A professional employment organisation is a type of business that can be extremely useful for small businesses. These types of organisations assist small businesses with comprehensive services like payroll processing, benefits administration, tax compliance, and risk management. The term is often shortened to only PEO and can also be known as co-employement. Because SMEs often have limited resources, relying on these organisations can boost your business growth without breaking the bank.
Understanding PEOs is important because they can help streamline HR processes, reduce administrative burdens, and provide access to better employee benefits, which can enhance employee satisfaction and retention.
For example, a small business with limited HR resources might partner with a PEO to manage payroll and benefits. The PEO would handle payroll processing, tax filings, and benefits administration, allowing the business to offer competitive benefits packages without the need to develop in-house expertise. This arrangement not only ensures compliance with tax laws but also provides employees with access to quality benefits, contributing to higher employee morale and retention. Furthermore, entrepreneurs benefit from quality expertise that they don’t need to have in order to ensure it is applied correctly in a business – that’s what the experts are being paid for.
Companies such as these do so much more than managing payments. Other support functions that you can find are compliance – such as environmental compliance and management services – risk and safety administration, drug testing programmes and talent management. The latter might be the most commonly known and most often used kind of PEO that small businesses use. In South Africa, it is also most often in the form of outsourcing. An administrative services outsourcing (ASO) agreement is used to list what the small business is outsourcing from the other business.
PEOs are businesses too, so before you start your journey and partner with a professional employment organisation, explore the cost first for the services you will be getting, versus employing an individual to execute those tasks.
The Disadvantages of PEOs
Aside from the abovementioned benefits, there are also downsides to outsourcing certain management tasks. The Society for Human Resource Management (SHRM) lists them as follows:
- Loss of control of essential processes and people.
- An outside company’s influence on your culture.
- Diminished value of internal HR department.
- Lack of control and security over employee paperwork.
- A loss of institutional knowledge.
- Security issues with the vendor’s system.
- Resistance from employees.
How Do PEOs Work
The relationship between an SME and PEO means that both share certain responsibilities – this sharing of responsibilities is what makes it a co-employment relationship. Common responsibilities of the PEO involve processing payroll, paying payroll taxes, maintaining workers’ compensation coverage, administering benefits and HR guidance. This allows the SME to focus on day-to-day business operations and high-level decision-making.
PEOs can be used by small businesses across all industries such as:
- Real estate and property management
- Computer services and technology
- Securities brokers and dealers
- Engineering services
- Health services
- Legal services
- Management consulting services
- Business services
- Accounting, auditing and bookkeeping
- Manufacturing
- Trades
- Insurance
- Wholesale
In spite of the positive impacts the PEOs can have on small businesses, there are some tasks that they do not do. It is still the responsibility of the business owner to take care of their business. This includes:
- Making decisions regarding your business operations.
- Marketing, sales or product distribution.
- Dictating pay rates, hours or schedules.
- Bringing in new business and serving return customers.
Remember, there are many reasons to use (or not to use) one or multiple professional employment organisations; however, at its core, you need to put the future and profitability of your business first.
