Considering Employee Leasing? What You Need to Know About Using a PEO

Hiring an employee is a huge commitment for any company. Whether an employer is looking to fill a part-time or full-time position, there are quite a few time and monetary investments to make, including recruitment, interviewing, payroll taxes, training and benefits administration.

For startups and small businesses, the hiring process can stretch a company's already-limited budget and take away valuable time from the executive team. But as a business grows, the need for additional help becomes more and more pressing. Instead of going through the hassle of in-house hiring, some of these companies turn to professional employer organizations (PEOs) as an easier way to meet their staffing requirements.

A PEO is a firm that provides businesses with outsourced workers while eliminating many expensive and time-consuming elements of a regular hire. Employees leased out through a PEO report to the client company for their daily tasks, but claim the PEO as their legal employer on their tax forms. This employment method is also known as co-employment. [Outsourcing Human Resources: 10 Companies to Consider]

"With PEO services you benefit from the "shared responsibility" model," said Dawn Amat, vice president of benefits solutions and product planning for ADP TotalSource. "When you establish a co-employment relationship, you're also sharing certain risks and responsibilities with the provider. Shared responsibility means you're not facing the threat and impact of changes to laws, regulations and other compliance requirements alone."

If you're considering leasing employees from a PEO, here are the answers to some common questions about how this employment arrangement works.

What types of services does a PEO provide?

A professional employer organization provides its clients with a number of outsourced human resources functions. These include recruiting, payroll, tax compliance, workers' compensation, health and life insurance, retirement planning, employee training, attendance and time-keeping. Not all PEOs offer every one of these services, but most provide the majority of them.

"There are numerous benefits associated with the use of [leased employees]," said Don Phin, vice president of strategic business solutions at "There's reduced liability risks, including worker's compensation, IRS and equal employment opportunity concerns; the introduction of an outside perspective; and the ability of a company to focus on core business operations [instead of HR management]."

How do I pay for these services?

There are a few different pricing models that PEOs will use. Some charge a flat fee for packaged services, while others charge a la carte per service and/or per employee. It's important to know exactly what you're paying for when you work with a PEO.

"What many PEOs will not tell you is what they are actually charging for a business to join the PEO," said Ryan Holloway, president of Holloway Benefit Concepts. "This is sometimes a percentage of overall payroll, and sometimes is a per employee per month charge. Some PEOs try to hide this fee and dodge by focusing on the perceived savings in other areas. A per employee per month fee is much more advantageous than a payroll percentage if a company is growing."

Holloway advised asking for a line-item breakdown of all charges and compare that to what you would pay for that service if you got it outside the PEO. Once you've determined the price and value for each service, find an organization that allows you to pick and choose the products you want so you can only pay for the ones that save you money.

What am I responsible for as an employer?

The specific services and packages you choose will determine exactly what your PEO does and where you need to step in as an employer. However, PEOs will generally take over only the administrative and legal-related human resources functions of managing your employees.

"The PEO assumes responsibility for payroll, tax administration, risk management, legal compliance, and in most situations, workers' compensation," said Jeff Rosset, director of marketing and strategic partnerships at Midwest HR. "The [client company] maintains control of its day-to-day operations, establishing pay rates, determining policies, hiring and terminating of employees, and just about everything else related to running the business."

Some PEOs will handle pay rates, hiring and firing on top of the administrative functions, which can help reduce tension between your company employees and your leased employees.

What should I look for in a PEO?

Every PEO is different, and may or may not provide all the services you need for your business. As you're searching for a firm to handle your human resources, be sure to understand exactly what the company offers to ensure that it meets your requirements.

"Selecting a PEO is like buying a car," said Shari Morris, international programs sales manager at HCBR Group. "You have to decide which features you must have versus which features you want. Companies considering the PEO option should identify their own business needs and wants and ask the right questions to ensure they will obtain the services they need from a prospective partner."

Another factor to consider is which markets your prospective PEO serves, Morris said. Different states and countries require different certifications for PEOs, so if your business operates nationally or internationally, ensure your PEO can accommodate your needs.

Rosset said that PEOs with flexible options and years of experience behind them are usually the best choice for your business. Before you make a final decision, ask the firm if it has worked with clients in your specific industry before, as this could be the determining factor between two qualified PEOs.

Originally published on Business News Daily.