Keeping up with employment regulations and health care benefits can be a struggle for many small to midsize businesses. One potential solution is engaging a professional employer organization (PEO).

PEOs employ experts who understand the minutiae of many HR functions. Moreover, these firms can handle difficult, recurring tasks such as managing employment taxes and administering payroll and benefits.

According to the National Association of Professional Employer Organizations, PEOs work with more than 173,000 small and midsized companies in the United States. They represent 15.3% of employers with between 10 and 99 employees.

Pros and cons

Why not simply hire or add HR staff rather than engage a PEO? For one thing, even an experienced HR professional might struggle to keep up with the ever-changing trends and regulations related to employment. The built-in expertise of a PEO can help ensure compliance and prevent costly penalties.

Further, because PEOs typically work with multiple clients, the cost to engage one can be lower than hiring HR staff. Partnering with a PEO enables a business to focus on its core operations while it gains access to HR know-how and administrative services.

In addition, many PEOs can recommend best practices for functions such as onboarding new employees. Some even provide an HR information system that allows your company to use the latest technology to track recruiting, payroll and benefits data.

Finally, long-standing PEOs often have established relationships with multiple health insurers. This allows you to shop for a greater number of policies at more competitive rates than you might be able to obtain on your own. A good PEO can also educate employees about the benefits available to them, which tends to boost participation, morale and retention.

All that said, a PEO isn’t right for every company. Some PEOs work with a limited number of health insurers whose policies might be no better than coverage you can find on your own. It’s also possible that your in-house expertise isn’t that far off from a PEO’s. A little more training or continuing education could get your HR staff up to speed and negate the need for investing in outside help.

It’s all about the contract

When you partner with a PEO, your business and the PEO enter into a co-employment arrangement. Your company typically remains responsible for strategic planning and business operations, while the PEO takes on specific tasks outlined in the contract. These typically include HR-related tax, legal and other administrative responsibilities.

It’s important to thoroughly understand the co-employment agreement. Often, the business engaging the PEO remains responsible for paying employment taxes and filing tax returns. Under some agreements, however, this responsibility shifts to the PEO. Read the contract carefully and ask your attorney to review it.

Thorough analysis

Deciding whether to work with a PEO calls for a thorough analysis of your company’s operations, HR needs, and the short- and long-term costs involved.

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