HR Outsourcing - What is a PEO?

Entrepreneurs, HR professionals, and finance departments will be hearing the buzz more and more in 2010. Terms like employee leasing, HR outsourcing, and PEO are being tossed around by all sorts of people, and most of us have a hard time understanding what it all means.

This article is the first of many aimed to educate the business community on the Professional Employer Organization (PEO) industry, the most comprehensive form of HR Outsourcing services for small companies.

Simply put, a Professional Employer Organization is a multi-service-providing vendor that allows companies to outsource payroll and tax administration, employee benefit packages, workers' comp insurance, and human resources all under one roof.

PEOs were once referred to as employee leasing companies, and this term still does makes sense as it loosely describes what a PEO does to deliver its service, however over the last 20 years PEOs have developed their offering into much more than simply leasing employees.
The backbone of the PEO value proposition, and what makes it unique from any other service in the HR Outsourcing industry is the concept of coemployment.

Here are a couple explanations of what a Professional Employer Organization is:
Napeo Definition for a PEO, look here
Entrepreneur Magazine for a PEO, look here

What is Coemployment?

Coemployment means the worksite employer (your business) and the employer of record (the PEO) both employ your employees, and the responsibilities of employing the workforce are shared between the two. The worksite employer continues to direct employees' day-to-day duties and activities: hiring, training, managing, firing, etc. The employer of record is responsible for the back-office administrative duties such as processing payroll, administering & paying federal and state taxes on-time, managing employee benefits, handling workers comp and unemployment claims, etc.

But here is the best part....

Through coemploying with all of its clients, the PEO essentially forms one large conglomerate, comprised of the sum of all of their clients' employees. This allows them to take advantage of economies of scale and the law of large numbers. This yields decreased risk across the entire group; thereby stabilizing and in many cases decreasing, health and workers comp insurance premiums as well as state unemployment tax rates. Professional Employer Organizations provide discounts on many other cooperative purchases such as EPLI insurance, HRIS systems, employee discount programs, and much more.

The ideal situation for a salesperson attempting to sell you PEO services is to save the company so much on cooperative purchases such as health insurance and workers comp insurance that it offsets all of their administration fees. Although this does not always happen, a business owner should shop around thoroughly as all PEOs are not created equally.