on their own.
• Benefits of PEOs:

1. They help employers stay compliant
2. They free up time for business leaders
3. They allow employers to access better benefits
4. Businesses are more successful when they work with a PEO

Professional employer organizations (PEOs) started decades ago to address the need for employer HR services. Today, PEOs operate under the co-employment model, where they share the risk with employers and become the employer of record for employees in tax and other matters.

When did this type of arrangement begin? This overview will walk through how PEOs work, the history of the industry and all the advantages of the PEO model.

To fully understand the purpose of a PEO, you need to know what co-employment means. Co-employment is when a PEO and its employer client share responsibilities as outlined in an agreement, usually called the client service agreement (CSA).

For whatever duties the PEO agrees to take on, they are acting as the employer and assume all the risks and rights that any employer would have. These liabilities and duties may involve the company’s employees, payroll or tax reporting, but control over decision-making is taken on by the PEO or shared between the PEO and the client.

PEOs thus help employers manage risk and perform HR duties. They differ from HR outsourcing companies or payroll companies in that they become the employer of record for tax and other purposes, whereas an outsourcing company just agrees to handle certain HR functions. PEOs share risk with employers so they’re further safeguarded if something goes wrong with employment regulations.

The concept of a PEO was first explored with similar types of firms in the 1960s and 70s. These firms were created to help smaller employers with HR components like workers’ compensation, payroll and compliance, which are challenging for businesses to manage on top of everything else.

A couple of decades later, PEOs started taking on even more HR responsibilities for companies, including employment law compliance and insurance administration. PEOs were officially born when the National Association of Professional Employer Organizations (NAPEO) was established, recognizing the need for more comprehensive solutions for employment concerns and creating the co-employment arrangement.

The term “employee leasing” used to be used to define what a PEO does today. But employee leasing now refers to the temporary supplying of new employees to businesses by a staffing service. PEOs don’t supply workers to companies, they just enter into the co-employment arrangement that involves the business’s existing workers.

Today, there are 487 PEOs in the U.S., employing 4 million people and delivering services across 173,000 small and mid-sized businesses, according to data from the NAPEO. These 173,000 employers make up 15.3% of all employers that have 10 to 99 employees.

So why has the PEO industry grown so much? PEOs take on many different HR administration tasks to help businesses succeed, all while sharing some of the risks associated with them so that employers have extra insulation. Here are four additional advantages of PEOs:

1. They help employers stay compliant 

A major reason companies work with PEOs is that they know the current environment in a range of HR areas, like recruiting, compliance and health insurance. They know what’s going on and can provide expertise to help businesses make better decisions for their employees and their bottom line. They have deep industry knowledge that businesses wouldn’t otherwise have access to.

2. They free up time for business leaders

Owners and executives of small and mid-sized businesses have a lot to manage on a daily basis, from hiring and firing to budgeting to operations to product quality to client communications. By allowing critical HR tasks to be taken off their plate with a PEO, these business leaders have a lot more time to devote to setting and reaching these business goals.

3. Employers can access better benefits

Smaller businesses don’t have the same HR resources as big companies, especially related to health insurance benefits and retirement plans. With a PEO, employers can offer these better benefit options and further improve employee satisfaction, which helps increase retention. For example, as far as retirement, PEOs offer an enhanced 401(k) for employees that help employers minimize their plan investment risks, save money and transfer fiduciary liability.

4. Businesses are more successful when they work with a PEO

NAPEO data also shows that small businesses that work with a PEO grow 7 to 9% faster than those that don’t, and they have 10 to 14% less turnover. They are half as likely to go out of business. In regards to cost savings, businesses that go with a PEO see a ROI of 27.3%.

These results come from the additional expert support that PEOs deliver to businesses. They provide solutions in tax administration, HR, payroll and benefits administration that help employers support their workforce more effectively and optimize their spending in these areas.

The history of the PEO industry showcases why these organizations are so helpful to businesses, especially those on the smaller side. PEOs take on a much more comprehensive set of HR responsibilities so that employers can focus on hitting their business targets.

StaffLink Outsourcing is a national PEO that focuses on customizing our solutions to businesses in need of HR support. We bundle risk management, payroll, benefits administration and many other HR solutions, depending on what you need.

Request a proposal or contact us at (954) 423-8262 for more information.